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Dissecting Downtown

Downtown Austin is front and center when it comes to speculation about the real estate market in our great city. The visibility of our new construction, specifically our new residential condominiums, makes these vertical neighborhoods easy to survey simply from the comfort of our morning and evening commutes.

The fact is that these new homes in our central business district represent just a small percentage of the new construction in the Austin metro area. None the less, “Armchair real estate speculation”, the kind found at cocktail parties and lunches with friends and co-workers, is more interesting if everyone knows what they are talking about. “Do you think Centex will sell all the homes at the Peterson Ranch?” or “Do you think that all the condos downtown will sell?” Guess what – If you stick to the downtown speculation, everyone can join the conversation. Even while you may have never heard of a Centex development at Peterson ranch, FIVE times as many homes would be built there than all of the downtown supply for the next four years. Downtown condos are a focal point.

Let’s look at some interesting things that affect downtown’s real estate supply and demand. If you are going to speculate, you might as well be right. Heck, this article could win you that next bet about whether it’s you or your cube-mate Jim that buys the first round of drinks at the company Holiday party.

In June of 2006 the city of Austin released the results of a study that was commissioned to examine the parcels of land in the central business district. The study’s aim was to sort into categories: Short term redevelopment possible, Government redevelopment, long term redevelopment possible, historic, and no redevelopment potential. Here is what it looks like:

(Graphic titled “Development Capacity” – just the image, not the verbiage)

Note that there are not many parcels available for development and that even fewer are larger than ¼ acre – a necessity for constructing on-site parking.

Another important consideration for those new to the downtown Austin development guidelines is the existence of “Capitol View Corridors”. These are protected view corridors from different vistas around town. The corridors radiate out from the Capitol towards the vista, and in order to preserve views, restrict the height of any development for that block. Take a look:

(Graphic titled DAP_extg_height and density)

The maps above are meant to point out some constrains regarding supply of developable land downtown. There just aren’t that many parcels left to do big buildings.

How has the mess in commercial financing and construction financing affected downtown? In short it has curtailed any projects that aren’t out of the ground yet. As a matter of fact, one of the last projects to get out of the ground had to have 50% cash down top get their construction loan! So, no more coming out of the ground until construction financing is back (12-18 months?), and then 36 months of lag time to build and deliver product. A little math tells us that what wee see, is what we get – for 4-4 ½ YEARS.

Look below for a quick summary of remaining units in the projects being build downtown now. I’ve also include an estimate of possible absorption rates (demand) for the next 4 years. Wow.

(Graphic titled SuppyDemand)

Of course there are specific strategies block by block and building by building. Contact me for more of the story, and I’ll happily meet in person to discuss how to profit from this undersupply.

Oh yeah… Enjoy that drink on Jim at the Holiday party!

Kevin

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