A mere 80 miles separates Austin and San Antonio, the anchors of the growing Interstate 35 corridor. The two cities have some fundamental cultural differences but share certain economic drivers that have produced healthy retail real estate markets in both metros, albeit with varied results.
The most basic economic drivers common to both metro areas are population and employment growth. Like other Texas cities, the Austin and San Antonio metro areas continue to experience a steady stream of new residents and jobs.
Kim Gatley, REOC San Antonio
Although San Antonio often takes a backseat to Austin in various rankings, the Alamo City topped this year’s national list for largest raw numeric growth in population among all U.S. cities of 50,000 or more, according to the U.S. Census Bureau. Austin landed at No. 12 in this category. However, Forbes ranks Austin second among America’s Best Cities for Jobs while San Antonio lags at No. 13.
Joined at the Hip
Because both cities and the small towns that surround them are growing at phenomenal paces, central Texas is starting to be identified in terms of Austin and San Antonio, not Austin vs. San Antonio. And although this concept has been talked about for years, retail development along the I-35 corridor continues to spur discussion about an emerging mega-region.
There is no doubt that the region’s overall retail market has expanded and enjoyed the benefits of sustained population and job growth. But neither Austin nor San Antonio has been immune to the rash of national store closures that continues to plague the industry.
In Austin, for example, the recent closure of Toys ‘R’ Us and Babies ‘R’ Us darkened four big boxes totaling roughly 150,000 square feet. Similarly, the toy chain emptied three storefronts in San Antonio totaling approximately 130,000 square feet.
In addition, the closing of Sears stores is impacting both markets. San Antonio is losing the 214,000-square-foot Park North location, and Austin is losing the 166,000-square-foot Lakeline Mall store, as well as the 172,000-square-foot Sears Grand at Tech Ridge store, which was shuttered earlier this year.
Despite these high-profile closures, both markets report healthy occupancy rates. Austin’s retail scene is arguably the strongest in Texas and outshined San Antonio at mid-year with a citywide occupancy rate of 96 percent, compared to 93 percent in the Alamo City.
The Amazon Effect
There is an ongoing evolution and disruption happening in American retail markets, resulting in increased e-commerce activity and vacated big box space. Yet demand for retail space in Austin and San Antonio has held steady.
Expanding retailers are taking advantage of this “Amazon effect.” They are filling vacant space at existing centers at rents that are lower than those of newly built product. For example, Burlington will occupy the 42,000-square-foot former Sports Authority space located at Stone Ridge Market in San Antonio.
Many of the vacant big boxes are also seeing new life in the form of subdivided smaller spaces. In Austin, for example, the 27,500-square-foot Sports Authority located at Southpark Meadows was backfilled by a combination of Old Navy and Party City. Similarly, in San Antonio, Spec’s is taking down a portion of the former J.C. Penney HomeStore at Ingram Festival.
Minimal New Supply
This new dynamic involving big box spaces is compounding an already-slow development cycle in both cities. In 2017, new retail construction delivered roughly 640,000 square feet in Austin and only 360,000 square feet in San Antonio.
The new retail center in Live Oak, which will be anchored by IKEA, is one of the few new retail construction projects going on in Austin or San Antonio.
Austin should close this year having delivered about 700,000 square feet of new retail space — just a 9 percent increase from last year. San Antonio should add about 300,000 square feet of new space this year, which is a decline from 2017. Demand-based construction is common in both markets and is a major factor for sustained high occupancy rates.
While San Antonio has a few pockets of mixed-use development — primarily The RIM and The Pearl —Austin has a growing list, including the Seaholm Power Plant, The Grove and Saltillo, not to mention The Domain, which many locals view as Austin’s second downtown. Speaking of downtown, nearly every new high-rise project in downtown Austin features some portion of ground-floor retail to provide residents or tenants with convenient locations for goods and services.
Generally less encumbered by barriers to entry, retail development in the San Antonio area is primarily happening in the sprawling suburbs. Singing Hills, for example, recently delivered a second retail building at U.S. Highways 281 and 46 in the shadow of the Walmart Supercenter. Plans there call for more retail and entertainment space to serve the growing satellite communities of Bulverde and Spring Branch.
Overall, the outlook for retail real estate in both cities remains very positive. But the key for both markets — really all markets — is to accept the changing trends and learn to adapt.
Retail is not dead, as some would say, but expanding retailers are more likely to be service-oriented or food-related — in other words, internet-resistant.
— By Kim Gatley, senior vice president and director of research, REOC San Antonio. This article first appeared in the September 2018 issue of Texas Real Estate Business magazine.