Month: March 2022

Construction

Huge Loss for Austin

  • On March 17, the Appellate Court ruled against the City of Austin in a suit over the overhaul of the land development code.
  • It ruled that the City violated property owners’ procedural rights by not allowing them an avenue to protest the changes.
  • As a result, the City Council faces a tough decision on how to combat the affordable housing crisis.

March 17 is supposed to be a fun day. It’s a day to drink green beer, eat corned beef and hash, and sing Irish drinking songs. At least it is in my household.

Unfortunately, this year it was not a very fun day for the City of Austin. On that day, the Court of Appeals handed down a long-awaited decision that upheld a district court ruling against the City. This decision, unfortunately, has a huge negative effect on the future of the City and how we are going to try to combat our affordable housing issues.

So what was the decision and what does it mean for the future of Austin? That’s what we talk about below.

Background – The Massive Overhaul of the Land Development Code

 

I have written about this previously, but the Austin Land Development Code (“LDC”) needs a massive overhaul. As we continue our rapid growth, there is a need for more housing. The best way to meet this demand is to allow for increased density throughout the City.

The City Council tried to do this by adopting a complete overhaul of the LDC. It would have allowed for increased density in many areas around the City, especially along transportation corridors.

But some property owners objected to the zoning changes in their neighborhoods and filed suit against the City to stop it. The district court agreed with them and put a temporary stop to enacting the new LDC. The City appealed that decision and has been waiting for this ruling for a while. For a more detailed analysis of the reasons behind the lawsuit, you can go here to read my previous posts about it.

What was the Ruling from the Texas Appellate Court for the Austin Land Development Code Lawsuit?

 

That brings us to St. Patrick’s Day this year. On March 17, the Appellate Court finally handed down its ruling. And it basically agreed with the District Court.

The Appellate Court ruled that the City violated property owners’ procedural rights by failing to a) notify the property owners of their right to protest and b) hold hearings at the Planning Commission before holding a vote to approve the new LDC. The trial court’s ruling is, therefore, upheld. And the new LDC cannot go into effect.

What does this Mean for the Future of Affordable Housing in Austin?

 

The City now basically has three options with this lawsuit. It can either a) ask for an en banc rehearing of the entire appellate court, b) appeal to the Texas Supreme Court; or c) let it drop and accept defeat.

Council members Tovo, Pool, and Kitchen originally voted against the LDC overhaul. And since this ruling, they have each come out with a statement that suggests they do not want the City to continue with the overhaul and to just let this drop.

The bigger picture, of course, is what does Austin now do about its affordable housing problems? The property owners in this suit have found what I characterize as a loophole in the State law. The procedures required in the statute work for changes in zoning for individual properties. But they handcuff a city if it wants to overhaul its LDC because it is not realistic to think that it could hold hearings for every property in the City. That would be far too time consuming and costly.

So a city like Austin – which has an affordability crisis and needs increased density to solve it – cannot make a large overhaul to the local code to try to solve its affordability issues. The State statute is working against the local interest for the future of the City.

But despite these issues, the City Council is going to need to figure out some answer to the affordability crisis. I guess we will see what they do next.

atx

SXSW – Its Good to be Home

  • After a three year hiatus where it was only virtual, SXSW thankfully returned to Austin last week.
  • In addition to the intangible benefits, SXSW allegedly brings a big economic boost to Austin.
  • And it was great to have SXSW back on our streets.

It had been three years since South by Southwest (SXSW) had graced the streets of Austin in person. For the last two years, SXSW has been virtual only. And while I am sure they put on a great virtual conference, its not quite the same as having it in person.

For Austinites, we sometimes view SXSW with some hesitation because of all the people it brings to the area. Traffic is bad enough during normal times. But after not having it for two years, everyone I talked to (I know – quite a scientific poll) was really excited for SXSW’s return – including me. Its so ingrained in the City and it was sorely missed the last two virtual years.

It is just more exciting around here during SXSW. I mean, Austin is a pretty exciting place on most days, but SXSW gives it a huge extra boost. The city is more alive during SXSW. But aside from just raising the excitement level, SXSW also provides other benefits to us. And that’s what we are going to talk about this week.

 

South by Southwest is an Austin Treasure

I talked a little above about what an intangible benefit SXSW brings to Austin. In addition to raising the energy of the city, it provides fantastic opportunities to hear great panels or see new movies or listen to music. But in addition to that, there are also economic benefits that SXSW brings.

According to a 2019 report, SXSW was directly responsible for 12,800 hotel reservations in the city. These reservations let to approximately $1.9 million in hotel occupancy taxes. The report claimed that the total consumer impact to the area was $16.7 million.*

In addition to the measurable economic impact, SXSW provides great exposure for Austin. According to Hugh Forrest, the Chief Programming Officer of SXSW, the 2022 crowd was expected to be just slightly smaller than the 2019 crowd. That’s a lot of people coming to see and enjoy our great city. In addition, there is a lot of increased national media coverage of Austin at its best. This coverage can lead to people being interested in living/working/investing in Austin. According to that same study above, the value of the increased media coverage to the City is almost $340 million.

So in addition to the benefit the actual festival brings – entertainment, thought provoking panels, etc – SXSW also potentially provides a big economic boost to Austin.

 

What Could Derail SXSW?

But that, of course, does not mean that everything is wine and roses during SXSW. I already mentioned above that the additional people make a bad traffic situation far worse. But that, of course is a temporary problem.

In addition, there is some cost to the City. I do not know and could not find the details about police presence, who pays for it, etc. But there must be some cost to Austin to host a festival of this size. But there is little doubt (to me, at least) that the benefits far outweigh the costs.

Unfortunately, however, there is something else that could derail SXSW. Late Sunday night, there was another shooting on Sixth Street downtown. Four people were shot and hospitalized with minor injuries. This is a worrying trend for Austin. If there is a significant increase in crime, it could potentially discourage people from coming to SXSW. And that would be a disaster for both the Festival and the City.

But overall, SXSW is just a huge benefit for Austin. And its hard to explain how much it was missed the last two years. So thank you, SXSW, for bringing this terrific festival to our city.

 

 

 

 

 

 

*I’ve written before that I am sometimes dubious of economic benefit reports like this, but it’s the best information I could find.

refinery

Is Energy City Still Full of Energy?

  • Oil and gas prices are up significantly in the last couple of months.
  • This has a profound effect on Houston – which is still closely tied to the energy industry.
  • As a result, it looks to be a pretty good time to invest in Houston commercial real estate.

I drive a Tesla. That’s not a brag – it’s the model 3. Its just a fact. But I will gloat a little because it means I do not have to put any gas in the car. And with current oil prices well over $100 per barrel and gas prices around $3.75 here in Austin, I’m pretty happy with that right now.

Like everyone, I reckon, I have been closely following the war in Ukraine and its resultant economic impact.* Its not clear how long this awful war will continue or what the long term effects of it will be. But clearly increased oil and gas prices are at least the case for the near future.

And that got me thinking a lot about our good friends and neighbors to the southeast. I joked last week that the Porsche dealerships in Houston must be booming. But is Houston still that closely tied to energy? And if so, what effect does this time have on real estate? So that’s what I wrote about this week.

Does Energy Still Rule Houston?

 

I lived in Houston for five years over two different stints in the early to mid 2000s. I liked it there quite a bit. So this is not a bash Houston article at all. I am a fan. But I am quite curious how beholden the local economy is to the swings of the energy markets. I, therefore, investigated it a little to write this article.

As I am sure we all know, Houston is the headquarters for several massive oil and gas companies – including BP, Conoco, and Shell. These companies (and the others in the industry) had faced layoffs in the last decade because of the swings in oil and gas. But largely because of the growth in industrial gas, Houston is still largely energy influenced and the energy capital of the US, if not the world.

From an historical perspective, energy jobs peaked in Houston in the third quarter of 1991. At the time, they represented 10.8% of the total local job market. Since then, the number has declined to the point where, in the fourth quarter of 2019 (the most recent numbers I could find), energy jobs represented 7.8% of the market.

For 2019, the energy sector also represented about 20% of Houston’s total GDP. I think it is pretty clear, therefore, that while Houston has become more industry independent, energy still clearly rules the day.

What is the Future of Houston’s Commercial Real Estate Market?

 

Because it is still so tied to the trends of energy and oil, this is a good time to be in Houston. But obviously we do not know how long this is going to last. But for purposes of this article, let’s assume that oil stays above $100 per barrel for a while.

Even at increased prices like that, it still takes a while to convert that into energy market jobs. Higher prices do directly lead to increased rig count and domestic oil production. But advanced fracking technology may reduce the number of jobs that follow. According to one study, if oil prices remain over $100, it would likely take until into 2023 to see any substantial job growth from that.

Despite that, though, the Houston commercial real estate market has been booming. The third quarter of 2021, for example, had more commercial real estate sales than any other city in the United States. And home values increased by over 17% in the last year. This is largely fueled by a population growth that has seen Harris County grow by 15.6% from 2010 to 2020.

As an investment, therefore, Houston looks pretty attractive. And if oil prices stay high for a little while, that’s even more incentive to consider investing in the original Energy City.

 

 

 

*It goes without saying that the horrific human toll of this awful war far outweighs the economic impact. But this is nominally a commercial real estate blog. So that’s what I focus on here. If you want to hear about what an horrific person Putin is, please give me a call and we can grab a beer.

yelling

The Unthinkable Sometimes Becomes Thinkable

  • Despite everyone’s best intentions, sometimes real estate deals go bad.
  • To minimize the pain, its best to be prepared with a great operating agreement and written records.
  • And when a dispute does arise, stay calm and hire a good lawyer.

I love real estate closings. Its such an exciting time. Everyone (usually) is happy and excited for the journey upon which they are about to embark. Optimism is high. Its an opportunity to improve a little piece of the world and make a little money also.

Despite the best of intentions, however, unfortunately deals do not always go as we expect them to. Through nobody’s fault, the market can change or deals can just go bad. When that happens, sometimes the partners in the deal will get upset with each other and blame each other for the failure. What do we do when that happens? That’s what we are going to talk about in this week’s blog entry.

The Most Important Way to Avoid a Partnership Dispute

For the thousands of avid readers of this blog, this next part may sound familiar. I wrote about it back in November. But by far the best way to avoid a nasty partnership dispute is to have a good partnership agreement.

A good partnership agreement will explicitly list the rights and responsibilities of all the parties to the agreement. And it will explain what needs to be done in the event that the future of the partnership is no longer viable. Of course no agreement can predict every potential dispute or scenario that will arise. But having a good one will provide guidance for most scenarios.

But even with a good partnership agreement, partnership disputes may arise.

How to Minimize the Disputes Between Partners in a Real Estate Deal

Even though disputes may be inevitable, it would still be nice to minimize them as much as possible. But how do we do that?

  • Act ethically – This may seem obvious. But that does not always appear to be the case. If you are the general partner, you have an obligation to use best efforts to protect the investment of all the partners. Acting ethically is not only the right thing to do, its also the best thing for your investment, and the best way to minimize partnership disputes.
  • Stay in contact with the partners – This is not a relationship blog, but good communication is the key to any good partnership. If things are not going well, keep your partners informed. It will pay off in the end.
  • Keep written records of everything – If, despite your best intentions, a dispute arises, records will be the key. Make sure you have written records of your expenses, efforts to make the investment work, etc.

Following these suggestions will definitely help. But they cannot completely eliminate the possibility of a dispute.

What to do if a Partnership Dispute Arises

So we have our partnership agreement, we have acted ethically, kept our partners informed and yet – despite all that, the deal went bad and our partners are not happy. What do we do now?

  • Be prepared – Hopefully you followed the rules in the previous section and kept great written records. Well its now time to get those records. Take the time to find all the documents you have because they will be important in any litigation.
  • Stay calm – Nobody wants a dispute to arise. But sometimes it happens. And partners can fight with each other. Try not to make it personal. And do not say or write anything emotional that can come back to haunt you during litigation.

And, of course, I’m sure you know the last and most important piece of what to do if a partnership dispute arises. Its not going to be fun. But – if you hire the right lawyer, hopefully you can get out of it without too much damage. So the final piece of that puzzle – hire a great lawyer.

construction

Affordable Housing Initiatives – Its a Good Start

  • Affordable housing is back in the news because it’s a major issue throughout the United States.
  • The City of Austin and Travis County have enlisted incentives to encourage developers to build more affordable units.
  • While this is a good start, we need more incentives to meet the needs of our growing community.

I’ve talked a lot in this blog about affordable housing. And there is a reason for that. It’s a big issue. It’s a big issue here in Central Texas. It’s a big issue in Texas in general. And it’s a big issue in just about every growing city across the United States.

Here in Central Texas we are having tremendous growth and, as more people move to the area, our housing supply has not kept pace. As a result, its getting more and more expensive to live in the area. And working class folks are being forced out of the area.

Austin and Travis County, therefore, have both been looking for ways to solve the issue. But what have they done? Is it successful? That’s what we talk about this week.

What has Austin done to Help Solve Affordable Housing Crisis?

The Austin City Council has talked a lot in the last few years about trying to solve its affordable housing crisis. And it has enacted a few plans to get that crisis solved.

Specifically, as developers have come to the city to build new projects, the City Council has routinely negotiated with them to include affordable units in those projects. Often the developers will want zoning variances to build higher, more dense buildings. When requesting these variances, the City Council almost always requires them to build some affordable units.

A big key to solving the affordability crisis is density. So these zoning waivers are crucial for increasing the supply of housing in Austin. Unfortunately, too often these plans have been stymied by neighborhood groups. But that is a blog post for another day.

In a recent email, Jack Craver discussed some additional measures that the City has taken. As you may recall, in 2018 we passed a $250 million affordable housing bond. That money has all been earmarked at this point. It is going to the following areas:

  • Land purchases – $100 million – Austin has bought/is buying land and is soliciting bids from developers to build affordable housing on that land.
  • RHDA and OHDA – $122 million – Austin uses these programs to incentivize developers to build affordable housing.
  • Home repair – $28 million – Presumably this money is being used by homeowners to improve homes and make them better suited for affordable housing.

According to Craver, this has and will likely lead to several thousand new affordable units. Obviously that’s not enough to meet the need, but it is a good start.

What is Travis County Doing to Help Solve the Affordable Housing Crisis?

Similar to the City of Austin, Travis County has been working on ways to help solve the affordability crisis. The Travis County Commissioners met this week to discuss this very topic.

During the meeting, they discussed a five year goal to improve housing and build more affordable units. This includes providing incentives to developers to build 70,000 new units by 2027. Of these units, 21,500 are to be built outside of the City of Austin.

Specifically, the units should have the following characteristics:

  • 12,000 units should be affordable to those making 30 percent of the median family income and below;
  • 15,000 units should be affordable at 31 to 60 percent MFI;
  • 9,000 units should be affordable at 61 to 80 percent MFI; and
  • The remaining 34,000 units should be affordable to those who make 80 to 120 percent MFI.

As always, the devil will be in the details. And these plans can still be derailed. But overall, this is a good start from both the City and Travis County. We need more affordable housing and both the City and County have some limited plans to incentivize developers to build more units and increase density. That’s the way we are going to get ourselves out of this crisis.

But, of course, this is just a start. We need more incentives and more ideas on how to increase density to provide better housing opportunities. Because the flow of new people to the area – thankfully – does not appear to have an end in sight.