TEXAS SNAPSHOTS, APRIL 2005

Austin Retail Market

As consumer spending increases and large firms return to the metro area, buyer interest is growing and institutional investors are taking a closer look at the Austin retail market. Local retail assets have been reporting consistent property operations and attracting a large amount of capital to the  area.

Strong consumer spending increased retail sales by 7.1 percent last year, and an additional gain of 6.3 percent is expected in 2005. This is exciting because spending was strong in 2004 even though the job market was relatively weak. In 2005, however, large companies and 23,000 jobs are coming to Austin. The Home Depot’s Technology Center and Samsung Austin Semiconductor are among the firms bringing high-paying positions to the metro. Combined, the two companies are expected to add 1,100 positions in 2005.

National retailers have noted the growing market strength and are expanding their presence. Wal-Mart is opening three Supercenters, The Home Depot is completing construction on a new store in Round Rock and Simon Property is constructing the 750,000-square-foot Wolf Ranch power center in Georgetown. The power center will include Target, Kohl’s and PetsMart. With the majority of new space already leased, the impact on existing shopping centers is expected to be minimal. The best-performing area continues to be south Austin. Owners there posted average revenue growth of more than 7 percent last year, and similar results are forecast for 2005.

Investment volume is expected to post a mild gain this year, with risk-tolerant West Coast investors targeting Austin to take advantage of cap rates that can’t be found in their home states. Grocery- or shadow-anchored centers remain the top choice among buyers, but only a few sell each year as most owners regard the properties as long-term investments. Overall, shopping center prices increased by 15 percent last year — to $150 per square foot. In the suburban areas, sales activity is expected to remain strong during 2005 as transportation and infrastructure improvements spur developers into action.

Builders are expected to complete 1.4 million square feet in 2005, which is a slight increase from the 1.3 million square feet delivered last year. Most construction is slated for the suburban areas: Georgetown, Cedar Park/Leander, Round Rock and south Austin. Because a large share of new construction is build-to-suit, vacancy is projected to recede by 10 basis points this year, to 6.9 percent. This will allow for modest rent growth of approximately 2 percent in 2005, hiking rents to $18.10 per square foot.

— Bradley Bailey is sales manager of Marcus & Millichap’s Austin office

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