The national real estate markets are a mess. The economy is in recession, credit is very tight, jumbo rates remain high. While the Austin market has stayed alive — and actually thrived compared to the rest of the country — it is a very tough time to be selling real estate.
In this market, it is common to hear the Austin condo market referred to as “overbuilt.” This is an easy claim to make: any new unit is an excess unit in a market like this. What is important to note, however, is that it takes three to five years to bring a new project to market. With capital markets frozen, it’s is unlikely that additional projects — besides those currently under construction — will hit the market for another five or six years.
This leaves us with the available inventory in projects currently under construction as the total supply for years to come. If you look at the buildings currently rising, projects like the Austonian, BartonPlace, the Four Seasons, the W Hotel & Residences, Spring, and Zilker Park Residences, there are actually less than 1,000 units currently under construction in downtown Austin. There are approximately 360 unsold new condo units in the pipeline for the Austin market. This is the total available inventory for the next half decade. These units will sell out and the market will be tight before new units are able to be funded, planned, and constructed.
It is important to remember that the fundamentals of downtown living remain strong: people are moving to Austin, downtown is being rapidly transformed into the center of the community, and people from across the region are looking at downtown Austin as a great place for a second home. As downtown Austin reaches a critical mass, the downtown migration is likely to accelerate.
While the downtown Austin market is doing better than almost any other market, there is no doubt that there are more units than buyers right now. Especially on the high end, for million dollar units, inventory absolutely exceeds current demand. As interest rates drop there will be an opportunity for buyers to have the best of both worlds: negotiating power and cheap mortgage funding. Whether this is enough to drain inventory in advance of a true economic recovery remains to be seen. The difficulty in adding future downtown condo supply makes it likely that the current condo slump will reverse sometime in the next 12-24 months. Given that many of the most prominent projects are not scheduled for completion until late 2009 or early 2010, people who want to live downtown will be limited to unsold units in 360 and resale units in other recent projects until that time.
In summary, while downtown Austin inevitably appears overbuilt today, there are just 360 units to sell over the next five years. Over this period, the current trends are almost sure to reverse, likely making the next twelve months seem like an ideal opportunity to enter the market.