Austin & San Antonio 2009 Market Outlook
Austin | 2009 Market Outlook
Austin Entering Downturn, but Well Positioned for Turnaround
The economic slowdown will weigh on retail fundamentals in Austin during the first half of 2009, though healthy population growth and relatively sturdy home prices should support retailers and limit the impact of the downturn. Among specific sectors, the technology industry faces the greatest threat of reduced employment due to a decline in global demand. As such, retail properties in tech-rich areas northwest and southwest of the city center may have the greatest difficulty retaining tenants, especially as new developments without significant pre-leasing come online. In the Central submarket, however, several multi-family towers have been completed or are under construction, which will increase population density and spur retail sales growth in the area. In addition, the state government and the University of Texas are located in the submarket, providing a sizable daytime population.
Investment activity in Austin will be subdued during 2009 due to the significant expectations gap between buyers and sellers. As out-of-state investors flocked to the metro in recent years, cap rates compressed to the lowest level in the state. At the end of 2008, average single-tenant cap rates were in the mid-7 percent range, while multi-tenant initial yields were approaching 8 percent. With exchange capital limited and institutions targeting properties in primary markets, cap rates may have to push higher in Austin to entice buyers from Houston and Dallas/Fort Worth. Nonetheless, opportunities to acquire small assets exist in the city’s core, where many local retailers attract a loyal consumer base and have been only marginally impacted by the economic slump. Since these properties are unlikely to draw the few out-of-state buyers remaining in the market, local investors may be able to negotiate above-average yields.
2009 Market Outlook
• 2009 NRI Rank: 10, Up 1 Place. Forecast household growth and modest job cuts will support retail demand in Austin this year, allowing the market to move up one spot in the ranking.
• Employment Forecast: Employers are expected to cut 2,100 jobs this year, a 0.3 percent decrease. In 2008, 9,500 positions were added.
• Construction Forecast: Approximately 1 million square feet of retail space is forecast to be completed in 2009, following the delivery of 1.1 million square feet last year.
• Vacancy Forecast: Easing tenant demand and continued construction are expected to push vacancy up 140 basis points to 10.5 percent this year, after a 60 basis point rise in 2008.
• Rent Forecast: As vacancy creeps higher, asking rents are projected to dip 2.6 percent to $20.01 per square foot in 2009 while effective rents retreat 2.8 percent to $17.93 per square foot.
• Investment Forecast: In South Austin, tenant demand near Southpark Meadows has been robust in recent months. As retail space on the perimeter of the metro comes online over the next 12 months, however, owners will have to compete for tenants by offering leasing incentives.
San Antonio | 2009 Market Outlook
Population Growth Sustaining Retail Demand Despite Employment Construction
Employers in San Antonio will trim payrolls this year, although deep cuts are not expected. The metro’s growing population, which is anticipated to increase by more than 200,000 individuals over the next five years, should support job creation over the long term. While the recession is slowing vacation spending nationally, the economies of the major Texas markets have remained comparatively strong, with tourist attractions in San Antonio, including Six Flags Fiesta Texas, SeaWorld San Antonio and the River Walk, popular with the state’s residents. Continued tourism should mitigate the decline in retail sales, supporting tenants near major destinations in 2009. On the supply side, retail construction will begin to slow during the second half of the year as national chains delay expansion plans. In fact, the planning pipeline recently reached the lowest level in more than three years, indicating easing supply-side pressure. Nonetheless, projects that are already under way will face longer lease-up times and offer significant concessions to attract tenants.
Investor sentiment in San Antonio will remain positive during 2009, though activity among regional buyers may decline. As such, sellers may have to realign pricing expectations to compete with rising cap rates in the state’s larger metros. Local investors are expected to stay prominent in San Antonio, targeting stabilized multi-tenant assets where cap rates are in the high-7 percent to low-8 percent range. Single-tenant properties were trading with cap rates in the low- to mid-7 percent range at the end of 2008. Further prospects will be created by developers divesting assets on outlying pad sites, generating competitive bids from exchange buyers who are seeking to place capital during the economic downturn.
2009 Market Outlook
• 2009 NRI Rank: 24, Up 9 Places. San Antonio rose nine spots in the NRI this year due to limited job losses and a modest decline in retail sales.
• Employment Forecast: After adding 14,800 positions in 2008, employers are projected to trim payrolls 0.4 percent this year, or by 3,300 jobs.
• Construction Forecast: Retail development will total 2.5 million square feet in 2009, down from 4 million square feet last year. Completions will account for a 3.3 percent increase in retail stock.
• Vacancy Forecast: Despite easing construction, vacancy is expected to finish the year at 10.4 percent, up 140 basis points from 2008, when the rate rose 40 basis points.
• Rent Forecast: Owners are forecast to increase concessions to hasten the absorption of new space. Asking rents are projected to end 2009 at $14.49 per square foot while effective rents slip to $12.84 per square foot, declines of 2.9 percent and 3.7 percent, respectively.
• Investment Forecast: Buyers with long-term holding strategies may want to consider properties in the Northeast submarket, where the recent relocation of Rackspace’s headquarters and the consolidation of the military’s medical training facilities will add thousands of new jobs over the next three years.
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