By Taylor Williams
AUSTIN, TEXAS — On the surface, Austin has everything that expanding retail and restaurant operators could possibly want: youth, density, culture, high-paying jobs. Yet when these users begin scouting and diving into the state capital’s retail real estate market, they often find that entering or expanding there is much easier said than done.
Skyrocketing home prices, increased vehicular congestion and limited infrastructure outside the urban core are just the most visible ways in which Austin has been somewhat victimized by its own torrid growth over the past 10 to 15 years. And each of those variables factors into retail site selection and contributes to the challenges of adding new retail and restaurant space to the market.
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Simply put, if there are no rooftops, roads, parking spaces and utilities, there can be no new retail development. Such is the story in some of Austin’s more remote suburbs, though few doubt that those preliminary requirements for retail growth will eventually be delivered. But there is also the issue of raw supply — and not just the simple lack of it as a function of demand, but also the misalignment between the types of spaces that are in demand and what leasable product is available in the desired locations.
For all of these reasons — combined with the simple fact that pretty much no real estate action in Austin happens quickly — retail and restaurant operators looking to plant their flags in the state capital must temper their expectations. Setting aside those users who are homegrown or got in early, there are just too many barriers to entry in Austin to actually achieve a fairytale growth story in a relatively short amount of time.
That’s according to a group of retail tenant brokers and owners who spoke at the InterFace Austin Retail & Mixed-Use conference in late February. The LINE Hotel, located in between downtown proper and the historic Rainey Street District, served as the host ground for the event, which drew several hundred attendees in its inaugural showing. Aamil Sarfani, CEO of San Antonio-based consulting firm Sarfani Commercial Advisors, moderated the retail leasing panel.
Panelist John Heffington, partner at the Austin office of retail brokerage firm SHOP Cos., crystalized the notion that for many retailers and restaurateurs, timely expansion in the Austin area is something of a pipe dream. His analysis included the challenges that he faces as an advisor in managing said expectations.
“When we talk to tenants that are interested in coming to this market and make plans, they’ll say, ‘We really want to open three stores at the same time to achieve maximum efficiency,’” he said. “My response is, ‘If I can find you three stores in five years, I’ll have done an amazing job as your broker.’”
“It’s all about setting expectations with Austin and frankly, the entire MSA,” Heffington continued. “Developers want to deliver the product that people will lease, because we have tenants that will pay $55 to $60 per square foot in Pflugerville, Georgetown, Cedar Park or even down in Kyle. But there are so many pieces of land that are locked up at too high a basis or subject to requirements from suburban planning departments that make no sense and don’t pencil [out]. So we’re not getting anywhere right now because although there is so much demand across the board, we don’t have places to put these tenants.”
Heffington also said that it is not uncommon for franchise operators to sign deals for multiple locations in the area without fully grasping the barriers to entry. The franchisors then contact brokers to help with their site selection — instead of the other way around — only to learn that scaling an operation to the tune of five new units will more likely take between five to seven years as opposed to one or two.
“Development timelines with franchisors coming into Austin are always interesting conversations to have,” agreed panelist Phil Morris, director of retail at local brokerage firm Commercial Industrial Properties. “They want your expertise and guidance, but they don’t want to hear that they won’t be able to open however many stores on their timeline, because they’ve sold that [business plan] on a different basis.”
Product, Location Misalignment
At another point in the discussion, both Heffington and Morris touched on the mismatch between the type of retail product that suburban municipalities prefer versus the types of spaces that tenants actually want.
“The biggest hurdle that we see is municipalities wanting and offering developers incentives for mixed-use multifamily environments,” Morris said. “Especially as you push northward, there are density increases and parking reductions, and it becomes clear that retail is an afterthought.”
“Developments have 20-foot bay depths, supports in the middle of spaces, slabs that have been filled in,” Morris continued. “So they’re just driving up the costs [on tenants] for a space that’s already going to be difficult for them to get into.”
Morris also said that he understands the logic of suburban municipal leaders and developers who want retail uses. He gets that vertical development, as indicated by the aforementioned design features, helps projects pencil out, and that city planners endorse the “if you build it, they will come” logic. He stated that regular communication between developers and retail brokers is therefore crucial to avoiding scenarios in which developers and municipalities inadvertently make it more challenging to incorporate retail components — and to lease those space up with quality tenants.
Moderator Sarfani concurred with this conundrum. He observed that “cities want mini-Domains, but it’s just not realistic,” a reference to the sprawling mixed-use development on the city’s north side that locals often refer to as Austin’s “second downtown.”
The fact that much of this discussion centered on deals and developments in suburban markets speaks to the tightness of the retail market in Austin’s urban core, as well as the faith in future growth prospects of the ’burbs. Still, these areas vary in the degree to which their growth stories are matured. Consequently, some nonlocal users are hesitant to pursue deals in some suburban markets, which can add to competition and barriers to entry in suburban markets that are highly developed. Panelist Andrew Alvarado, vice president at Weitzman, spoke to this dynamic via anecdote.
“We represent a coffee user that’s expanding into Austin, and we drive the market with them, and when we get to certain areas, they’re confused because it looks like pastureland,” he said. “They know the growth is coming, but it still takes them some time to wrap their heads around it all.”
Heffington concurred that location and how prospective tenants perceive a suburban market’s fundamentals are top concerns for brokers who represent them.
“The biggest driver for tenants when they enter this market is inventory and where they can get the deals done,” he said. “We have tenants that would pay $70 to $80 per square foot in the suburbs if the location was right, but ask them to go two blocks over, and they wouldn’t pay $20 per square foot. So it’s very hard right now to find the deals and trade areas that these tenants want.”
Panelist Graham Hildebrand, director of real estate development for local restaurant chain Torchy’s Tacos, confirmed this market reality by stating that his company is fine with ponying up for the best real estate.
“If we can find the location with the [co-] tenants that we want, we’re willing to pay a premium price instead of paying a little less for bad space,” he said.