2021 REDNews Austin Summit Recap - Retail Expert DeLea Becker
"Everyone in this room right now should feel extremely lucky working in this city"
On June 23rd, DeLea Becker spoke alongside fellow Commercial Real Estate Experts at the REDNews 2021 Summit Retail panel about opportunities and trends of the Austin Market.
REDNews is a Real Estate Directory Publication & Event/Networking producers with 50,000 circulation followed by Commercial Brokers, Investors & Developers.
We thought COVID was going to back us up 5-10 years in our business. Actually turned into ACCELERATOR.
Good Merchants succeed and adapt
Last 15 months the good merchants are emerging stronger and better
During the pandemic, Beck-Reit managed 35 tenants, 15 were Retail Tenants and we did not lose any. At most, we negotiated waiver of Late Fees, and a couple we relieved of rent for 30-60 days and tacked it on the back of their lease. Retail has stayed strong in Austin despite the pandemic.
In fact, it may have only gotten stronger.
Retail doesn’t have the option to work from home.
And if you close up shop, good luck finding new space in Austin.
So we saw tenants fighting hard to stay in business - applying for PPP money, EIDL grants, curbside pickup, etc.
We were fully prepared to lose 20% of our tenants, but Austin as a whole has only seen a 10% decline in occupancy overall.
For those that managed to stay in their spaces and keep the lights on, the reward is here - Austin is BOOMING.
Globally
Walmart is investing more money in E-Commerce than anyone else
Amazon is investing more money in Brick & Morter than anyone else
E-Commerce hurrdles - Returns , Waist, and Shipping Cost
THE YEAR 2021 :
CBD market has come back with a vengeance - particularly Restaurant
Rental Rates are15-20% Higher than they were 18 months ago
Retail in CBD will be high $40s and low $50s
Backfilled Second Bar & Kitchen Space on 2nd Street - $60/sf + $25/sf NNN
TI Request are coming in higher - expects significant $30/sf for 2n gen. $160/SF for a 1st Gen Space
South Congress
Land of Triple Digit Base Rents
$130-$150/SF Base Rent
Digitally Native Brands are looking for Flagship space
Looking NY, San Fran, LA. We are approaching same level as those Top Cities
38th & Lamar up to Anderson Lane Mid 30s - mid 40’s with NNN $10-$15
Concessions dependent on tenant - $10/SF - $40/SF
OVERALL DEMAND - Crazy Amount of Activity. Leasing Brokers experiencing flurry of touring and demand
Domain / Arboretum
Overnight Success - was really best Real Estate in Austin and was hatched decades ago.
Rental Rates - challenge is Supply and Demand - Product is limited
$30-$40s + NNN
Domain NNN is $45/sf
Cedar Park | Leander
Rent Rates upper $30s - Lower $40s
Lost very few tenants
Capital Markets for Transaction of Retail Sales
A LOT OF LIQUIDITY IN THE MARKET - A lot of Banks and Lenders competing.
Many Interest Only Loan Request - generally 9-12 months. Now with construction issues Borrower needs longer
Community Bank is generally above 4%, but competing with some lenders that are doing sub-4%
Banks want to see some Pre-Leasing
Retail Cap Rates are hovering about 6 - 6.5%
Everyone looking to buy DISTRESSED - they want a “Steal Not A Deal” and there are none. Across USA only 2.5% of sales volume is “Distressed Asset”
A lot of Media about Austin - Media Speculation FUELS Capital Speculation
LOSES FROM COVID - (not talking about Sears and Stein Marts of the world)
Pre-Covid had 50 restaurant spaces available, now about 210 spaces - Austin MSA
36% of vacant space have been backfilled
Full-Service Restaurants were hit the hardest
The businesses that did not PIVOT got left behind - Have Big Losers and Big Winners
Real Estate is about LOCATION, LOCATION, LOCATION - especially Retail
BIG PICTURE
TENANTS must be Opportunistic & If See Opportunity must be Aggressive and Fierce
Retail is doing well - Huge amount of Personal Savings and consumers are making up for lost time
CHALLENGES
Restaurant Business Owners STRUGGLING TO STAFF - not enough people that want to work
Construction Cost, Supply, Staging
Project cost for Tenant Finish Out at $100/SF then it comes in at $160/SF and Landlord not contributing anymore
As exuberant as we are about all of this ACTIVITY - NONE OF THESE DEALS ARE EASY
Michael McDonald - Cushman & Wakefield
South Lamar Office Building $825/SF ~ North of $96 Million ~ Vacant Building ~ 15 Bids ~
Buy for $560/sf , put $100/sf in , lease up, hold for year, sale @ $825/sf @ 5 Cap . DO NOT FOCUS ON per Square Foot, Focus on PROFIT
The Best Market - Living In Amazing World ~ 100 Years ago - 1920’s - phenomenal decade - Soaring 20’s. Blow doors off this country on on Domestic GDP growth. Austin will lead nation in this regard
State Capital - UT - Tesla, Calling Netflix coming to lease 100 Million SF, all buildings downtown will get leased 100%. Wall Street Journal reports Millennials moving to sunbelt, companies follow them, investors follow companies. Investors are matching up the growth of this market.
Investors are piercing through - Aligned Perception crosses Reality - Shaded area is where HARVEST EQUITY - Magic Elixir
Texas and Austin have great GROWTH FUNDAMENTALS ~ We are amazing . Amazingly fortunate and lucky people to be sitting in this market and in the Commercial Real Estate Business. All about to make a massive amount of money over the next 9 years, so enjoy it.
Brad Philp - Stream Realty
Investors are coming in and paying Peak Market Prices. Rent Growth is coming. Residential market has shown people are coming here.
350,000 River South under construction
Smartest Building in Austin Texas, touch-less technology everywhere. License Plate Recognition. Automated temperature checks. (Big Brother Type fo Stuff)
2 Million under construction going into Pandemic, zero stopped. In wake of pandemic, commodity prices have gone through the roof. Labor cost have come down. Buying building downtown, have 1.5 Million SF Vacant… Negative Absorption, we need to see Positive Absorption. So Much Value Add $$$ Out there, looking for leased and vacant buildings.
Core CBD and East Austin sitting well. Developers are moving there.
Developers must start developing for millennials, need to update old buildings to compete and be sure have good retail.
Kevin Kimbrough - Jones Lang LaSalle
All about DEMAND - Buyer/Investor looking to acquire buildings . Run the numbers at $42/Sf and investor wants to see comps, but we don’t have them now - in 6 months we will have the comps that are incredibly supportive. During the pandemic our Lease Rates held. Lease Concessions and Abatements have gone up a bit but will subside. Commercial professionals outside of Austin are baffled how we have held strong. Investor calls looking at these buildings - Not making a risky bet - Betting on DEMAND and AUSTIN is where everyone wants to be.
McDonald :”Sometimes the BEST LEASE is the One You Didn’t Do”. They were going to do a lease at $38.50/Sf on 10 year deal, brokers told owners not to do the deal. Ended up selling to investor that underwrote it at $42/SF so sold for more. Depends on where you are in the cycle - this cycle it was best to sell.
CO-WORKING SPACE:
Switch to Management Agreement & Profit Sharing - Landlords that embrace this model will succeed.
We have switched from the term “co-working space” to “flex office-ing”. Landlords and Brokers are pitching as amenity. Expect to see every office building have some in the future, at least the smart landlord will include it. It is great space to “incubate the building”. Management Agreement allows landlord to be more involved and Incubate the Building. The “Flex Office” will likely be handled like Taxes - True Up. Structure Parking the same with a 12 month look-back.
People want to be at their desk, people love to be in the office to collaborate and have in-person meetings. Texas is leading the way of getting back in the office.
OUR CRYSTAL BALL
Flight to quality
Best City in the world
Rates Go Up expecting to hit $60/SF + NNN
Feb, March & April there have been uptick in Leasing Tours. We lead Texas and The USA in Leasing
Next 1.5 months will be slow with people traveling, then it will boom
Netflix is coming to Austin
Austin is heading into the, “soaring ‘20s” as they call it. Rental rates for Office space held entirely through the pandemic, and it seems the market plateau is over and heading for a steady incline. Millennials are moving to the sunbelt at record speeds, with companies and their investors following suit. Many of us thought Office space would contract - that working from home would become the norm post-pandemic. But it seems employees and employers are both eager to get back into the office. Ultimately, it comes down to the importance of those 40 or so interactions one has with colleagues on a day to day basis and how important those interactions are to productivity and wellbeing. Even with many major employers considering some hybrid office/home working model, it seems the demand for Office space isn’t going anywhere.
50% of Austin can’t host industrial space. Pricing for people coming to Austin - Sicker Shock in Industrial. Rent does matter, but only relative to profit. If they need to be here and can make money coming to service this population, the industrial tenants and owner-occupants will pay.
BIG COST for manufacturing- Labor & Logistics. We are more expensive labor market and less plentiful. We are a good fit for mid to higher-skill manufacturing.
No Availability - If Building goes up for sale it is a Feeding Frenzy.
No one understands our market, significant barrier to entrance, and an insatiable appetite for our market
6% of Austin is zoned for Industrial
Capital Preservation vs Yield
How long Runway for Institutional Investors, long runway, we have good metrics
Investors Want - Apartments, Industrial & Anything Austin Texas
Plays well for long-term holds, if sell they can not hardly find anything to buy for 1031
COVID 19 IMPACT :
Fueled appetite for Industrial as Investment Property
Perpetuted E-Commerce
Requiring companies to store more inventory
Acted as time machine- a lot of trends were we seeing got massively accelerated
E-Commerce is affecting the Industrial and massive movement of people to Texas.
Industrial Market during Pandemic moved ahead 10 years in some respects
End-user pumped break at beginning of Pandemic, pulled back on moves they were making for couple of months. But then need for space came roaring back, now a lot of those companies are fighting for space.
Stacked up a lot of tenant requirements
Pre-Covid we had 120 people moving to Austin NET, today it is 184 - 90% of
Construction, retail, gas, buying a Tahoe in Central Texas, chips. - it is impacting everything
Lot of projects were paused or paused looking for land, now huge Demand.
Projects delivering over last year have been Smash Hit because there is so little being delivered.
Manufacturing R&D
Construction - where are you looking to build:
anywhere can find land
next to major freeway - I- 35, 130, 183
land under $7/sf
not crazy topography - so don’t need a massive amount of dirt work
Austin Metro Area growth - crazy growth to all surrounding areas
Small developers can look and find 20 acres and build a small product that leases well here. Larger developers coming from out of town looking for larger land to do larger products.
Seeing any “amenities” in the industrial world like seeing demand for in Office Product
Increased trailer parking
Drive or walk to get lunch for the smaller product
Industrial is practical, why brokers like it.
Have seen Tenants respond well to newer design/look. Little nicer finishes. Little more glass on exterior. Insulated Roof Decks, Higher Ceiling Heights
Do have Higher Base Building Standard these days
Construction Cost and Lack of Product/Supply
Paint, drywall, lumber
Steel - example - 10 weeks to get steel to build demising wall
Seeing TI Increases? Increase in cost, yes. Landlords are not increasing TI allowance, but hope to see a little over next couple of months. As more product finishes and come on-line will see Landlrods have to compete for Tenants and ones that can throw in a little extra for TI allowance to soften the blow of high construction cost will win the tenants
Construction cost suppose to be coming down, but won’t see on the ground for another 18 months
Cost are double what they were a year ago
Example - Contractor Bid - outrageous bid on TI Allowance - 20% more than 6 months ago, 30% more than a year ago
Inflation, rising cost of commodities, availability of commodities, tight market - TI allowance and concessions are getting compressed
Replacement cost up 20%, steel order is out 6-8 months
CRYSTAL BALL - FUTURE - Brokers Track differently, but come up with same crazy growth numbers
Added lately: 4 million sf for Amazon & 4-5 million sf from Tesla
Capital Market guys say we should be at 80—90 million SF for our Market size in comparison to other cities.
Right now 6-8 million SF under construction which is 2 X where we have been historically. Expect to see 10 Million SF get absorbed over next 5 years
Land is such a premium here in Austin & we are close to Houston, Dallas, SATX we are close to other markets that have the cheaper Industrial Space. SO probably not going to go way above 100 Million SF. Cheaper need will go to SATX - cheaper land, cheaper construction
Another Broker tracking16.5 Million SF formally announced with Site Plans - counting ALL multiple phases projected out over 7 years. 7.5 million SF of that is in North East and Far North East corner of Austin. Area is actually pretty close in and seeing a lot of development there.
10.5 Million under construction with 10.5 Million planned. of 10.5 Million under construction 88% Pre-leased, have never had these kind of numbers (that includes Tesla and Amazon projects)
4% Vacancy Across the Market
Expect to see it go down the Innovation Corridor : ATX - SATX . I-35 Is our Life Blood
BLUE SKIES till we get to 7-8% Vacant (that is when it will stabilize) . Right now sub 4%. We are comfortable at 11% Vacancy Rate
We did learn from COVID - there are blind spots, we don’t know them till they hit us. Best we can do is keep doing what we are doing Day By Day.
Right now investors are looking for 3 things - Multifamily, Industrial, and anything in Austin, Texas. Demand is so high for space, it has pushed cap rates lower in the past 18 months. It comes down to institutional investors. Seeing growth in the entire central Texas corridor- from Austin, Buda, Kyle, San Marcos down to San Antonio - has convinced big dog investors that Austin is a safe place to park their money. Amazon is taking up 12% of the Industrial market in Austin, alone. They’ve nearly bought all the commercial grade construction steel available across the state. This, matched with other supply-chain disruptions has buildings appreciating in based on the value of their bones!
1031’s and Cost Segregation
Cost Segregation: Depreciation value is one of the most commonly missed write-offs. Floors, walls, ceiling tiles… any permeant fixture can be depreciated over time, items most owners miss. Most companies, even the big guys tend to fail in maximizing the benefits of their true depreciation.
~ ~ 1031 Block & Tackle
In the past you could stop a closing and get 1031 documents same day. Can not to do that these days, need to prep days or weeks earlier. 1031 Exchange MUST have 100% of the documents. COMMUNICATE EARLIER
INVESTMENT STRATEGY
Beware - If you are thinking about a 1031 start as early as you can. Weeks if not months and before you close looking for your replacement.
This is happening a lot. Investors make a ton of money selling a property/project. But they do not have a good and sound investment strategy. And they will say their investment strategy is not paying taxes. TRUTH - If you make a ton of money on a sale and then put in a Crappy Investment then it is all BAD. You may have deferred taxes, but gave away money with Bad Investment.
Biden Tax Plan 1031: Cap 1031 deferral at $500,000 for Single and $1 Million for Married
1031 is primarily used by smaller investors. Average 1031 Exchange is $100,000s of dollars, not Millions
1031 came about by Farmers that were upset they could not Trade Dirt for Dirt
1031 been around for 100 years this year
1031 is great for GDP & Jobs
When it comes to 1031exchanges, the most common problem investors have is their clock. With only 45 days to identify 3 properties, one must be looking for their replacement before their current investment sells. Beck-Reit is ALWAYS looking for investment properties. In our 1031’s, we’ve started looking for replacements the moment our holding goes under contract. Generally, people are too focused on reducing their capital gains tax implication, and not on securing a strong investment to transition into. But this legwork is essential. If you sell something at a good price and make a good profit, then make a bad investment decision, you’ll defer your taxes but end up with less when it’s all said and done.
Austin is one of the fastest growing cities in the country, which has lead to a local housing crisis - and a boom in Multi-Family development. 5 years ago, we had 150 people moving here everyday- and that seemed crazy. Now we’re clocking over 200 new residents each and every day. That keeps rental rates high. Many are asking where the ceiling is. We’re not sure there is one - more and more people from the coasts are moving to Central Texas, where prices still pale in comparison to Los Angeles or New York City. It’s not uncommon to see single family homes sell for 10’s of thousands above asking.
Cap Rates - They’re up across the board, and we aren’t seeing much difference between Class A and Class C apartments per square foot.
Developers are even buying land to hold that is not zoned for MF, holding until it does get zoned.
Equity is willing to take the risk based on the metrics.
So much money in the market here in Austin
Everyone wants to own in Austin
Suburbs don’t want apartments and employers struggling to have housing for their employees
Corporate Relocations - currently 28 pending and approved by Austin Chamber, another 56 in the queue for review.
No Rent Concessions, right now can’t even find an apartment to rent
Year over Year 6% Rent Growth is Typical - as coming out of COVID seeing rent growth in 18% - 25% for new construction.
Single Family has 2 week supply, causing MF to be pushed up. A home in Austin that would be $750,000 - will have to pay $950,000 Cash Offer to get it.
Development: Land Prices Going Up & Construction/Material Prices are volatile.
Cap Rates continue to drop | Historically Low
3% Cap Rates in Austin - “3 is the new 4”
1965 MF project in mid 3 % Cap Rate
CBD - 4 Cap Rate , Mid-Rise 4.5% Cap Rate - For Larger Deals
Per SF & Per Unit
DeLea Becker, Cathleen Slack, Marcie Phillips, ELise Giles