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Commercial Real Estate: A Market Outlook

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By Charles Harvey Friday, 20 March 2009

Central Texas is growing and for numerous reasons. New residents moving in from across the nation have recognized the opportunities in the Capital City and its surrounding areas.

Central Texas is growing and for numerous reasons. New residents moving in from across the nation have recognized the opportunities in the Capital City and its surrounding areas. The rapid increase in area populations has driven demand for the commercial real estate market, particularly in the sub-markets to the north where demand is high and development land is abundant.

Two of Austin’s hottest sub-markets are Round Rock and Pflugerville, where populations have grown in the last few years. These communities continue to benefit from Austin’s unique position in the global market with an influx of highly educated people absorbing the wealth of jobs in Central Texas. Despite the rapidly deteriorating national economy, Round Rock and Pflugerville are well-positioned to weather the recession with minimal damage.

Retail

Retail follows the rooftops, and where you have an increase in population, you have an increase in rooftops, resulting in a large following of retail. This is evident in Round Rock and Pflugerville with large developments along IH 35, University Boulevard, Toll 130 and Toll 45. The large power center developments are having great success in both cities. The retail growth is driven by population growth and a large amount of disposable income among the population.

Among the smaller neighborhood retail centers, we are seeing a slight decline in demand by tenants due in part to a surplus of vacant space and a tight credit market making it harder for small retail shops to obtain credit.

I believe we are entering into a corrective period where development activity in retail is slowing to allow demand to catch up with the supply.

Office

The office sector in Round Rock is in the recession stage of the cycle. Vacancy is increasing with several new projects that outpaced demand and the number of tenants who are making their spaces available for sublease. We are starting to witness a correction in the office market with softening rents, greater tenant improvement allowances and other incentives offered by landlords. Considering the amount of inventory in the area, recovery may be a couple of years out.

Pflugerville has a limited office market with a number of office condos and small office buildings. There is not much office vacancy in Pflugerville, but office development has been minimal in recent years. There are a few office projects that are part of mixed-use developments around town, but it may be a couple of years before we see any of that materialize.

Industrial

We continue to see some large industrial projects begin in Round Rock and Pflugerville. A major factor that is driving this new development is the new toll roads that have made transportation easier for industrial users. These toll roads have enabled manufacturers, distributors and tradesmen to move their goods and services around the region faster and more efficiently. We also recognize a continued demand among smaller businesses for smaller office/warehouse units (10,000 sq. ft. and less). This demand is creating an opportunity for developers to build office/warehouse spaces of 1,000-10,000 sq. ft. with a relatively short absorption time.