Deliveries double year-over-year in Austin Retail

EXECUTIVE SUMMARY

Q3 In Review
By the end of Q3 2023, the overall vacancy rate in the Austin retail market rose 20 basis points quarter-over- quarter, from 3.0% to 3.2%. Net absorption is at 326,447 sq. ft. Year-to-date, net absorption amounted to 1.6 million sq. ft. Year-to-date, deliveries totaled 1.7 million sq. ft. On the quarter, deliveries are at 561,635 sq. ft., more than doubling from 259,713 sq. ft. year-over-year. A notable completion within the last year was a 160,437-sq.-ft. supermarket (Costco) at 2201 North Interstate Highway 35 in July 2023. In addition, construction is at 2.4 million sq. ft., 8% up from the prior year’s 2.2 million sq. ft. Lastly, the average asking rent reached a record-high—currently standing at $26.52 per sq. ft., increasing 5% from $25.18 per sq. ft. in Q2 2023.

Austin Economic Update
Austin’s unemployment rate increased to 3.6% in August 2023, slightly up from 3.5% in July 2023. The metro’s jobless rate was lower than both the nation’s rate (3.8%) and the state’s rate (4.1%). Austin’s employment fell 1.9% in August, the first month the rate declined since February 2021. The largest declines by sector included: health and educational services (-5,033 jobs, -32.4%), leisure and hospitality (-1,503 jobs, -11.7%), and financial activities (-480 jobs, -6.6%). The largest gains by sector included: construction and mining (1,475 jobs, 23.2%) and government (1,871 jobs, 12.8%). Year-to-date, Austin’s payroll employment has grown 3.8%, higher than both the nation (1.9%) and the state (3.3%).

MARKET OVERVIEW

Positive Net Absorption In Q3 2023
Net absorption—move-ins minus move-outs—is at 236,447 sq. ft., 46% down from 604,450 sq. ft. in Q2 2023. Despite the decrease, net absorption hasn’t dipped into negative territory for 12 straight quarters— dating back to Q3 2020 (-160,385 sq. ft.) Year-to-date, net absorption registered at 1.6 million sq. ft., 54% higher than the prior year-to-date net absorption figure of 1.0 million sq. ft. H-E-B filled 105,689 sq. ft. of retail space at 12021 West Highway 290 in July, and HomeGoods occupied 25,000 sq. ft. of retail space at 9600 South Interstate 35 in September. In addition, the overall vacancy rate rose 20 basis points quarter-over- quarter, from 3.0% to 3.2%. The slight increase in the overall vacancy rate can be attributed to the influx of new retail space delivered within the past year. Nevertheless, vacancy rates are projected to remain at or below 4% over the next four quarters—signaling healthy demand for Austin’s retail sector.

Deliveries More Than Double From Prior Year
As of Q3 2023, deliveries in Austin’s retail market are at 561,335 sq. ft. Although down 20% quarter-over-quarter, deliveries more than doubled from 259,713 sq. ft. in Q3 2022. Year-to-date, deliveries totaled 1.7 million sq. ft. This surge in deliveries was primarily driven by strong construction starts in Q1 2023 (3.1 million sq. ft.)—the highest quarterly construction starts on record since Q3 2007 (3.4 million sq. ft.). Notable retail completions within the last year include a 35,719-sq.-ft. daycare center at 11812 Millwright Parkway in September 2022, and a 160,437-sq.-ft. supermarket (Costco) at 2201 North Interstate Highway 35 in July 2023. On the quarter, construction is at 2.4 million sq. ft.—across 111 buildings—increasing 8% from the prior year’s 2.2 million sq. ft. According to a recent CoStar publication, the Austin retail market now has the highest square footage under construction in the U.S. with 2.0% of inventory underway.

Record-High Asking Rents
Austin’s average asking rent currently stands at $26.52 per sq. ft.—a record-high for the metro’s retail sector. Quarter-over-quarter, the average rate increased 5% from $25.18 per sq. ft. in Q2 2023. Year-over-year, the average rate increased 15% from $23.12 per sq. ft. in Q3 2022. This marks the highest annual rent growth recorded since Q3 2016(11% year-over-year increase to $20.35 per sq. ft.) On the quarter, the CBD submarket had the highest average rate at $39.30 per sq. ft. On the other hand, the Southwest submarket had the lowest average rate at $21.52 per sq. ft. Despite the minimal increases to the vacancy rate in the forecast, rents are expected to continue to climb higher, albeit at a slower pace that is more consistent with historical averages.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618