TEXAS SNAPSHOT, MARCH 2007

AUSTIN’S ECONOMIC REBOUND DRIVING RETAIL EXPANSION IN CENTRAL TEXAS

The Austin metropolitan area continues to be one of the fastest-growing markets in the nation, which is fueling strong retail sales growth and healthy fundamentals. Expectations for another year of above-average growth has captured the attention of developers and tenants alike, and retailers continue to seek out suitable locations for expansion. Job growth in the region is forecast at 3.3 percent, one of the highest rates in the nation. The high-tech industry is on a rebound, and venture capital funding is picking up momentum. Employment opportunities are driving household growth, which is expected to average 3.2 percent over the next 5 years, and, as a result, retailers are rushing into the rapidly growing suburbs.

In 2007, over 3 million square feet of retail space is expected to be delivered in Austin. IKEA, which rarely moves into markets with fewer than 2 million people, opened a new location in Round Rock last year, and the 1.1 million-square-foot Hill Country Galleria is slated to open with brand name tenants this summer.

Austin’s favorable demographic and employment outlooks will continue to fuel the region’s investment climate. Average cap rates in the high-7 percent range, more than 100 basis points higher than many coastal markets, will continue to attract out-of-state investors to the region. Additionally, metro areas that experienced a run-up in retail sales due to home price appreciation and cash-out refinancing will struggle to generate similar returns this year. Austin’s housing market did not appreciate at an overheated pace, leaving local retailers and property owners better insulated against a cooling housing market. Investors are expected to focus on multi-tenant opportunities with national anchors in the rapidly growing suburbs north and south of the city. Near the city center, where high-end condominium developments have increased population density, investors may reap higher yields by taking on vacancy challenged assets and repositioning them to attract tenants to the area.

As for retail fundamentals in the Austin MSA, builders are expected to bring 3.5 million square feet on line by the end of 2007, increasing total inventory by 6.5 percent. The influx of new retail space will push vacancy up 60 basis points to 9 percent by the end of the year. Nonetheless, asking rental rates will strengthen and are expected to reach $19.68 per square foot by year’s end, a 3.3 percent gain, while effective rents are forecast to grow 3.2 percent to $17.80 per square foot.

Because of these solid fundamentals and strengthening economy, Austin will continue to attract both retailers and investors. Employers are expected to add 24,000 positions in 2007, an increase of 3.3 percent. Active home building in South Austin also will  lure retailers to this market and garner attention among investors.

— Bradley Bailey is the regional manager of the San Antonio and Austin offices of Marcus & Millichap.


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