The Austin area retail space market in the second quarter of 2003 remained healthy, if unsurprising. Occupancy rates remained high, as did demand for space, and familiar players drove new development.

According to statistics from The Source, published by NAI Commercial Industrial Properties, occupancy for the quarter was 93.85 percent overall, remained stable, and both occupancy and demand for space were high for the period.

Eric DeJernett, retail specialist at NAI/CIP, which tracks multi-tenant centers of 50,000 square feet and larger, said that for the past six months the retail market has been stable and much of what was happening three months or six months ago is still the case now.

“The market is still being driven by HEB, Target, Walgreen’s and the tenants that like to follow them,” he said.

In this case, stability is good news, “In the centers we track,” he said, “we’re showing an overall occupancy rate of 93.85 percent. Since 1998 it’s been above 93 percent overall, which is very good by any standard.”

During the quarter, average rental rates continued to increase gradually. In retail centers of 50,000-100,000 square feet, rents averaged $1.44 per square foot, and $1.69 per square foot in those larger than 100,000 square feet.

One new development is the finalization of the CVS purchase of Eckerd Drug. “Eckerd had slowed down pending their sale to CVS and now that that’s been finalized, we’re going to see some of that activity come back,” he said. “It looks like they will become an active player in developing new drug stores in Central Texas.”

DeJernett said that several players are trying to put together lifestyle centers – focusing on south Interstate 35 and the Domain in Austin, the community of Bee Cave, north Round Rock and the La Frontera area. But these centers are not quickly put together. “They require a certain amount of critical mass of tenants like Banana Republic or Williams-Sonoma or the GAP,” he said.

Tenants “want to know if our market is large enough to support more than one lifestyle center, given the stores they already have in this area, before they commit” he said.

With Simon as the managing partner, “The Domain is clearly the frontrunner” in this area, DeJernett said.

Another bright spot is Barton Creek Square Mall. “With the introduction of Nordstrom’s, Barton Creek Square Mall has been able to upgrade their tenant roster,” he said. He pointed to Lucky Brand Jeans, White House Black Market and the California Pizza Kitchen as being new to the area, and added that American Eagle has increased the size of their store since Nordstrom’s went in.

DeJernett said he sees Austin’s roadway issues as having a profound influence on new retail space. “We continue to see demand from retailers, both specialty and mainstream grocery and home improvement, for locations in this area,” DeJernett said, but their growth hinges in part on the creation of new roadways. “The existing roadway system in Austin is in some ways fully developed,” he said, “and it’s the new roadways coming in that will create new opportunities for retail to locate where housing has been expanding over the past five to 10 years.”

Gail Whitfield, head of The Whitfield Co., said the quarter was good to most of the familiar standbys. “We’re still seeing a lot of anchors expand; HEB is still expanding very aggressively — to keep up market share and keep up with Wal-Mart — as are Target and Kohl’s and Lowe’s.”

However, other more traditional retail, “is struggling at this point, “ she said. “For example, your neighborhood grocery and some of the big power centers. I think a lot of retailers are struggling and I think you’re seeing some tenants leave the market. “

Whitfield said another segment she sees doing well are often those businesses that focus on a providing the consumer a unique, fulfilling experience.

“One thing you’re seeing is day spas,” Whitfield said.  “They’re taking up a lot of retail space as men and women both indulge in this luxury.”

Lance Morris, Weitzman Group senior vice president, gave an upbeat appraisal. The retail market is in great shape,” Morris said. “Existing shopping centers have a great occupancy rate – it’s in the mid-90’s. And there’s new development coming on line and it doesn’t matter who it’s anchored by — they are all showing healthy activity as far as new leasing is going.

“Lots of retailers are still looking for space and we’re leasing all the empty space we have,” Morris said. “In fact, we could use some new product because we have leased out so much of our inventory.”

Morris said that while the retail space in Austin proper is healthy, the real growth has been in outlying areas.

“The big news is in Buda, Kyle, Hutto, Taylor, Georgetown, even Dripping Springs and Bee Cave — that’s where the bulk of new development is going online,” he said. “There’s still a lot going on in Austin proper – nothing to complain about there – but the growth in these outlying areas has been explosive.”

According to Chris Ellis, principal at Endeavor Realty Group the Austin market continues to perform very well and that demand for space is still strong. Ellis said that in the 11 Austin-area centers owned, leased and/or managed by Endeavor “we’re well over 95 percent occupied.”

However, he also believes some areas are nearing the saturation point. “I think there are areas that have the potential to be fully built out petty quickly,” he said, specifically the Interstate 35/FM 1325 area in Round Rock and the I-35/Parmer Lane area in Austin.

Ellis also said he does not see a lot of “lifestyle centers” in Austin — perhaps two or three but no more. “I think we’re seeing a lot of development of that type of center, but I also think there’s a limited demand for them,” he said. “So, it’s a fast-growing segment but they’re not going to be built on every corner. Developers will be picky about where they build them.”

He also predicted that newer lifestyle centers “will be much bigger and much more diversified in their tenant mix.”

This article originally appeared in Austin Business Journal, July 2004