Austin’s retail and restaurant market is rapidly becoming one of the hippest and most dynamic scenes in the country, as new concepts are flocking to the state capital in lockstep with its remarkable job and population growth.
The push by both new and established retailers and restaurants to grab a piece of the Austin pie has driven the city’s retail occupancy rate to roughly 93 percent. Annual rent growth has exceeded 10 percent at Class A properties in submarkets such as the Central Business District (CBD) and East Austin. But while demand for retail and restaurant space in Austin’s urban core is at an all-time high, so too are rates of turnover among these users.
A Gentrified Market
The driving factors behind these trends are fairly straightforward. Buoyed by the still-surging job growth in the tech industry, the median age of Austin’s population is getting lower, currently sitting at about 34 years. Many of these residents have high-paying jobs, are new to the city and are eager to take advantage of its thriving food, beverage and entertainment options.
Kevin Hunter, CSW Development
The gentrification of some of Austin’s historic neighborhoods is well underway and expected to continue in the near future as tech giants further their commitments to Austin. Apple made arguably the biggest splash of 2018 when it announced it would invest $1 billion in a new campus in North Austin. Initial reports project that more than 5,000 people will work at the property, with the eventual potential to house thousands more.
Facebook will be the largest tenant at the Third + Shoal office building downtown, while Google has announced occupancy of an entire 35-story building downtown. Both properties are currently under construction.
With each such deal comes thousands of high-paying jobs and young workers that fuel the city’s retail and restaurant growth. But here’s the kicker: Austin residents want originality and variety. They rarely want to eat at the same place twice in a short period of time. They want to experience the freshest, newest concepts available.
Jon Switzer, JLL
Crazy Competition
These consumer trends have created an incredibly competitive market for authentic dining, drinking and entertainment concepts. As such, especially in the CBD, it’s not uncommon to see user turnover at an accelerated pace, sometimes as quickly as 12 to 36 months for a struggling concept.
The problem does not always lie with operators, who often find early success but see their customers move on to the next new thing. Rents and property taxes are simply too high and the competition too great in areas like East Austin or The Domain for struggling concepts to operate at comfortable profit margins. Consequently, we frequently see operators rebrand themselves in the middle of their leases.
Rents at restaurant spaces in East Austin, such as those at Saltillo, a mixed-use project by Endeavor Real Estate Group, are among the highest in the city. Many of the older properties in this area have already been redeveloped for retail or restaurant uses.
For many of Austin’s restaurant operators, knowing when a concept has run its course and when to pull the trigger on a rebrand can be the difference between remaining in an ideal space or relocating. Fortunately for the rest of Austin’s retail market, this extreme level of competition is mostly limited to restaurants.
Other Segments
Now more than ever, retail landlords in Austin have to be exceptionally smart about what tenants they sign leases with. The ceiling for rent growth in the Austin retail market has never been higher, but neither have the risks. Thorough credit checks and assessments of long-term viability are critical to maintaining strong occupancy and steady rent growth.
Retail concepts that truly capture the Austin lifestyle through their originality, authenticity and ambiance are finding the most success in this market. Boutique fitness, as well as broader health and wellness concepts, are perhaps the two fastest-growing sectors of the retail market in terms of leasing and franchising activity.
In terms of development, the market is running low on supply. There are very few older properties in Austin’s top submarkets that have not been redeveloped or renovated for new concepts. The only true repurposing plays in this market involve big and junior boxes that have been victims of e-commerce, and we see very little absorption of those spaces by soft goods retailers.
As a result of both the rapid population growth driven by the healthy economy and the high cost of living in Central Austin, the surrounding suburbs are some of the fastest-growing neighborhoods in the country. Core retail uses including quality dining, fitness, entertainment and medical, as well as premium service providers, are active in these markets to accommodate this growth. The success of these uses remains tied to the fact that they are largely e-commerce-resistant in nature.
— By Kevin Hunter, COO/CFO, CSW Development; and Jon Switzer, senior vice president, JLL. This article first appeared in the March 2019 issue of Texas Real Estate Business magazine.