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Austin: high job growth fuels commercial recovery, drives residential, retail activity

The Austin area's exceptionally high job growth continues to fuel the recovery of its commercial real estate markets, drive new residential construction and stimulate retail sales.

"The key factor that continues to drive Austin's robust real estate market remains the unprecedented job growth which may be as high as 5% to 6% when the finals are in," according to Jerry Lumsden of CB Commercial in Austin. "This job growth has not only outpaced the rest of Texas over the past three years, but has also positioned Austin in the top spot in the nation for aggregate job growth over this same period.

"Austin's economy for the first three quarters of the year is the strongest among the major Texas metro markets."

The steady string of high technology expansions was buoyed by the November announcement that Southwestern Bell Technology Resources Inc. will move 175 employees to Austin from St. Louis.

"The burgeoning high-technology industry will continue to serve as the catalyst for the creation of 52,800 new jobs in the next two years in the Austin metropolitan area," said Lumsden. "This strong job growth has been and will continue to be driven by corporate expansions, relocations from the East and West coasts and home-grown entrepreneurial ventures. What other marketplace can boast of not just one, but two, $1 billion expansion projects under way?"

"We are seeing many high-technology companies pursuing campus facilities," said Andy Pastor, principal of industrial leasing at Trammell Crow Central Texas Inc. "This is creating badly needed lease space in a market where development has not been able to keep up with demand, where development supply is not keeping pace with tenant demand.

"Speculative bulk warehouse development should meet demand within the second quarter of 1995, while speculative service center space has been nonexistent," he said. "We anticipate service center development activity to commence in the first quarter of 1995 in the north and southeast market sectors. The airport relocation to Bergstrom as well as the expansion of Advanced Micro Devices and Motorola Inc. in southeast Austin have fueled increased interest in the acquisition of raw land parcels in southeast Austin."

"What distinguishes the Austin real estate market is the quality and quantity of jobs being created," said Bryce Miller, president of Trammell Crow Central Texas, a major property manager. He noted that Southwestern Bell Technology will immediately absorb 112,000 sq. ft. of space in Northwest Austin. The Austin metro area had a 3.4% unemployment rate in September.


A recent survey of 60 major metro areas by the National Real Estate Index ranked Austin as the nation's second most favorable real estate market, noted Chris Kelly, with Heller Real Estate Financial Services.

The city's apartment market has been gaining the most attention. After severe overbuilding in the mid-1980s, Austin's multifamily market has rapidly corrected and the market remained at 98% occupancy throughout 1994, one of the healthiest in the country.

Since 1991, 4,700 multifamily units have been absorbed, according to Capstone Real Estate Services, an Austin-based apartment manager. Angelique Goodnough, a Capstone senior vice president, said the market's 7% average annual rent increases are expected to drop to 4% in 1995 as the market softens because of planned construction of 4,000 to 5,000 units in the next year.

Rents averaged 71 cents per sq. ft. in the third quarter, according to Austin Investor Interests.

David Ward, vice president in charge of Austin projects for Dallas-based JPI of Texas, said that historically Austin has needed one apartment unit for every four jobs. During the last 12 months the area created 22,000 jobs, said Ward, whose company plans three to four major projects a year in the next several years.

"Sites are getting harder to come by and you're getting pushed out to the outskirts," he said. Sites are costing $4,000 to $6,000 per unit and approvals are taking nine months to a year.

"Fortunately," said Pastor, "multifamily development has been extremely active in providing much needed housing for the increased labor force required for company expansions and relocations."

Austin's development regulations make it difficult to find appropriate sites, especially in southwest Austin, where the city's Save Our Springs ordinance has restricted development in the area feeding Barton Springs, a revered natural swimming hole in downtown Austin. However, that market may open up because of several court challenges to the "SOS Ordinance," including a jury decision in mid-November that found the ordinance unlawful.

Endangered species issues have hampered construction in the metropolitan area.

The city's 15 million sq. ft. industrial market has tightened up in the last four years and has also drawn the attention of several developers. The market's vacancy has shrunk from 17% in 1990 to 5% by mid-1994, according to Austin-based Commercial Industrial Properties (CIP).

"Availability of space is limited, rates have been on the increase for the past two years and the demand is strong," stated Lumsden. "Construction of new industrial space is under way again after a number of years of no new construction, and the market will see 500,000 to 750,000 sq. ft. of new product on line by midyear.

"The downside of this good news is that with the high demand by users, this new development is only meeting the demand and does not appreciably add to the supply side," he said. "However, with average industrial rates citywide ranging from $3.90 to $6.50, this new development cycle will continue to add to the inventory of available property."

The demand is being generated by the growth of local companies as well as branch expansions by companies serving the area's expanding high-technology sector.

The lack of available space is forcing some companies to lease less functional space and the tight supply is creating a strong build-to-suit market.

Susan Harris, an industrial leasing specialist for CIP, projected that rent for bulk warehouse space would increase to an average of 36 cents per sq. ft. in 1995, representing a 12% annual increase. She predicted that service center space would increase 15% to average 65 cents per sq. ft. and that land prices for lots in developed business parks will range from $1.75 to $2.25 per sq. ft. in 1995.

Developers starting new industrial projects include former Trammell Crow Co. partners Sandy Gottesman and Richard Hill. The Gottesman Co. has started three buildings totaling 300,000 sq. ft. in its 1 million sq. ft. Metric Park in north Austin. Nearby Hill Partners is building a 126,000 sq. ft. warehouse and 55,000 sq. ft. office showroom/warehouse just west of Burnet Road and north of U.S. 183.

Security Capital Industrial Trust, a Denver-based real estate investment trust, has purchased 562,000 sq. ft. of industrial space in the market and plans to build about 400,000 sq. ft. more.

In southeast Austin, the city's plans to reopen the former Bergstrom Air Force Base in November 1998 as a new municipal airport is expected to spin off new industrial development opportunities as well.

Strong sales, retail expansion

The Austin area's retail sector has been expanding due to strong retail sales. Jill Harris, a retail leasing broker with Harris, Russell & Associates, cited statistics from the Texas comptroller's office showing retail sales up 12.9% in 1994, following a 14% increase in 1993.

CIP estimated occupancy at centers larger than 100,000 sq. ft. at 88% in June 1994, while centers 50,000 to 100,000 sq. ft. averaged 84% occupancy.

Downtown, which has largely languished, has been eyed for a possible regional mall. St. Louis-based CenterMark Properties and Bennett Consolidated, a California investment firm partnering with the Yarmouth Group, have both proposed malls for sites in or near downtown if the city is willing to assist.

LakeLine Mall, a 1.1 million sq. ft. regional mall anchored by Sears and set to be completed in October 1995, is already being built in far northwest Austin by Indianapolis-based Simon Property Group in rapidly growing Williamson County.

Major retailers, such as Linens n' Things, Borders Books and Discovery Zone, have leased space in new centers being completed near the Arboretum mixed-use center at loop 360 and U.S. 183 North. Mark Palmer, head of SMP Interests Inc., is completing three retail centers totaling 500,000 sq. ft. across from the Arboretum. Atlanta-based New Market Development, on behalf of an Austin family trust, expects to complete in April a 129,000 sq. ft. project nearby.

Office, hotel gradually strengthening

The 20 million sq. ft. Austin office market is mixed. While the demand for suburban space has greatly cut into available space, the downtown market has not experienced the same level of turnaround. While the suburban market has had vacancy drop from a high of 38% in late 1987 to only 13%, the downtown market has had vacancy shrink from 35% to 22%.

"The office market has also experienced strong demand," reported CB's Lumsden, "but with an 86% occupancy factor there still are some options available for users looking for space. New construction of office buildings is still three to six months away, although there are a number of excellent sites with approvals in place to begin development as soon as the underwriting criteria for financing can be achieved."

Gross rental rates at midyear were $10.50 to $20 per sq. ft., according to CIP.

The hotel market has had average occupancy reach 77.6% by August 1994, up from 74.1% a year earlier. The CBD occupancy rate was 75%, with northwest Austin the strongest submarket at 84.3%, according to PKF Consulting/Hospitality Advisory Services. Revenues per room averaged $49.18, a 13.8% increase from a year earlier.

The 292-room Austin Four Seasons Hotel was sold in November by the Toronto-based luxury hotel chain to Hotel Capital Partners, a recently formed investment partnership of Wolff Sesnon Buttery Development Co., Los Angeles, and SPO Partners and Co., Mill Valley, Calif., for a reported $31 million.

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