Market Update: Austin - Fall 2023

Austin Market Update

Austin has long been a hotbed for real estate, construction, and economic growth. As we step into November 2023, the landscape of the city’s construction and building permitting processes continues to reflect the dynamic nature of this vibrant and ever-expanding market.

According to the US census, the Austin metro area is the fastest-growing metro in the United States. Since 2010, the population has increased by 41%, and since just 2019, the average home price in the Austin area has shot up 170 percent—almost double the national average.

This fall, permit applications took a large turn upward, with a 48% increase in commercial permits submitted in September as compared to June. The spike in permits in September appears to be somewhat of an outlier, as October’s permit volume landed almost exactly in line with July and August.

The city is building and building quickly, but it is still not keeping up with the demand, in part due to permit backlogs. Austin is at the center of housing affordability challenges in Texas, and now the Austin City Council is pushing to ease city restrictions on where and how much housing can be built, all of which impacts site and building permitting.

Of course, it’s not only housing being built in Austin. The decline of office occupancy is continuing to spark conversation around the conversion of office space for other uses, such as hospitality, housing, and mixed-use. According to Avison Young, office vacancy in Austin has hit an all-time high at 23.5%. Walking around Downtown Austin, the crane and construction sites still seem endless. Retail, hospitality, and renovations have far from slowed down.

Current State of Permitting

Site Development Planning

This summer, McKinsey released the findings of their investigation into Austin’s site development process. Although their report detailed extensive issues and delays, it also highlighted Austin’s unique positioning and ability to change and improve this process, saying, “Greater Austin remains early enough in its evolution to change these trajectories.” McKinsey’s study was an eye-opening look into the precise pitfalls resulting in a slow and painful process around site development planning. For example, the City of Austin site plan review process has a lower satisfaction rate (1%) than…. pretty much everyone, including cable TV, the federal government, and airlines. A few other key takeaways:

  • Just one month of delay costs $10k when building a single house and $564k when building an apartment building.
  • 81% of applicants surveyed reported submitting 3+ times to resolve formal review comments.
  • ~80% of respondents reported taking longer than one year to receive a permit.
  • From Q1 2021 to Q1 2023, average City review days per application increased by ~85%.

Digitalization and Automation:

The city has continued to invest in digital systems to facilitate the permit application and review process. Since Austin switched to digital permitting in 2020 due to the COVID-19 pandemic, online portals and electronic submissions have become 100% digital in Metro Austin, but the systems have a long way to go. We’ve continued to hear first-hand accounts from developers and project teams struggling with the Austin Build and Connect system (also referred to as "AMANDA"), and the city continues to struggle with managing the system’s backlog of open permits. One developer customer recently referred to Austin's system as “technology-averse” and “very challenging to navigate.”

Environmental Compliance and Sustainability:

With a growing emphasis on environmental sustainability, Austin’s building permitting process has placed increased importance on compliance with green building standards. In October 2022, Resolution No. 20220609-061 passed and is currently being implemented, which adds additional regulations on building and development code. Part of this resolution, a variance related to water quality control, went into effect on November 1st. Developers are required to adhere to specific environmental regulations, encouraging the construction of energy-efficient and eco-friendly structures. While this is extremely important, the changes add a layer of complexity to the already complicated and opaque process.

Recent Changes

New site plan improvement website

As a result of McKinsey’s report on the site plan review process, on October 26th, the City of Austin launched its new website that will track improvements to the process. The city has signed a six-month contract with McKinsey to revamp the process through 44 initiatives laid out by McKinsey. The new site lays out each initiative alongside details and progress being made.

City of Austin updates and process improvements

The City of Austin held a webinar on September 28th about the various legislative updates happening within the Development Services Department for Subdivision and Site Plan Applications. Additional online materials and details in regard to these updates are expected to be published on January 1st, 2024. The webinar also touched on how Austin is beginning to role out adherence to state laws, such as HB-14. A few key takeaways:

  • Preliminary plans and plats are now allowed to be approved/disapproved administratively
  • The project assessment process is now a voluntary process for Preliminary Plans and Plats as opposed to a prerequisite.
  • The completeness check process for Site Plan and Subdivision Construction Applications is being streamlined.
  • 3rd party reviews and inspections will be authorized in some instances
  • New rights of appeal are being established for when a plan is disapproved.

Minimizing parking requirements

On November 2nd, the Austin City Council voted to approve Item 28, which calls to eliminate parking minimums city-wide. This is a big win for developers! According to the Real Estate Council of Austin (RECA), Item 28 will “allow for more housing, lower development costs, and quicker review times, all of which incrementally help Austin work its way out of our affordability crisis.” In September, a study from Rutgers University concluded that unused parking adds millions of dollars to multifamily construction. Their recommendation? Reducing minimum parking requirements. In the Austin City Council statement on approval, they said, “Eliminating parking minimums will reduce these costs and give developers greater flexibility in choosing building typologies.”

Looking Ahead

Minimum lot sizes

This past July, the City of Austin passed a resolution directing the city manager to propose amendments that reduce the minimum lot size in single-family zoning districts to 2,500 square feet or less, which would allow existing lots to be subdivided. This is a major reduction from the previous minimum lot size of 5,750 square feet. The ordinance also amends the code to allow for a maximum of three units per lot, up from one unit per lot. This passage will be beneficial for single-family home builders, who will have increased flexibility and opportunity to add housing to the Austin market. The City Council is now scheduled to vote on the proposed initial changes on December 7th.

Parkland dedications

The City Council recently postponed voting on an ordinance to comply with Texas House Bill 1526, but the vote is now set to occur on November 9th. The Texas House Bill limits Austin’s authority on how parkland dedication can be administered. If this ordinance is to pass, it would be a win for developers and project teams as it will overturn City Council amendments from 2022 that required parkland dedication from commercial developments and also reduce associated fees for projects that do apply for parkland dedication (reducing to 40-70% of current fees). In accordance with the Texas bill, Austin needs to adopt a new ordinance complying with the law by December 1st. The legislation applies to all multifamily and hospitality plans submitted from January 1st, 2024 onwards. 

“McMansion” regulations

Austin has something called the Residential Design and Compatibility Standards, more commonly referred to as the “McMansion” regulations, which currently regulates the size of new homes as well as remodels and additions to existing homes in certain areas of Austin. The regulations also set a maximum floor area, building envelope, and several design standards. Resolution No. 20230720-126 proposed to limit the applicability of the “McMansion” regulations to lots with one home, which is incredibly important for the ability and affordability of developing duplexes. The proposal would also remove limitations on the number of unrelated adults allowed to live together, which currently has a maximum of four within the “McMansion” zones and six outside of those zones. These changes come as part of the HOME Amendments, which hopes to increase housing supply. If duplexes do not need to adhere to the “McMansion” regulations, it will be far easier to build them.

Stay tuned for more updates on all things permitting, construction, and real estate in the Austin area.

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