By Taylor Williams
The Austin retail market is in dire need of more quality space, but between the newfound volatility in the U.S. capital markets and longstanding local policies that have hamstrung commercial developers in the state capital, delivering that space is no easy feat.
The city’s remarkable growth story is well-documented. Big Tech has made Austin its home away from home, spearheading what was a 33 percent increase in population between 2010 and 2020, according to the Austin Chamber of Commerce.
But the paces of growth of housing and infrastructure — two crucial prerequisites for retail development — haven’t kept up with the surging head count. In addition, the Austin bureaucracy is notorious for slow-moving entitlement and permitting processes, at least in the eyes of Texas developers who have done business in zone-free Houston or certain municipalities of Dallas-Fort Worth that make it a point to fast-track new projects.
These issues at the local level have merged with debt market disruption on the national circuit, rendering a scenario in which the process of financing and building new retail space is fraught with headaches, delays and pitfalls. The number of ways in which new projects can be killed in action — or before they ever see real combat — is long and getting longer. But developers know that healthy fundamentals still exist in Austin and the potential for robust rent growth exists for completed projects, which is why they’re finding creative ways to keep doing what they do.
The subtleties and nuances within this challenging market dynamic were discussed in detail at the inaugural InterFace Austin Retail conference on Jan. 17. InterFace Conference Group, a division of Atlanta-based France Media, hosted the event, which took place at the Renaissance Hotel on the city’s north side. Cole Brodhead, principal of Edge Realty Partners, moderated the discussion on retail leasing and tenant representation.
Robby Eaves, principal of locally based brokerage firm Commercial Industrial Properties, was among the first panelists to acknowledge the challenges of building in Austin. Eaves cited both a local issue — the limited availability of quality development sites — and a national one — supply chain disruption — as factors that have complicated this trend.
“Pre-COVID, a lot of the low-hanging fruit with regard to raw dirt got picked over pretty hard, and post-COVID, what was left had a lot of hair on it,” he said. “So you have challenges with permitting, development and site planning that were inherent to the city prior to COVID, and now you have the element of supply chain issues. Transformers are necessary to power a development site and can take a year to arrive, so having to wait another year for materials to arrive and shovels to go in the ground is a big challenge.”
“Lack of inventory has been crazy since COVID,” agreed panelist Nick Young, director of real estate for Austin-based retailer Excel Fitness. “It’s a sit-and-wait game, which is why it’s critical that we get ahead of any off-market sites [that might trade]. We’ve had to consider ground-up [construction] more than we’d like to, since that’s more costly and time-consuming. But as a franchisee we have obligations on club counts to hit each year, so we also have to consider shrinking our footprint in our more mature, infill markets.”
Young’s point directly addressed the barrier to expansion that is higher construction costs for both raw building materials and customized buildouts. In addition, his statement implicitly noted that for users looking to build — even if their facilities are relatively small — financing is usually required, and debt isn’t particularly cheap these days.
Young said that on average, Excel Fitness spends between $3.2 million and $3.5 million to open a new facility — about 25 percent above pre-COVID levels.
Other panelists noted that declining land values have proven problematic in getting new projects off the ground. Two years ago, when interest rate hikes began unfolding at an aggressive clip, development slowed, creating less demand for land. Landowners have not always accepted declines in valuation and lower sales prices; thus some parcels remain vacant.
“We’re very real with landowners we work with, who know their values from two years ago, but that’s not where we are now,” said Barry Haydon, executive vice president at JLL. “We offer to meet their price with a year of options, and we’ll pay along the way if we believe in [the site], but they don’t want to do that until time shows them that the buyers have financing and users in place and can actually deliver.”
The degree of disconnect in perceived values between landowners and developers can vary, but wherever that dynamic exists, it is purely a function of upheaval in the U.S. capital markets. But the discussion would soon revert to localized analysis, namely the undeniable fact that Austin infrastructure is unequal to meeting demand from years of rampant growth. Traffic and congestion in the city proper are well-documented. But from a pure real estate perspective, the inability to provide water and sewerage services to more suburban — yet fast-growing — sites that could otherwise house new projects is a big detractor to supply growth.
On the Flip Side
After establishing the cons, panelists who are active in retail leasing in Austin made sure to note the pros.
“We don’t have a demand problem [in Austin] — everybody wants space,” said Haydon. “We have a finance problem, but we know those interest rates are going to come down at some point, though probably not to where they were three years ago. And for the most part, tenants understand that they have to pay more [rent] than they did in the past, and landlords understand that their TI packages might be a little more. But the real question is, ‘can they pull it off, meaning, can they build?’”
Haydon noted that the decision to delay or even abandon a project is never easy, especially when a developer has already incurred a fair amount of sunk costs to the likes of engineers and lawyers. But the landscape currently holds such a unique array of development hurdles that sometimes there’s simply no other option.
“If you don’t pull it off, you’re losing money and credibility, so it’s really important to pump the brakes and make sure we can actually do a project before we go in and find out we can’t,” he said. “We have to manage expectations. The same applies with existing centers — they’re great as built, but you have to put money into them. Otherwise, they won’t be able to support the types of tenants you want to put in there.”
Haydon also touched on the creativity that owners of existing centers, many of which are seeking to add other uses, can employ. By investing in capital improvements to their retail spaces and boosting their occupancies and rents, owners have cash flowing in while laboring through the arduous process of rezoning and entitling part of the land for other uses. Then when financing is needed, the owner has both cash on hand from the retail and some progress to show on the other uses.