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Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information - Whole Foods 365

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Austin retail market on absolute fire, with asking rent and occupancy at all-time highs

EXECUTIVE SUMMARY

Occupancy remains at all-time high

Austin’s overall retail vacancy rate remained at 3.9% quarter-over-quarter, and up 10 basis points year-over-year. Net absorption grew to 400,000 sq. ft. as of the quarter’s end, following the previous quarter’s 283,000 sq. ft., and on par with the 336,000 sq. ft. year-over-year. In addition, metro Austin leasing activity is at 494,000 sq. ft., down about 40% from the previous quarter, and this time last year. The retail market saw overall average asking rates rise $0.35 per sq. ft. quarter-over-quarter to finish at $21.91—an all-time high—on a triple-net basis. A year ago, average rates were at $20.60, representing a 6.4% increase. Austin’s retail market has been gradually tightening for the last ten years and has seen occupancy rates at or above 96% for ten consecutive quarters, or Q4 2015.

Austin economic indicators

The Austin Business-Cycle Index grew at its fastest pace since late 2015, boosted by strong employment growth over the first two months of the year. The unemployment rate increased slightly to 3.0%, due to a surge in the local labor force, but remained near a two-decade low, while the state and U.S. jobless figures held steady at 4.0 and 4.1%, respectively. Census data for 2017 reported population growth in Austin slowed slightly to 2.7% in 2017 from 3.0% the prior year, and below the long-term population growth rate of 3.5%. However, this was nearly double the 1.4% pace for the state, and in a further comparison, the U.S. has averaged a 1.0% population increase per year since the early 1980s.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information


MARKET OVERVIEW

Austin No. 1 on ‘best places to live’ list

Austin was named the best place to live in the United States for the second year in a row, by U.S. News and World Report. That distinction tends to be an economic boon, attracting new residents to the workforce as well employers looking for a new location to live, work, or expand their business.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Alignment of supply and demand

Austin retail market fundamentals are very strong, with occupancy at 96.1% and 400,000 sq. ft. absorbed in Q1 2018, up from the previous quarter’s 283,000 sq. ft. Negative net absorption has not been realized in the Austin retail sector in 28 consecutive quarters, seven years ago in Q2 2011. Supply and demand have been equally aligned for the last 10 years with supply averaging 371,000 sq. ft. and demand 321,000 sq. ft. per quarter. Construction activity leveled off at 720,519 sq. ft. at the end of Q1 2018, after highs averaging 1.2 million sq. ft. per quarter since Q1 2016. This controlled growth will support the steady retail evolution taking place in the retail market.  While new development has been slower to deliver, the majority of current projects in the pipeline are scheduled for completion this year.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Investment sales activity

Real Capital Analytics data reports retail sales volume year-to-date through March 2018 in the Austin area at $133 million, resulting in a year-over-year change of -42.2%. The buyer composition is made up of primarily private investors at 72%; institutional buyers account for 24%; and user/other investors make up 4%. A recent top investment transaction in the Austin area retail market is the RREEF Funds acquisition of Market at Parmer at 12411 N Mo-Pac Expy., a 122,349-sq.-ft. retail center/grocery property from Crow Holdings Group. The property was 96% occupied with tenants such as H-E-B, Anytime Fitness, Pet Supplies Plus, Twin Liquors, and Subway at the time of sale.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Leasing activity slowed

Leasing activity slowed during the first quarter, with a total of 494,000 sq. ft. leased in the Austin market—down from 868,000 sq. ft. at this time last quarter. The amount of square feet leased by submarket remained comparatively even, with the Round Rock submarket leading the way with 21%; the East/Southeast submarket next in line at 14%; and the Southeast in third place at 13%. On a percentage basis, the number of transactions dropped quarter-over-quarter by 40%, while the year-over-year drop was at 30%. All told, the largest lease signings occurring in 2018 included Flo Sports sealing a deal leasing 31,000 sq. ft. at 1300 E. 5TH St. in the East submarket; the 29,000-sq.-ft. lease signed by Altitude Trampoline Park at IH 35 & SH 45 in Round Rock; and the 20,000-sq.-ft. contract inked in Sunset Valley Village Shopping Center at 5601 Brodie Lane in Sunset Valley’s South submarket.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Where the retail giant’s H2 might land and its impact

When the ecommerce giant issued its shortlist of 20 metro areas for the companies HQ2, Austin made the cut. Now the question is, where would it go? Amazon has said it needs up to 500,000 sq. ft. of space by 2019, and ultimately requiring as much as 8 million sq. ft. Local experts have given their list of predictions that includes, but is not limited to: the 66-acre Broadmoor campus, which is next to the Domain; Motorola’s former 100-plus acre campus in East Austin; the 19-acre American-Statesman property along Lady Bird Lake, just south of downtown Austin; a proposed 79-acre development called Project Catalyst planned for Southeast Austin; and family-owned +/-6,000-acre Robinson Ranch spanning Travis and Williamson counties. Many in the real estate industry believe Austin is a viable candidate and meets the most important criteria to be selected. It is reported that Amazon expects to make a final decision by year-end. The Austin metro has added 12 million sq. ft. of retail space to its inventory in the past decade. The total size is at 93.8 million sq. ft. as of Q1 2018. Would the addition of Amazon’s H2 reshape the Austin retail sector? Big box stores would likely feel increased pressure from the ecommerce realm, although rumors of the death of brick-and-mortar stores have been exaggerated.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information

Asking rent at all-time high

The tight retail market continued to push the Austin metro asking rents up, reaching $21.91 per sq. ft. to start 2018 at a record high. At the end of the first quarter, prices climbed 23% above the price five years ago of $17.88 per sq. ft. While retail availability is especially limited across the Austin area, it is particularly tight within the East/Southeast area, with a total inventory of approximately 6.4 million sq. ft. with a vacancy rate of 1.9% and the average asking triple net rent at $24.39 per sq. ft. The squeeze is also on for space in the Southwest submarket, representing almost 9 million sq. ft. of rentable retail area with only 234,000 sq. ft., or 2.6% of inventory available, and an average asking triple-net rent at $27.23 per sq. ft.

Austin Retail Market Commercial Real Estate Q1 2018 Economic Data and Information


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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