TEXAS SNAPSHOT, JUNE 2009

Austin Retail Market

TREB: What major trends are affecting your area?

DeJernett

The Central Texas market has followed the national market in the significant decline of retail sales. While the Austin economy slowed later than most, we are now experiencing the effects of job losses, tightening credit and lower consumer confidence. We will continue to see a number of retail store closures throughout 2009 in the Austin area and many of the remaining retailers will have a disappointing year. The positive result, however, is that we are starting to see opportunistic retailers moving into the market to backfill vacancies that were not available in the tight retail market experienced during the past few years. This is true for new retailers entering the market and existing retailers looking to fill gaps in the market.

TREB: What recent sales or leases have impacted the market?

There have been very few retail sales transactions in the market due to the rapid tightening in financing and increase in cap rates. While there is a big demand for buyers looking to take advantage of a “distressed” market, it seems that most owners are doing whatever possible not to have to sell in this market environment. On the leasing front, we are seeing regional and national tenants such as Sprouts and New Flower Market moving into Austin to take advantage of prime second generation spaces being left behind by former retail chains such as Circuit City and Linens ‘n Things. Existing tenants are also using this opportunity to expand, as this is the most attractive time to lease space in Austin in recent memory. It is very clear that Texas in general and Austin in particular are still perceived as economies that will come out of this recession earlier and stronger than many parts of the country.

TREB: Are there any transactions in the works that will have a major impact?

There will be a series of transactions resulting from lender workouts as owners negotiate terms with banks to make determinations as to whether to release the properties back to the bank or continue ownership. Distressed sales are what the market is looking for, and for the most part, we are just starting to see this type of activity come onto the market. Time will tell how much of an impact distressed sales will have on the market as owners, even financial institutions, look to slow sales activity during the recession to buffer the impact of a forced sale on asset value.

TREB: Are there any major projects affecting the market?

Retail development has come to a halt in most every market, Austin included. The next phase of The Domain in North Austin is one of the only major retail expansions currently under way. The additional development phase should attract a mix of tenants that will enhance the overall development with additional traffic. We are also seeing the completion of suburban projects that were started prior to the economic fall-off. Conventional wisdom says it will be years before we see significant retail development again in the market. We will probably see redevelopment of existing retail centers with out-dated tenant configurations in strong demographic submarkets before we see the return of suburban development supported by new housing growth.

— Eric DeJernett is vice president of CB Richard Ellis in Austin, Texas.

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