Office Leasing in Austin

Austin’s retail market remained tight during the third quarter of 2019, with the overall vacancy rate up only slightly quarter-over-quarter—and year-over-year—at 4.3%. Net absorption also remained at the same level compared to last quarter at 175,000 sq. ft., continuing to stay positive for 33 consecutive quarters, or eight years.


EXECUTIVE SUMMARY

Austin’s retail market remains steady

Austin’s retail market remained tight during the third quarter of 2019, with the overall vacancy rate up only slightly quarter-over-quarter—and year-over-year—at 4.3%. Net absorption also remained at the same level compared to last quarter at 175,000 sq. ft., continuing to stay positive for 33 consecutive quarters, or eight years. In addition, metro Austin’s leasing activity stood at 473,000 sq. ft., down slightly from the amount of activity in the previous quarter. The retail market saw overall average asking rates rise $0.33 per sq. ft. quarter-over-quarter at $22.44 per sq. ft. on a triple-net basis. Austin’s retail market has seen occupancy rates at or above 95% for twenty consecutive quarters, or Q2 2014.

Tight Austin labor market persists

The Austin metro realized a 3.4% annualized increase in jobs during the three months ending in August. Most job sectors experienced payroll gains, with professional and business services growing 9.0%, adding approximately 4,300 net jobs. Trade, transportation, and utilities grew by 8.7%, adding 3,800 net jobs; and leisure and hospitality rose by 6.8%, totaling 2,250 net jobs. The five-month moving average for total housing construction permits (single-family and multifamily) expanded 3.9% from July to August in Austin, compared with an increase of 2.9% in Texas. Austin’s unemployment rate remained at 2.7% in August, and unemployment rates for the U.S. at 3.7% and Texas at 3.4% were unchanged from the prior two months.

MARKET OVERVIEW

Healthy Austin retail market

Austin retail market fundamentals are thriving, with occupancy at 95.7%, and 1.6 million sq. ft. of leasing activity so far in 2019. Overall net absorption has remained in positive territory in all except four quarters since NAI Partners began tracking performance in the retail sector in 2006. Supply and demand have been equally aligned for the last decade with supply averaging 265,000 sq. ft. and demand 310,000 sq. ft. per quarter. Available space is tight in the retail market, while awaiting the completion of over 1.5 million sq. ft. of retail space—of which half is available for lease—to help meet demand. 627,000 sq. ft. has been delivered to the greater Austin retail market in 2019, with 30% of that space available.

West Anderson Plaza changes hands

Real Capital Analytics data reports the third-quarter sales volume for 2019 in the retail market of the Greater Austin area at $175.6 million compared to third quarter 2018 at $125.6 million. The primary capital composition for buyers in 2019 is made up of 75.5% private investors, and 13.6% institutional investors. For sellers, the majority was 54.0% private investors and 17.2% institutional investors. In September, Pennybacker Capital acquired West Anderson Plaza from Anderson Burnet Plaza Ltd. The two-property, 116,500-sq.-ft. retail center is located at 2438 W. Anderson Lane in the Central submarket. The property was 96% occupied at the time of sale to major tenants Precision Camera, Sun & Ski Sports, and Terra Toys.

Leasing activity slows slightly

Leasing activity remained active during the third quarter, with a total of 473,000 sq. ft. leased in the Austin market— compared to 585,000 sq. ft. at this time last quarter. The amount of square feet leased by submarket had Georgetown leading the way with 106,000 sq. ft. (22%), the Central and Cedar Park submarkets tied for second at about 67,000 sq. ft. (14%), and third place taken by the South at 48,000 sq. ft. (10%). The largest lease signings occurring in Q3 2019 included Academy leasing 62,917 sq. ft. at 1310 University Ave. W. in Georgetown; Aldi signing a 20,000-sq.-ft. prelease in Wolf Crossing in Georgetown; and Caliber Collision inking a deal for 14,600 sq. ft. at 5236 City Lights Drive in Hays County.

H-E-B celebrates its 114th anniversary

H-E-B has plans to replace their store in the Oak Hill Community, less than two miles away in Southwest Austin. Starting in Q1 2020, the store will be built on a 30-acre site at 7901 U.S. 290 encompassing 90,000 sq. ft. In addition, one of H-E-B’s oldest Austin stores, located at 2400 S. Congress, will be replaced with the first multi-level H-E-B in Austin. The grocery store at 2400 S. Congress St. opened in 1957 with 25,000 sq. ft. and later expanded to 69,000 sq. ft. Construction is set to begin in late 2020, turning it into a spacious 100,000-sq.-ft. grocery store. Another store is under construction at 8801 South Congress Ave. H-E-B, with sales of $26 billion, operates 400 stores in Texas and Mexico. Known for its innovation and community service, H-E-B celebrates its 114th anniversary this year.

Asking NNN rates continue to increase

The retail market saw overall average asking rates rise $0.33 per sq. ft. in Q3 2019 at $22.44 per sq. ft. on a triple-net basis quarter-over-quarter. Vacant space has lessened in Austin’s retail market during the last five years with occupancy rates at or above 95% for twenty consecutive quarters, or Q4 2014. While retail availability is especially limited across the Austin area, it is particularly tight within the North/Domain, with a total inventory of approximately 7.4 million sq. ft., a vacancy rate of 2.9%, and the average asking triple net rent at $20.84 per sq. ft. Overall average asking rates have climbed almost 30% over the last five years from $17.45 per sq. ft. to $22.44 per sq. ft. at the three-quarter mark of 2019. Although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator, the price of Austin’s retail space is climbing. The highest-quality space, with the best location, and ease of accessibility will demand the highest rents.

Double-digit percent increase in Austin home sales

The Austin-Round Rock MSA single-family home sales in September experienced a double-digit percent increase of 13.4%, and sales dollar volume jumped 19.6%. During the same period, the median price for single-family homes increased 6.7% to $320,000. The median price of a single-family home in the city of Austin rose 11.9% in September to $406,000––an all-time high for any September on record. For the third year in a row, Austin is the No. 1 Best Place to Live in the U.S., based on the U.S. News & World Report: Best places to live in the U.S. in 2019. U.S. News ranked the 125 most populous metro areas offering the best combination of jobs, desirability, cost of living, and quality of life.