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RETAIL RUSH

With more than 20 centers on the way, Austin gets much-needed infusion

BY JILL MAUNDER

“I’ve always loved Austin,” said Thomas J. Schneider, executive vice president of development for Simon Property Group. “It’s a great city.”

Part state capital, part college town and part high-tech hub, Austin boasts a thriving music scene, beautiful natural surroundings and a quirky sense of humor.

Above all, it seems to be a treasure trove of retail opportunities.

Simon certainly thinks so. The firm already has a lock on Austin’s regional mall business, with seven centers in operation, amounting to nearly 5 million square feet of space. But Austin’s economy and demographics are just too good to leave things at that, Schneider says. He will be visiting Austin a lot over the next several years, because Simon plans to double its holdings there, building eight new retail projects totaling 5 million square feet.

Simon is not alone. Currently, there are eight retail centers totaling 2.2 million square feet under construction. In addition, at least 17 lifestyle, community and neighborhood centers are in the hopper as well, says Greg Blackburn, vice president of retail at the CB Richard Ellis Austin office.

This retail-building explosion amounts to a delayed response to the city’s skyrocketing population, which grew at about 4 percent a year on average through the 1980s and ’90s and continues to expand by 1.5 percent annually, says Ryan Robinson, the city’s demographer.

The metro-area population totals about 1.4 million today, double what it was two decades ago. And there is plenty of spending power. Robinson says the median family income is $66,900 a year. Though that is down from a peak of $71,100 in 2002, it is still significantly higher than the household incomes in similar-sized markets, such as Las Vegas or Orlando, Fla.

Through its boom, Austin beckoned to people of various age groups and interests, as well as to large high-tech employers. “We were a high-flying community in the ’90s,” Robinson said. But the tech industry collapse of 2001 did hurt, he adds, and the local economy is only now starting to recover.

Nowadays government — city, county, state and federal — is still the No. 1 employer. But the local Chamber of Commerce continues to support the expansion of the semiconductor and computer software and hardware industries, and has lured biomedical, wireless communications and automotive components companies in the past year. The influx of new companies is keeping the job market healthy.

“Jobs are up, with unemployment at 4.7 percent,” and the retail real estate investment market is heating up, said Blackburn. Retail sales, up each year, are projected to hit $20 billion by year-end, he adds.

But in spite of Austin’s phenomenal growth — or perhaps because of it — “we’ve been underserved for retail,” said Todd Wallace, Austin vice president for retail at Dallas-based Staubach Co., which is a full-service real estate brokerage with 19 offices across the United States. Staubach recently began operating in the market. “There’s a tremendous amount of growth in Austin and the suburbs of Round Rock and Buda.”

As is true of most growing cities, the majority of Austin’s new retail development is taking place in the suburbs. New rooftops are rising in western Austin, Round Rock and Pflugerville. And the south Interstate 35 corridor in Hays County is a hot zone for retail, with a planned Cabela’s store expected to spur still more development (see story).

Retail space metrics are holding up well too. Rents average $35.54 per square foot at regional centers and $18.85 per square foot for nonregional space, according to Blackburn. Neighborhood center rents average $19.96 and strip centers, $16.47. Anchor rates in new centers are typically about $9 to $15 per square foot, with junior anchors paying $12 to $20 per square foot and in-line shops paying $20 to $60, he says. (All figures are triple net, including taxes, insurance and common-area-maintenance fees, Blackburn said.) Nationally, rents per square foot average $40.12 at regional malls, $20.42 at power centers and $17.43 at grocery store-anchored neighborhood service centers, according to the 2004 Global Market Report by NAI, a real estate brokerage network.

Big-box boom
It’s a sign of Austin’s growth, Blackburn notes, that Wal-Mart is moving out of established stores of 50,000 to 100,000 square feet and into larger supercenters (about 225,000 square feet in this market) built nearby. Other retailers then take over the vacancies. Blackburn handled four sales of Wal-Mart properties now occupied by second-generation users including Oklahoma City-based crafts company Hobby Lobby Stores, Columbus, Ohio-based closeout specialist Big Lots and Nashville, Tenn.-based Tractor Supply Co.

Value-oriented big boxes are driving many of the new projects in the suburbs. Sears, which already has two full-line stores in the market, chose Austin for its fifth Sears Grand store. (The company foresees having at least a dozen Sears Grands in the United States by the end of 2005.) Preliminary site work began in September on the one-level, 180,000-square-foot store, which is going up at I-35 and Parmer Lane, says spokeswoman Lisa Gibbons. The freestanding one-stop home and family shopping store, located next to Tech Ridge Shopping Center, will carry everything from milk to refrigerators and is slated to open next fall.

Developers plan to bring some 6.9 million square feet of retail space next year, with an additional 4 million square feet coming online in 2006, says Blackburn. This year Austin is absorbing about 2 million square feet of new space, and the occupancy rate on multitenant retail properties is holding at 93.5 percent, he adds.

Kohls, Target and T.J. Maxx are among the 12 that will anchor Simon’s Wolf Ranch, which is under construction in Georgetown, a suburb north of Austin. The 750,000-square-foot open-air center, scheduled to open in July, will be perched on a bluff overlooking the San Gabriel River, says Myles Minton, Simon’s senior vice president for development. Other announced anchors include Linens ’n Things, Michaels, Office Depot and PetsMart.

Thanks to its acquisition of Chelsea Property Group, Simon also counts the 430,000-square-foot Round Rock Premium Outlets among its upcoming projects in the market. This will be the second Premium Outlets center in Texas, the first being in Allen, near Dallas. A Chelsea spokeswoman says construction will start in mid-2005 for a fall 2006 opening. Round Rock is the home of tech manufacturer Dell, the area’s largest private employer.

On the western edge of Austin, locally based International Development Management and partner Dallas-based Lincoln Property Co. are building the first of two centers planned for the Village of Bee Cave. (Invesco is an equity partner in the project.) Long referred to as the Shops at the Galleria but likely to be renamed, the 570,000-square-foot center is going up on an 88-acre tract near state highways 71 and 620. The opening is scheduled for next October. It is one component of a mixed-use development that International Development President Christopher Milam says will include 200,000 square feet of offices and 450 housing units.

International Development and Lincoln also plan to build a larger lifestyle center of 1.7 million square feet on a 145-acre tract north of the Shops at the Galleria project. (Phoenix-based Opus West is an equity partner in this project.) It has been referred to as Hill Country Galleria for several years, but this name, too, may change because its scope was reduced from four anchors to two, Milam says. A department store, a high-end grocery store, a bookstore and a multiplex cinema have signed on, though he would not identify them. Construction on the first retail phase (440,000 square feet) is scheduled to start in April, and the opening is targeted for the fall of 2006. At the southern tip of Austin, Forest City California reportedly will enter the market for the first time, teaming up with Walters Southwest, of Austin, to develop a 600,000-square-foot center called CityWay at the planned mixed-use Double Creek Village. The developers declined to comment about the project or its timetable. The Austin American-Statesman described CityWay as a master-planned development on 330 acres straddling FM 1626 west of Interstate 35.

But not all Austin’s retail activity is suburban. Storied Texas institution Neiman Marcus is opening an outpost downtown at The Domain, a joint venture between Simon and Austin’s Endeavor Real Estate Group. Set in the heart of the city, near the University of Texas, the 750,000-square-foot retail village concept is scheduled to start construction next year. The 50-acre site is part of 235 acres Endeavor bought from IBM. The property, which boasts 2,600 feet fronting MoPac Expressway, is within a mile of another Simon center, The Arboretum.

“It came down to waiting until the right property came along,” says Wayne Hussey, senior vice president of properties and new store development at Neiman Marcus, which has a Last Call clearance center in Austin. “There’s a lot of money in Austin right now. Economically, it’s been through some tough times, but it’s coming back, and they love Neiman Marcus.” Devotees of the tony chain now drive three hours each way to shop at its Dallas and Houston stores, Hussey says. Neiman Marcus plans to open a store in San Antonio’s Shops at La Cantera, 70 miles to Austin’s south, next year.

Though development is chugging along in Austin, it’s not necessarily the easiest place to build. “It’s as close to developing in Southern California as you get in Texas,” Milam said. “There are lots of hills and lakes and environmental issues to be addressed. It’s unlike Dallas and Houston, where the land is flat and you can build on every corner.”

But there’s an upside to that for those who have projects on the way: It will keep the competition at bay.