Austin's retail market is currently enjoying a robust environment, driven by above-average population growth and strong employment figures. One of the standout statistics is the remarkably low vacancy rate, standing at just 3% according to NAR. This low vacancy rate with a strong demand for space has been instrumental in boosting the average asking rents, which have demonstrated a solid annual growth rate higher than the national average.
Despite the overall strength of the market, the financing landscape in Austin's retail real estate sector has posed challenges. Property owners have been cautious and reluctant to accept unfavorable prices, resulting in a slowdown in property acquisition activity. As of 2023, capitalization rates (cap rates) for average retail properties, which are predominant in Austin, have ranged between 5% to 5.5%. This marks a .5% decrease compared to 2022. Property prices have remained stable, contributing to one of the lowest sales volumes among the top 50 U.S. retail markets, registering only a 1.5% turnover in 2023, a substantial decline from the 4.1% average turnover observed between 2015 and 2019 (according to CoStar).
Traditionally, Austin's real estate marketplace has been led by private real estate companies and individual investors. Over the past five years, CoStar attributes these groups made up 36% of the total sales volume. However, in 2023, their influence has grown even more, making up 45% of all sales volume. It is clear the interest from these buyers remains strong, especially for smaller deals, given the city's robust rent growth, reputation and urban sprawl into surrounding areas.
The retail real estate market in Austin has witnessed a noticeable shift in deal sizes and sales volumes. Average deal sizes have decreased over the last year and there has been a dramatic decrease in deal volume overall as an industry.
Despite the overall decline in sales volume, emerging submarkets in Austin continue to attract investment activity, particularly those with rapidly expanding populations, such as Hays County and Georgetown. These northern suburbs, along with Round Rock and Cedar Park, account for half of all properties sold due to their potential for sustained, long-term population growth. It is not all roses though, I do see a good amount of retail properties sitting vacant along Ronald Regan and New Hope, so hoping to see some tenants fill in those areas. Long term vacancies like that can have an overall negative impact on the area rents as well as sales prices.
An interesting observation is the inverse relationship between price stability and declining sales volumes, I would suggest that sales activity in Austin could rebound if property prices begin to experience a decline.
Austin's retail real estate market presents a unique blend of strong fundamentals, changing buyer dynamics, shifting deal sizes and volumes. While challenges such as financing constraints and stable property prices are impacting the acquisition activity, the city's robust growth and emerging submarkets offer opportunities for investors to navigate these challenges and provides a glimmer of a hopeful rebound in the future.