FEATURE ARTICLE, DECEMBER 2005

2006 Broker Outlook

Austin

The Austin commercial real estate market continues to improve and stabilize across the board as Austin is slowly but surely working off vacancy. Absorption is likely to be positive after 5 years of languishing. In fact, at third quarter 2005, the office market recorded absorption of 105,986 square feet according to The Source, an NAI Commercial Industrial Properties Company publication that tracks the office, industrial and retail commercial real estate markets in Central Texas. At mid-year 2005, the retail market absorbed 259,941 square feet and the industrial market's net absorption for the first 6 months of 2005 was a positive 657,287 square feet. Leasing activity in the Central Texas market is steady with rates increasing. Due to the increase in absorption, incentives have been reduced.

Austin continues to develop itself as a location for national and regional corporate headquarters. In 2005, Austin successfully defended its position against tough national competition by securing the location of The Home Depot's Information Technology group, convincing Advanced Micro Devices to consolidate its Austin office in a new location. Austin's greatest accomplishment was the successful bid to keep the Motorola spin-off, Freescale Semiconductor, in Austin and to establish Austin as its world headquarters. The year also was highlighted by a new world headquarters for Whole Foods Market that was newly constructed.

The Interstate 35 Corridor from Round Rock to Georgetown continues to attract growth, particularly along Chandler Road in Round Rock. The area has added Scott and White, IKEA, Texas State University and Chelsea Property Group's Round Rock Premium Outlets. Other areas to watch include the former Robert Mueller Airport conversion, Hays County south and west of Austin, and the central business district (CBD).

Residential continues to do very well as a result of low interest rates. Retail property also remains very stable as it follows the retail boom.

The expansion of Samsung will be a major attraction for new employers and will help to increase the existing employment base. This also will represent the largest single construction project in Texas for 2006.

Trends that will continue well into 2006 include office and residential activity in the CBD. Major projects significantly impacting the market are the new toll road bypass of State Highway 130 scheduled for completion in 2007; the Mueller redevelopment; Simon Malls nearing completion in Georgetown, Round Rock and Austin; malls underway in Bee Cave; the redevelopment of the IBM tract at Braker and Mopac; and the consolidation of AMD offices to a new location.

— Jerry Heare is a principal with NAI Commercial Industrial Properties Company in Austin.

There are several market factors and projects impacting the market for investment properties in Central Texas. First and foremost, the region will continue to see out-of-state investors, predominantly in 1031 exchanges, take advantage of income-producing properties in Central Texas. Thus far in 2005, approximately 70 percent of the investors purchasing properties in Texas are from out of state and half of those are from California. Secondly, job growth and immigration are having a positive impact on investment property. New developments are being constructed in suburban areas following home construction and, in some cases, entering areas on speculation. Finally, continued construction along the Interstate 35 Corridor will improve mobility between Austin and San Antonio. As travel and commutes between these cities improves, residential and commercial growth, as well as development, should thrive. In the next few decades, with continued growth, Austin/San Antonio is primed to rival Dallas/Forth Worth as a major metroplex.

Apartments and retail have been and will continue to be in high demand in Central Texas. However, office, industrial, hotel and self-storage investments also will command attention due to higher cap rates and better returns. With these factors, combined with economic drivers and interest rates still at historical lows, the investment market in Central Texas will continue to be very active in 2006.

— Brad Bailey is regional manager, Austin and San Antonio, for Marcus & Millichap.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.