The Shrinking Downtown Austin Rental Market

The Austin residential rental market — the whole thing, not just downtown — has been very strong throughout 2007. Throughout the first half of the year, both rents and occupancies increased significantly. For example the mid-year citywide occupancy rate was 96.8 percent, up 2 percentage points from December.

Despite the strong rental market, plans for hundreds of planned downtown rental units have recently been abandoned to make way for condos. At the both the Four Seasons Residences and the Monarch, no rental units remain even though hundreds were originally planned. The Monarch, in fact, was originally proposed as an all-rental project before switching to an all-condo design during construction.

What is driving the change? The answer is simple: cost. The downtown condo boom has driven up both land costs and construction costs for downtown projects. As the cost of building downtown goes up, property taxes have also risen at a rapid rate. As these costs go up, developers are forced to pass on the increases to renters or buyers to maintain the viability of the project. So far, the condo market has shown strong resilience — units continue to sell well even as prices increase. The rental market, however, is very different.

Today, there is only a small high end rental market in Austin. For rentals in the $2,000 – $5,000 / month range, the market is relatively limited. Today, the downtown premium for rentals is very steep — downtown rents are as much as twice the rents for comparable luxury units in other parts of the city.
Unlike other cities, affluent Austin buyers prefer to buy houses or condos, they do not seem as inclined to rent big dollar downtown rental units. As costs have driven the required rental rates higher, developers have become concerned that they will not be able to rent all of their units at a high enough rate to make their projects financially viable.

While many units have been redirected from rentals to condos, there are still a few projects such as the new AMLI tower that are still slated to be 100% rental projects. As future downtown rentals do come to market, developers will likely focus on smaller unit sizes in order to keep rates competitve in the face of rising construction costs.