Austin has weathered the housing downturn much better than most of the United States, but not all market segments are rosy. All real estate is hyper-local, with market conditions varying widely from one neighborhood to another, even within a very strong local and regional market. One market segment that has suffered in the Austin/Central Texas market over the past few years is multifamily housing — i.e., duplexes, triplexes, and fourplexes. This chart highlights the difference between our single family housing market and the multifamily market:
The peak in multifamily sale prices in 3rd Quarter 2006 is obvious, and with the exception of a failed resurgence one year later the trend has been clear for more than three years. At the same time, median pricing in the single family market, while erratic, has continued to trend upward. (See www.AustinMarketDashboard.com for more details, updated monthly.)
Averages always conceal the extremes, and in this case the extremes can be dramatic. I have clients who own duplexes that have lost 35% or more of their value during the timeframe covered by the chart above, even though the purchase prices at the time were well-supported by gross rents and comparable sales, and even though gross rental incomes today would still justify those higher values. Without any doubt, very weak demand for these properties is the reason for the decline in values, but demand for single family homes has also been down, although not nearly as significantly as in the multifamily market:
Sales of multifamily properties have declined almost twice as fast as sales of single family homes, and time on market has quadrupled! However, notice that sales volume stabilized over the past three quarters of 2010 — a sign of a turning tide.
At the same time, leasing activity has been relative unscathed:
Lease volume and pricing of both the single family and multifamily properties are up, albeit by relatively small margins. That said, a decline in rental income opportunities does not explain the reduced demand for multifamily properties, or for their decline in value.
Without speculating on why this disparity exists, what this data indicates is an opportunity to buy multifamily properties at significantly reduced values, and therefore with stronger net cash flow results than just a couple of years ago. The strength of current gross rents, and the stability in multifamily pricing for most of last year, suggest that we have seen the bottom of this cycle. New project announcements and building permits for multifamily construction (including substantial additions to the inventory of available apartment units) show that large investors and developers are betting on coming growth. Now is the time for smaller investors to take advantage of the trend as well.