Austin Touted as Buyer's Market for Commercial Real Estate

Mary Alice Kaspar

Austin Business Journal
March 28, 2005

Is now a good time to buy real estate in Austin? A new report says yes, if you're looking to buy office, retail and multifamily properties under $5 million. Austin also ranked high in the top 10 spots for buying retail properties over $5 million.

The study, "Top 10 Markets to Watch," was recently released by Sperry Van Ness Commercial Real Estate Advisors, based in Irvine, Calif. The commercial real estate company's research team reviewed a representative sample of commercial property transactions from markets nationwide, examining factors such as price per square foot and capitalization rates (income expressed as a percentage of purchase price). Projected employment and disposable income growth were also factors taken into consideration.

For retail, Austin placed No. 4 for buying properties both under and over $5 million. Austin ranked behind Raleigh, St. Louis and Detroit for properties above $5 million.

"Austin has been battered in the tech collapse, but it would be a mistake to see this market as permanently handicapped," the Sperry Van Ness report states. "With projected income growth faster than nine percent per year, stores should see sharply improved revenue through 2007."

Specifically, the study projects a 27.26 percent increase in disposable income through 2007. It also points to a 7.6 vacancy rate in the local retail market.

A separate retail market study by Austin-based NAI Commercial Industrial Properties Co. shows the local retail market had a 6.11 percent vacancy rate as of the end of 2004. It also found retail rates for retail centers over 100,000 square feet rose by 5.45 percent, increasing from $1.66 to $1.75 per square foot, plus taxes, insurance and maintenance expenses.

Austin nabbed the No. 3 spot in the top 10 markets to watch for buyers of properties to watch, and No. 10 for multifamily, for investors of properties under $5 million.

It is just as interesting to see where Austin didn't rank.

For example, the only product type under $5 million Austin wasn't a place for buyers to watch was in the industrial sector.

Austin also wasn't found among any of the top 10 markets to watch for sellers.

"I'm glad that they're recognizing Austin as a good place to be buying now, rather than selling," says Fred Higgins, an industrial specialist with NAI CIP. "It implies Austin is on an uptrend rather than a downtrend, and there's plenty of room to grow."

While grateful for the recognition, Higgins also says there's a shortage of properties under $5 million to buy in Austin, and "I think it's just as good a place to have $30 million in property as a larger city."

Higgins says a number of people from larger cities tend to think of Austin as a smaller market than, say, Dallas or Houston. But, when his clients are looking to invest just a few million dollars, properties are scarce.

"A lot of times when we're trying to find a little $3 million to $4 million property, I can find them in Houston, not here," Higgins says.

He also says that when compared with Houston and Dallas, comparable Austin properties are selling for more per square foot, and with lower cap rates.

Large firms returning to Austin, creating a splash in the retail market

The Austin retail market is poised for above-average household growth and moderate rent increases for 2005.

According to the recently released 2005 National Retail Report from Encino, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Company, the nation's largest real estate investment brokerage firm, Austin has climbed four spots to number 17 in the annual National Retail Index.

"Strong retail fundamentals have resulted in an optimistic outlook for the Austin market," says Michael Hoffman, vice president and regional manager of Marcus & Millichap's Austin office.

"As a result of strong consumer spending, national retailers have taken note of the market's strength and are expanding their presence in Austin."

The report indicates that larger firms are returning to Texas' capital city, which will help create some 23,000 jobs in 2005.

Atlanta-based The Home Depot Inc. (NYSE: HD), which is opening a technology center in Austin, and San Jose, Calif.-based Samsung Semiconductor Inc. are among the companies the report says are bringing high-paying positions to the metro area, with the two companies expected to add 1,100 workers this year.

According to the report, builders are expected to complete about 1.4 million square feet of space in 2005. Most construction during the year will likely be in suburban areas including Georgetown, Cedar Park, Leander, Round Rock and South Austin.

The vacancy rate for the metro Austin area is forecast to drop by 10 basis points to 6.9 percent by year's end, the report says.

But since the majority of new space is already leased, the impact on existing shopping centers is expected to be minimal, and strong consumer spending will likely keep tenant demand high.

Owners are expected to raise asking rents to $18.10 per square foot in 2005. And in spite of rising construction activity, the vacancy dip will allow for rent growth of about 2 percent, according to the report.

© 2005 American City Business Journals Inc.