Twenty years ago, if you were to make the 100-mile drive along Interstate 5 from Los Angeles to San Diego, you’d be driving through crop fields, ranchlands and vast tracts of undeveloped land. Today, that same corridor in southern California is defined by commercial and residential development, so much so that it’s hard to tell where one city ends and another one begins.
In recent years, California has become a feeder of the growing Texas population as businesses and households alike seek the tax benefits of relocating from the West Coast to Texas. Central Texas has been the landing spot for many of those firms and families as well. Consequently, the region’s overall population growth is laying the groundwork for a similar type of transformation along the Interstate 35 corridor connecting Austin and San Antonio.
Brad Bailey, CBRE
While retail normally follows rooftops, in Central Texas we see retail developers and investors — as well as their counterparts in the industrial space — targeting these markets in advance of the residential building boom that they feel is sure to come.
In addition, the remarkable population growth of both of the corridor’s anchoring cities has cemented its role as a rising star in terms of distribution. The U.S. Census Bureau identified San Antonio as the nation’s fastest-growing city by annual head counts in 2016 and 2017, while the Austin Chamber of Commerce notes that the state capital’s metro-area population grew by 23.3 percent between 2010 and 2017.
As such, e-commerce firms and large retailers are increasingly eyeing the likes of Buda, Kyle, San Marcos and other municipalities between Austin and San Antonio for both new stores and distribution operations.
Apples to Apples
In terms of major economic industries, cultures and lifestyles, there are a number of parallels between the anchoring cities of the California and Texas corridors.
Logan Reichle, CBRE
Austin, with its reputation as a hip, trendy market with a strong tech presence and a health-oriented lifestyle, is not unlike Los Angeles in those respects. San Antonio is similar to San Diego with regard to Latino-influenced cultures, as well as strong military presences and historic tourist attractions. Both regions have hill country, water features and until very recently, a penchant for following college football over the NFL.
Market Trends
Although Central Texas still has ample land for commercial development, the reality is that employment and population are growing at such paces that the real estate in the interior of each market is struggling to keep up.
Across commercial asset classes throughout this region, we regularly see demand exceeding supply, landlords pushing rents and inventory levels being undersupplied. These trends are especially visible in the retail investment space.
Throughout the various municipalities that dot the I-35 corridor, we see demand from local- or Texas-based retail investors whose familiarity with the regional market allows them to recognize just how phenomenal the growth has been in recent years. However, even with the broader move by institutional capital sources to shed non-core assets as brick-and-mortar retail adjusts to e-commerce, there is still not enough supply to meet buyer demand in this region.
Adam Rabin, CBRE
As a result, we see a solid percentage — about 35 to 40 percent — of deals for all sub-types of retail product trade off market. In some cases, retail landlords often receive unsolicited offers that are simply too great to ignore. As brokers, this trend in the marketplace often translates to increased opportunities to create competitive bidding for properties, regardless of whether or not these assets have actually been listed.
That said, competition among buyers is still most intense for properties that are located in close proximity to the urban cores of Austin and San Antonio. But the growing presence of a base of investors that really understands this market also ensures that non-core assets can be efficiently and successfully operated after they trade hands.
Cap rate movement for retail properties across Central Texas as a whole has been relatively static over the last 12 to 18 months. Increased rents and investor demand have at times been offset by rising interest rates and general occupancy fears brought on by e-commerce. With the Fed recently announcing a break from rate hikes, we do not expect to see much upward pressure on cap rates throughout 2019.
Rising property taxes have also worked to neutralize some of the demand. But regardless, in this region, selling a property’s location and the natural growth of its surrounding customer base is a critical part of the marketing process.
Additional Growth Factors
A residential building spree is inevitably coming to Central Texas. Developers are actively scouring the market for new sites. As more housing comes on line, retailers that have found success in Austin by positioning themselves as local brands will surely look to expand outward.
Central Texas is also building a strong workforce for retail operators, in terms of both storefronts and distribution centers. Several large-scale industrial projects, including Philadelphia-based Exeter Property Group’s 600,000-square-foot facility in Buda and Hays Commerce Center, a 40-acre development in Kyle by California-based Majestic Realty, are underway in anticipation of greater demand for distribution services in the area.
So long as the municipalities along the I-35 corridor continue to add jobs and people at rates similar, if not equal to the present, demand for retail space will inevitably grow in Central Texas. The only questions lie in which retail developers, investors and users will be positioned to capitalize when the region goes the way of the I-5 corridor in southern California.
— By Brad Bailey, first vice president, CBRE; Logan Reichle, vice president, CBRE; Adam Rabin, associate, CBRE. This article first appeared in the May 2019 issue of Texas Real Estate Business magazine.