Retail keeps city vibrant, despite tech slump

Drug Store News, Dec 16, 2002 by Molly Prior

AUSTIN, Texas -- The place is a modern-day boomtown for retail. In the mid-1990s, the promise of cheap real estate enticed high-growth companies, such as Dell Computer, IBM and Motorola, to plant flags here in Austin, another of the technology industry's new frontiers.

These corporate relocations sparked more than a decade of phenomenal growth. The influx of business professionals to the central Texas metropolis paved the way for various retail formats to set up shop in the Austin market. Moreover, the expanse of land so characteristic to central Texas made Austin a perfect fit for such big-box retailers as Walgreens, H-E-B Grocery and Wal-Mart.

In the majority of locations, each of these concepts prominently features a pharmacy. Walgreens is the No. 1 retailer in the market with 26 stores and more than 31 percent of the market share. In the No. 2 spot is regional player H-E-B Grocery, which has been making its way into the pharmacy business with new concepts, such as its H-E-B Fresh Foods/Drug Store format.

Retail growth has been largely reactionary, mirroring the labor force's migration by setting up shop along major highways, such as I-35. Moreover, the spoils from business activity in 2000 spilled over into the construction industry in 2001.

According to a retail market report released this fall from The Weitzman Group and Cencor Realty Services, "construction planned for 2002 will primarily open during the second half of the year and will come close to matching 2001's level of 1 million square feet." The bulk of the construction includes multitenant shopping centers, the expansion of existing centers and a notable number of large-format, freestanding retailers, such as Wal-Mart Supercenter and Randall's supermarket.

And while office vacancy has increased in recent years, Austin's retail space market is growing still as it races to catch up with residential growth during the past 10 years.

"Retail is clearly the strongest segment in the market," said Charles Heimsath with the Austin-based market research firm Capitol Market Research. He added, the city has maintained retail market occupancy rates at about 95 percent in the last several years. Heimsath expects that rate to continue. As of mid-year 2002, retail occupancy was approximately 95 percent.

"While the market remains tight in terms of supply and demand, the limited vacancy has come in the form of closings from major retailers that have experienced difficulties nationwide. For example, Kmart closed two of its three Austin-area stores during the first half of the year," stated The Weitzman Group's report.

Because neither retailers nor consumers are immune to a downturn in the economy, central Texans, feeling the pinch of the national economy, are shopping around for value, a phenomenon that creates an even more opportunistic environment for such big-box players as Wal-Mart and the H-E-B Grocery.

Like most technology hubs, such as its California counterpart Silicon Valley, central Texas was hit with many layoffs in late 2000 and throughout 2001.

"Most economic indicators are showing the impact of a fairly long slump in the tech sector," said Saralee Tiede, vice president of communications for the Greater Austin Chamber of Commerce. In fact, most of the 25,000 local layoffs in 2001 occurred in the high tech sector.

While Austin's economy is still feeling the aftershock from the tech implosion, the stability of the main drivers of the city's economy, such as state government, the growing student body of the University of Texas and an active housing market, cushioned the blow.

And despite the downturn in the national economy, the Austin retail market has proven to be amazingly resilient and once again is primed for a future of growth.

The phenomenal job growth of the 1990s has leveled off somewhat. Nevertheless, Austin continues to add jobs. "Although it is not possible to predict how quickly the central Texas economy will recover, the Greater Austin Chamber of Commerce expects that Austin will continue to lead the [state] in employment growth over the next decade by adding at least 100,000 jobs to the region by 2006," according to the Chamber's annual economic report Focus on Austin: 2002.

And regardless of whether the tech industry's golden days have passed, last decade's boom saw an influx of white collar professionals to the city; these professionals since have settled in the periphery of Austin. High tech wages, which continue to rise, have pushed Austin's average annual wage per worker up 71 percent over the last five years to $48,200--$10,000 more than the U.S. average, according to the chamber of commerce.

Attractive real estate offers even more fertile ground. Monthly retail rental rates for shopping centers between 50,000 square feet and 100,000 square feet range from 90 cents per square foot to $2.34 per square foot, depending on geographic location. Rates for centers larger than 100,000 square feet range from 96 cents per square foot to $2.39 per square foot, according to NAI Commercial Industrial Properties.