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Austin renters face soaring costs in ‘extraordinary market’


After Patricia Arreguin and her boyfriend split early last year, she set three seemingly modest goals for her apartment search. Find a one-bedroom unit. Negotiate a deal for less than $700 a month. And be sure the complex would allow her 70-pound lab mix, Liam.

During the search, her patience turned to a ball of frazzled nerves as one scouting trip after another ended in disappointment. Units disappeared before she could get to them. Some wanted hefty pet deposits.

Finally, after three months – “Three months!” – Arreguin, an administrative assistant, found a one-day-only special. The complex agreed to let her pay the $400 pet deposit in two installments. Arreguin got 500 square feet in far North Austin, for $645 a month.

“Is this what it feels like to live in New York?” she said.

The comparison was tongue-in-cheek. But it mirrors the experience of many Austinites who have recently tried to rent a place. The occupancy rate in Austin is now 97 percent – “an extraordinary market,” said Charles Heimsath, the head of Austin-based Capitol Market Research and someone who has tracked the city’s rental scene for 25 years.

The average Austin rent now stands at just above $1,000 a month, the highest it has ever been. It rose 50 percent from 2004 to 2013, according to Capitol Market Research, even as the median income rose just 9 percent over that span, according to the Texas A&M Real Estate Center.

Those rents, plus more general questions of affordability, rank with traffic and water as the most pressing problems facing Austin, Heimsath said.

“It’s a complete nightmare trying to find something to live in and still live,” said Cody Caporale, an X-ray technician who said typical deposits of $100 or $200 a few years ago have shot to nearly $1,000.

An unprecedented building boom along places such as South Lamar Boulevard and East Riverside Drive might keep prices steady for a year and might slow the upward climb of rents after that. But demand will probably overtake supply again as soon as 2015, those familiar with the market say. The root issue is a basic supply-and-demand mismatch, said Terry Mitchell, a developer who builds urban infill projects.

“Economics 101 teaches us that if you increase demand (job growth; population growth), and supply remains the same (in this case relatively the same), price goes up,” Mitchell said via email. “Sometimes way up.”

There are a variety of reasons supply hasn’t kept pace with demand. Perhaps the most thoroughly debated cause is voter-approved environmental rules that limit development for the sake of protecting features such as Barton Springs. Some who work in the development industry cite other reasons, including convoluted building rules, a slower-than-necessary approval process and energetic opposition from neighborhoods who worry their leafy, quiet enclaves could be overrun by apartment complexes.

“I’ll probably just have to settle”

Most debates about rental properties are framed as developer-versus-neighborhood. And much of the civic discussion about Austin’s rising prices has focused on homeowners. But renters are probably hardest hit by rising prices. When housing prices go up, renters don’t have the consolation prize of someday selling and making a tidy profit.

Sarah Hickam’s lease is up June 30. Her $770-a-month, two-bedroom apartment near 51st Street and Lamar Boulevard will soon be renovated, and the complex plans rents from $1,100 for a one-bedroom and $1,400 for a larger unit. It is an expense that Hickam, a 37-year-old office manager, said she cannot absorb.

The market isn’t on renters’ side now, Heimsath said. He said 92 percent occupancy is about the “equilibrium point” in Austin where the supply matches the demand and renters and landlords have equal bargaining power. Austin has been mostly above that point for the last decade: The 89 percent occupancy rate in 2003 climbed to 97 percent in 2007, dropped back to 91 percent by 2009 and shot back up to 95 percent in 2010 before stabilizing at 97 percent in 2012, 2013 and the first four months of 2014.

“The old axiom is in the rental business is if you’ve hit 95 percent, you should be raising your rents,” Heimsath said.

But Hickam said moving in that extraordinary market is tough because she needs to stay close enough to the neighborhood to ensure her 13-year-old-son, Cruz, can attend Lamar Middle School’s Fine Arts Academy. Rents in the suburbs would generally be cheaper, but Hickam said she can only handle driving her son a half-hour to school before getting to work on time becomes nearly impossible in Austin’s snarled traffic.

Hickam said apartments within that driving distance typically charge more than $1,200 a month. Splitting the cost with a roommate is probably not an option, she said, because she doesn’t want to live with a stranger.

“It seems like rents have jumped, but it doesn’t seem like wages have,” said Hickam, who was raised in Buda and moved to Austin when she was 19. Her initial look at the apartment market, she said, has left her thinking, “I’ll probably have to just settle for something.”

“More than you’re going to want to pay”

Austin, by reputation, has been the kind of place where people across the economic spectrum can move and not only live, but live well, where waves of newcomers have looked around in astonishment at the houses and apartments available to them, many an easy walk from a Central Market or neighborhood bar or Zilker Park. One of Austin’s charms was that even working-class people could enjoy the kind of music and culture available in big cities — and do it while living nearby in a house with a backyard, or an apartment not crowded by roommates.

The mismatch between Austin incomes and its rents has undercut that long-standing appeal. In a little more than a decade, Austin went from relatively cheap to not cheap at all.

In the 15-year span from 1985 to 2000, Austin renters spent just more than 20 percent of their after-tax income on housing. That made Austin the cheapest among Texas’ big cities, according to Zillow Real Estate Research. The state capital was also below the national average.

Now, housing takes 30 percent of Austin renters’ income, more than the national average and more of peoples’ paychecks than in Dallas, Houston and San Antonio — and above the “red line” that Zillow says is too much of a household income.

Chelsea and Jeff Pickering said Austin is still gettable and worth getting — it’s not California expensive — but said newcomers should temper the traditional have-it-all expectations.

The couple is from the Houston area and graduated from Texas A&M University in 2012. She moved to Austin in the summer of 2013 when a previous summer internship with the Austin office of Deloitte became a full-time job. She said her friend had found a Tarrytown house whose owners hadn’t raised the rent in years despite rising prices in the area, and Chelsea moved in with her.

Jeff Pickering followed and, through a connection at church, found a room with some guys in a house at 12th and Chicon streets. When he proposed in September, they decided to rent for their first year of marriage before buying. They began a month-long search, starting in the downtown area and moving outward as nothing fell into their price range. They finally settled on a $1,000-a-month, one-bedroom apartment near Loop 360 and RM 2222.

Their experiences taught them Austin is a place where home hunters have to accept trade-offs.

“We’re so lucky to be here,” Jeff Pickering said. “We’ve got a place with a great Hill Country view. But you really do have to come to grips with the fact the rent is more than you’re going to want to pay.”

“A compelling strategy”

Some of that is the perhaps inevitable twin of Austin’s success. The city has a glittering national reputation, drawing people of means who drive up the cost of housing. The textbook solution is to increase supply and, at first glance, that is happening. Those who haven’t driven down South Lamar Boulevard recently should be forgiven for gaping at the blocks of four- and five-story skeletons now filling out with glass and glint.

Roughly 11,000 new rental units will be ready to inhabit this year along the Austin area’s Interstate 35 corridor, a boom that could absorb nearly all the new renters coming this year. (The calculation is based on population growth of 140 people per day, just less than half of all households renting, and 2.6 people per household.)

But even the apartment buildings rising along Lamar Boulevard and Riverside Drive won’t satiate the growth of Austin, Heimsath said. The building boom is an unprecedented blend of supply limits (little got built during the Great Recession) and growing demand (the Austin area was the fastest-growing in the country). In a sense, Austin is just letting some air out of the swollen rental-market balloon.

There is evidence the construction boom is slowing. In 2012, the city approved 10,748 multifamily units; in 2013, it was 7,097. That means the skyrocketing rental prices will probably slow over the next few years, Heimsath said, noting there are efforts to help match the supply to the demand. Council Member Chris Riley, for example, is pushing for “micro units,” popular in San Francisco and New York, that can pack more dwellings into relatively small tracts of land. But Riley’s proposal has run up against housing advocates who worry it would undermine an existing affordable-housing program and require neighborhoods to absorb inconveniences such crowded side streets and noisier nights.

The city’s development rules aren’t sophisticated enough to navigate the conflicts of an urbanizing city, some observers say.

One “pernicious” portion of the code requires that, in most cases, a property must have at least 1,500 square feet of land for every one-bedroom apartment built on it, said Chris Bradford, an attorney who publishes the Austin Contrarian blog, which tracks development issues. (A four-unit complex in many parts of town, for example, would require at least 6,000 square feet of land.) The requirement is counterproductive, Bradford said, because it is blind to how large a particular unit is. A 500-square-foot unit requires the same amount of land as a 900-square-foot unit under the code. In effect, the city code encourages larger units, and thus fewer units — restricting the supply.

Outside of downtown and a few busy commercial corridors, a developer who wants to build smaller units must seek a zoning change, Bradford wrote earlier this year. He added that alternative “doesn’t seem to me to be a practical solution, if the goal is to encourage micro-units. That … requires a full-fledged zoning case, which is time-consuming, expensive and uncertain. That’s a compelling strategy if you want to raise the average fixed cost of your units, not lower it.”

“I’m going from here to heaven”

Rising prices appear to be hitting all corners of the rental market.

The Atria at the Arboretum is an “independent living facility,” a place for senior citizens when they can no longer maintain their homes but don’t require assisted-living care.

David and Mary Nagle, who are 87 and 79, respectively, said they can afford the $4,400 they pay now to cover virtually all their expenses. Most residents expected to cover the 3 percent annual increases the facility was charging in its first four years. But last year rent rose 6.5 percent, and it will continue rising at that pace or faster for the foreseeable future to keep up with rising taxes and a market in which vacancies are almost immediately snapped up, management has warned the residents.

The residents are well off, seven of them said as they ate lunch in the Atria dining room, talking about the cost of Austin living. But three years of compounding rent increases equals $1,000 more a month for the Nagles. Other facilities are seeing similar increases, residents say. And the assumption that renters can counter market pressures by moving isn’t fair in the case of seniors, David Nagle said.

“The people who live here have diminishing control of their lives,” said Nagle, a retired attorney. “Moving is particularly difficult for us, physically and emotionally. The presumption of equal bargaining power and the ability to negotiate effectively is the basis of free-market transactions like rents.”

To which Vivian Spence, a four-year resident, later added, “When we moved here, my husband said, ‘I’m going from here to heaven.’ At that point, moving is extremely difficult on you.”

Using that line of argument, The Nagles and some other residents wrote a recent letter to the Austin City Council proposing what amounts to a Texas heresy: rent controls, at least for those 55 and older.

Council members haven’t responded. But a smattering of out-of-the-ordinary things have happened recently because of rising rents.

“Affordability matters to us”

The Bouldin Creek neighborhood is to some the epitome of funky old South Austin. It is also a hot market, which means rising prices. In the case of Oak Creek Village, that seemed to mean losing a four-decade-old apartment complex that accepted government housing vouchers, in favor of a much larger place that would cater to the demands of the market and be too expensive for its longtime residents to afford.

This is where supply-and-demand theory gets muddled, said Kevin Lewis, president of the Bouldin Creek Neighborhood Association. When old housing is cleared away or renovated, prices rise because the replacement is nicer. In theory, prices should be falling elsewhere as other housing ages, giving people priced out of Oak Creek Village an affordable option somewhere else.

But those market forces often don’t sync in neat ways that would, for instance, keep the 1 in 7 Travis Heights Elementary School students who live in Oak Creek Village from dispersing to other parts of town. Such a dispersal could strain other schools absorbing the students. And it could leave Travis Heights, which has some well-regarded programs, perilously underenrolled should the Austin school district look to close central city schools, as it has considered in recent years.

Facing that possibility, the Bouldin neighborhood association did something unusual: It endorsed the new, larger complex (and the traffic that will come with it), if the developer agreed to continue keeping 173 of the 486 units available for low-income residents.

“Affordability matters to us; it’s not just a talking point or something written into a neighborhood plan 10 years ago,” Lewis said. “But most affordable units are being eroded away.”

It is a lesson that Arreguin, owner of the lab mix, said she is about to learn again. She is planning to enroll in college somewhere in Austin this year and, while awaiting the colleges’ decisions, didn’t renew her lease. She is staying on a friend’s couch in the meantime.

When she learns where she is going, she said, the apartment hunt begins anew.



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