Navigating the Future of Retail and Real Estate
Insights from Industry Leaders on Retail + Restaurant
The retail and real estate industries are evolving rapidly, shaped by shifting consumer behaviors, rising construction costs, and the growing popularity of mixed-use developments. As a retail and restaurant expert, I recently had the opportunity to moderate a panel of industry leaders who shared valuable insights into these trends and how developers and investors can adapt. With a focus on retail and my own mixed-use development at 2422 E 7th in East Austin, this post explores key takeaways from the panel and offers a roadmap for navigating the changing landscape.
The Changing Retail Landscape: Flexibility is Key
Retail real estate is no longer about static spaces; it’s about creating flexible, experience-driven environments that can evolve with market demands. During the panel, we discussed the importance of adaptive use spaces—properties designed to accommodate multiple uses over time. This approach is at the heart of my own development project on East 7th Street, which will feature 6,000 square feet of restaurant space and a vibrant outdoor area. By integrating elements like temperature-controlled offices and versatile layouts, the goal is to attract a mix of retail, dining, and service-based tenants that enhance the community experience.
Permitting Challenges in Austin
One significant hurdle for developers in Austin is navigating the city’s complex permitting process. The panel emphasized the importance of early engagement with local municipalities to streamline approvals and minimize costly delays. In my own projects, including the mixed-use development on East 7th, building relationships with city officials and planning authorities has been crucial in moving forward efficiently. Understanding the local zoning requirements and aligning development goals with city plans can save both time and money.
Rising Construction Costs
With material and labor costs continuing to escalate, developers are exploring alternatives like modular construction and repurposing existing properties. This approach is especially relevant in East Austin, where preserving the neighborhood’s character is as important as new development. My strategy has been to focus on adaptive reuse and efficient design to control costs while delivering a product that aligns with the community’s needs.
Smart Investment Strategies for Retail Real Estate
Economic pressures and shifting investor priorities are reshaping the retail investment landscape. The panel highlighted several strategies for navigating these challenges effectively.
Avoiding Over-Negotiation
Securing favorable lease terms early is essential. As rental rates in Austin continue to rise, waiting too long to finalize leases can be a costly mistake for both landlords and tenants. For my East 7th project, the focus is on structuring leases that balance rental income with tenant sustainability, ensuring long-term occupancy and minimizing turnover.
Institutional Capital and Retail Stability
Interestingly, institutional investors are increasingly allocating capital to retail real estate, viewing it as a more stable asset class compared to office spaces. The panel discussed how this trend is driving up competition for retail properties, making it a lucrative time for landlords in Austin. This aligns with my own observations, as we’ve seen significant interest from investors looking to secure well-located retail assets with strong tenant profiles.
Balancing Rent and Operational Costs
Rising real estate taxes, insurance, and security expenses are squeezing tenants' margins, making it vital for landlords to adopt a strategic approach to setting rents. For my projects, this means focusing less on achieving the highest rent per square foot and more on ensuring tenants can thrive long-term. The goal is to create a sustainable ecosystem where businesses can grow, benefitting both the landlord and the community.
Placemaking and Mixed-Use Developments: The Future of Retail
Placemaking—the practice of creating vibrant, community-focused environments—is no longer just a buzzword; it’s a necessity for driving real estate value. The panel discussed how cultural districts in smaller towns like Smithville and Belton are boosting tourism and attracting businesses. For my East Austin project, the goal is to capture a similar spirit by integrating local art, community events, and diverse retail options that reflect the neighborhood’s character.
Vertical Mixed-Use: Opportunities and Challenges
One of the key debates during the panel was the potential of vertical mixed-use developments. While grocery-anchored shopping centers remain the gold standard for many investors, vertical mixed-use projects offer a compelling alternative—especially in dense urban markets like Austin. However, the success of such projects hinges on thoughtful planning. Many multifamily developers fail to consider the nuances of retail, resulting in poorly executed ground-floor spaces. My approach is to prioritize retail that complements the residential component, focusing on service-oriented businesses and restaurants that enhance the live-work-play dynamic.
Small-Format Retail: An Underrated Asset
In addition to large mixed-use projects, I see significant potential in acquiring smaller, standalone retail properties—particularly 2,000 to 3,000-square-foot cinder block buildings across Texas. These properties can be quickly tenanted with businesses like CBD shops and boutique retailers, generating strong cash flow with minimal risk. By signing short-term leases and maintaining flexibility, this strategy allows for rapid adjustments to market demand.
"In real estate, the difference between a profit and a pothole is knowing when to take risks and when to hold steady. You either lead the market or you get left behind." ~DeLea Becker
Workforce Development: Building for the Long Term
A thriving retail market depends not just on physical spaces but also on a skilled workforce. The panel discussed the value of technical college partnerships and industry-specific training programs to address labor shortages in construction and property management. For my projects, building relationships with local trade schools and offering internships could help create a pipeline of skilled workers, ensuring that developments are both built and managed efficiently.
Key Takeaways: Planning for Growth
Flexibility and Adaptability: Embrace adaptive use spaces and mixed-use developments to future-proof investments.
Strategic Leasing: Focus on early lease negotiations to lock in favorable terms amid rising rents.
Community-Centric Development: Integrate placemaking elements like local art and community events to enhance property value.
Smart Capex Management: Control costs through adaptive reuse and efficient design, especially in high-cost markets like Austin.
Workforce Alignment: Partner with local institutions to develop a skilled labor pool for long-term growth.
In a market as dynamic as Austin, staying ahead requires a blend of creativity, strategic planning, and a deep understanding of local trends. By focusing on flexible spaces, sustainable rents, and community-oriented developments, retail real estate can not only survive but thrive. As I continue to develop projects like 2422 E 7th, these insights will shape my approach, ensuring that each investment not only meets market demands but also contributes positively to the community.
Future Investment Considerations
The panel concluded with strategic investment insights, including:
Focusing on Demand-Driven Markets: With limited supply and increasing demand, investing in high-growth areas with strong demographics is key.
Smaller, Adaptable Spaces: Retail spaces designed for flexibility—whether for retail, office, or light industrial use—will yield higher returns in a shifting market.
Mixed-Use Developments on the Rise: Combining retail with residential and entertainment components creates resilience and diversified revenue streams.
FULL TRANSCRIPT
[00:00:00] DeLea Becker: Everybody who is here for the last panel. We are glad that you say we plan to deliver the best, most timely information to you so you can take it and go make some money. However you want to do that, as a developer, as an architect, designer, investor, broker, all of those things.
[00:00:23] DeLea Becker: One of my very favorite things, actually, about saying yes to Speaking on panels is the pre panel call. I get to get on the phone with experts in different fields, and our calls are usually an hour to an hour and 30 minutes, even though they're scheduled for 45 minutes, where we all joke and tell anecdotes.
[00:00:45] DeLea Becker: to create the vision of what's going on in our lives, right? Retail market in Austin, Texas, versus Texas, versus the United States. Development, construction costs, interest rates, property taxes. All of the things that go into it. Wonderful panel call. Funny things were said. Interesting insight into deals done.
[00:01:08] DeLea Becker: We have decades and decades of experience up here on the panel. They've been doing deals for a very long time. Many of them in some deals that you won't read about in the ABJ, but they were involved, so they know the nitty gritty. And now that I've got everybody in their seats, I will kick off our panel.
[00:01:28] DeLea Becker: I did not introduce myself. My name is DeLea Becker. I am owner and founder of Beck-Reit Commercial Real Estate and two affiliate companies. One manages the buildings that we own, and the other one repairs roads and bridges. across the state of Texas for you to drive across, but great sons, that's my money making company so that I can go be a real estate collector as Nick and his father has coined what they do.
[00:01:56] DeLea Becker: So the reason why I'm on this panel is I do absolutely love retail. I love developing it. I love owning it. I love tending it in Austin, Texas because it's easy. And then I'm delivering a project in East Austin in one year. with 6, 000 square foot of restaurant, quarter acre, all of the amazing things all the panels have said, I'm doing that.
[00:02:21] DeLea Becker: So please bring your tenants to my project workmen 2422 East 7th. I will have the panel introduce themselves so you know how they relate to retail. Wes?
[00:02:34] Wes Babb: Hello, I'm Wes Babb with Colliers here in Austin. Oops. No. You can just you can't say it. I'm Wes Babb here in Austin with Colliers.
[00:02:43] Wes Babb: I've been doing this for a number of years, as Billy indicated. And and appreciate being here on the panel. Locations for organizing this event in this beautiful setting. Look out for the ceiling windows. You see these oak trees on a beautiful day here in Austin, Texas. So this is gonna be good.
[00:03:03] Wes Babb: Thank you.
[00:03:03] Nick Tarantino: Hello. Good morning. Nick Tarantino Properties. Really? Thanks for being on here and help the energy for us and get this together here. But Tarantino was started by my father Anthony, and we're still headquartered in Houston. We go throughout Texas and into about 15 other states.
[00:03:19] Nick Tarantino: We provide property management, leasing, investment and sales services for office, retail, industrial, multifamily, so we see a lot of different product types. But we also invest in, in retail particularly.
[00:03:31] Shea Patrick: And have accumulated a portfolio of deals and work. I run our Austin office and oversee our Central Texas operations.
[00:03:39] Shea Patrick: I'm Shea Patrick with JLL Capital Markets. Born and raised Austinite, so some would call me a unicorn. I've been with HFF and then JLL for about 10 years. Started in our Atlanta office with HFF and then did acquisition with Festivus
[00:03:57] Shea Patrick: Hills across the entire system.
[00:03:59] Michael Noteboom: Mike from NOPEM, one of the principals in the Resolute RE Austin office. We work on about 4 million square feet of shopping centers in town. I'm also an Austinite myself, actually, yeah. We do landlord rep, tenant rep, investment sales. We've got a national tenant rep platform as well.
[00:04:16] Michael Noteboom: Headquartered in Austin. Happy to be here in place of David Simmons.
[00:04:20] DeLea Becker: Excellent. I will remind you this panel is about investment sales, brokerage, and finance. And I say that simply because every one of these panelists can talk on any of the other panels. We kind of cover it all. So I wanted to set the stage, that's what we're focusing on for the next 50 minutes.
[00:04:40] DeLea Becker: And in Austin, Texas, retail has been said over and over this morning, we live this, we breathe it, we've got 98 percent occupancy. Hallelujah! Like, it's great to be a landlord. It is just lovely. But it does create challenges for our tenants. And as an investor, who doesn't want to buy in Austin? Well, they all do.
[00:05:03] DeLea Becker: But the question is, when did that really start to occur? We were a secondary market. It was very easy for Nick and I to pick up shopping centers in East Austin and along the airport. And now it is not because it feels like we have institutional Fighting for what we want. Wes, you're the one that brought up when this really started to occur and the pressure it's creating on us.
[00:05:30] Wes Babb: Thanks, DeLea. I didn't realize we were going to do a background. I, too, am a unicorn. This is an interesting panel here. Grew up here in Austin. been here other than a tour of duty in Dallas for a while before grad, grad school. This is great. It's three people that have seen the changes within Austin been on the development side, brokerage side, all things retail for a number of years.
[00:05:52] Wes Babb: Confirm. To Lee's question why retail? Let's, before that I'm gonna, I'm gonna start with saying barring any sort of trade wars or tariffs that, you know, seem to have now made their presence. Personally I think that's gonna be relatively short term. From the standpoint of Washington and other countries Trump getting those things worked out so I don't see that long term, but I do see some pause, if you will, and just while that Seems to we're investors and lenders and equity and debt are all a little more comfortable with what that's going to look like.
[00:06:28] Wes Babb: So going back to the question of why retail, let's talk with the supply. Let's talk about the supply side first and take us back to 2000 on that. This isn't going to be long, but between 2000 and 2010, there was X number of square feet built in the United States. Between 2010 and 2020 half X. So then you throw in the pandemic on top of that.
[00:06:56] Wes Babb: So back in the first tranche of time frame there, there was about 70 something square feet per person of retail. You move it into The, the 2010 to 2020 where half the amount of space was built and delivered. That per square footage per person went down to 50 something. So in the pandemic, gross cities like Salt Lake, Austin, Phoenix cities in Florida DFW for that matter, some of those cities that per square foot per person.
[00:07:26] Wes Babb: metric came down to 30 something square feet per person. With that, obviously growth, population growth in many of these places, very little retail space being delivered, and you look up and there's 97 percent occupancy. On the institutional side deal volume on, was out, up like, fourth quarter of 2024 was up 43 percent or something like that.
[00:07:52] Wes Babb: Lots of risk. Now, of course, within office, the institutional market started looking at product out types. And it's interesting. I was talking with a friend of mine months ago, and he said to me, Wes, it's nice to be the bell of the ball again. And I said, Pat, you're right. And I said, You know, I've actually had a couple Calls from institutional investors saying that they wanted to increase their allocation toward retail.
[00:08:17] Wes Babb: All of that is going on as we speak and the whys and wherefores, when you look at the valuation declines recently, retail didn't really decline that much because it not, it never really got bid up that much. And you've got Constitutional investors that are looking for stability, predictability, and then their analysis of risk.
[00:08:41] Wes Babb: And so retail checks those boxes now because you've got a stable environment, again, within your, what's going on within the retail centers. You got high demand, low supply. And when you see any, when a retailer goes away, another one back does. Investors have moved, institutional has moved towards retail because of that stability, predictability.
[00:09:07] Wes Babb: And what they feel like is lower risk. Now which is a big change. That's an important component to this because retail historically has all been, always been viewed as higher risk. Now it's both viewed as lower risk. Because of these dynamics that we're talking about. So I'll give you a couple of examples and then hand it over to someone else.
[00:09:25] Wes Babb: Here recently Blackstone's had about, I don't know, 5. 2 billion, I think, in 2023 of loan payoffs from office. That's 40 something percent high over what was it, 2023. So they have taken much of that money and placed it into, and beginning to place it into, and they've got a new program on net lease triple net lease type of investment because it's going towards what they feel like.
[00:09:54] Wes Babb: It's needs based retail and they're very bullish going forward on that space retail. So they've shifted a bunch of this, you know, 5. 2 billion worth of office, mostly office loan payoffs into at least retail. Another example, they also recently acquired R. O. I. C. San Diego based I was about 93 grocery shopping centers across the western seaboard, l a seattle, Portland et cetera.
[00:10:24] Wes Babb: So he had needs based. They, that was about a four billion opposition. So those two examples happens to be the same institutional investor that clearly has moved money into a product type that they feel very confident and very bullish on going forward. That's my long answer to why retail.
[00:10:49] DeLea Becker: Thank you Wes, that was amazing.
[00:10:51] DeLea Becker: Look back at history. multi-growth Shea, I think you also have insight into why retail, institutional investors.
[00:10:59] Shea Patrick: Yeah, I think It wasn't on the supply store, it was just hammered on for Austin, kind of some of the retail per capita stuff, right? We're at 44 square feet per person in this growth market, it's like, what's it saying, we're at 55.
[00:11:14] Shea Patrick: You extrapolate that out to what that really equates to in terms of million square feet. That's about 27 million square feet that Austin would have to build tomorrow. The catch up to the rest of the growth markets, the most that we've ever really built in the last decade or two has been New York from height transfer fee this year, of which 82 percent is catch-up previous.
[00:11:36] Shea Patrick: So from a supply perspective, we're never going to catch up. always going to be undersupplied and I think, you know, that's been driven a lot by multi growth in the denser product types that you can go build on land sites. And so I think Austin will continue to kind of have a a floor in terms of Or maybe a ceiling, I guess, in terms of like, how much demand is going to continue to stay where it is, and where occupancy is going to continue to stay where it is.
[00:12:06] Shea Patrick: You know, the, I'd say, you know, from a, from an institutional perspective, and from a county enforcement perspective it's all flowing, a lot of it's flowing into retail, and I would say that, you know, We all know this, but COVID was really the ultimate litmus test, so the retailers that are still around and made it through COVID are the best of the best, and they can kind of survive through this, and it really just served as a kind of a clearing of the deck to where you're now seeing, you know, an office that's having to clear and cull The bad supply out there.
[00:12:39] Shea Patrick: COVID was the perfect kind of accelerant for us that got that out of the market. You know, a lot of the product that's left has kind of been through the ringer and is of the best. So institutional capital is always late to, to the table. And so they saw the performance through Covid.
[00:12:55] Shea Patrick: In the last kind of three or four years and say, okay, this is the best performing product. It's, I can get the best yield and compared to multi and industrial. And I can continue to push brands and, you know, get positive leverage and arbitrage where I've historically been able to. And so you're saying, just.
[00:13:18] Shea Patrick: So much dry cattle for retail compared to all the other products. You know, my, you know, my expectation, I've kind of what we've seen the last 12, 18 months has been cattle compression and, you know, any deal you take out, you're going to get five, 10, 15. It's you're going to push past your guidance.
[00:13:37] Shea Patrick: If it's a good product it's got what we've seen across the board, not just in Austin, but in Texas and across the nation and in a lot of these countries.
[00:13:45] Wes Babb: They probably have this product, lack of product coming to market and owners and sellers not really wanting to bring their retail to market.
[00:13:54] Wes Babb: Just given the dynamics that are occurring. Yeah. I know you're staying down on the tip of the spear.
[00:13:59] Shea Patrick: Exactly. That's kind of the balance I was saying is you're chasing product because it's you know, it's easy to sell and there's a ton of money for it. But on the flip side, especially in Austin.
[00:14:09] Shea Patrick: with so much private ownership across the retail space because it was a secondary market and we weren't having these groups come in and snatch it all up. And those groups are likely to trade more than five, 10 year kind of cycles. The owners that have held for 10, 15, 20 years have, in some cases, we've had discussions with owners that they've temporary wanted since 1980, and so their tax basis is so incredibly low, they're like, where am I getting all this product that I'm clipping 10, 12, 15 percent cash?
[00:14:43] Shea Patrick: Cash for cash every single year. I have completely paid off. What am I going to do? What am I going to do with these proceeds? Because if I go sell, I'm in the market competing against the Curbons, the Crows the Stablewoods, like these groups that have raised such an enormous amount of dry powder and press it.
[00:15:04] Shea Patrick: And so a lot of the lack of product is due to that.
[00:15:09] Nick Tarantino: Well, yeah. Well, I think it's interesting that this panel has three unicorns that have all been here in Austin since they grew up in, and that is the key to real estate in Austin. You have to be here a long time. I mean, if you own real estate, you know, retail real estate in Austin for a long time, you've done incredibly well because you've had so much growth.
[00:15:27] Nick Tarantino: And what's been alluded to up here, and we're seeing it, Is there's such little excess supply of retail real estate that your retailers are doing well. And when it's come time for renewal, I mean, we've seen incredible renewal rates. I mean, we've had in some cases, more than 15 to 25 percent.
[00:15:45] Nick Tarantino: Year over year renewal rates, and and that's hard for a retailer to swallow, but their choice is very difficult. You know, if you're a retailer, and you're doing well, you have a limited opportunity to relocate. Your move costs are extremely expensive, because construction costs have gone up, and and your, the landlords are benefiting from being able to push rents, and And it's a wonderful time to own retail real estate in Austin.
[00:16:10] Nick Tarantino: It's a very challenging time to buy retail real estate. Because where the net market is and where sellers expectations are. And as Jay alluded to, what are you going to go buy if you sell something, if you are an owner. So I think that's all you know, what we're seeing in Austin and but the key is with the limited supply we are being, we are able to push rates occupancies and remain really well and the retailers are doing well.
[00:16:35] Nick Tarantino: So those are all positive sides about the retail market.
[00:16:39] DeLea Becker: Well, and that leads me into question one. I am, I'm not a unicorn in that I was born and raised in Austin, Texas, but I have been here since 1992, which is a really long time compared to many people. And I have found it interesting, I got a call several weeks ago from a large brokerage, That wanted to ask you questions about retail rent on South Congress because I managed a building on South Congress and they're like, we heard you got these rents and I'm like, yeah, and they're like, we're trying to explain to our institutional investors the rents escalation and all of that.
[00:17:14] DeLea Becker: And all we can come up with is anecdotal. And I said, that's all I've got for you. I can't show you a financial model. of what's going to happen because it doesn't make any sense. But I can tell you it's true because I can show you past performance over the last 20 years. So we do have some hometown people here.
[00:17:34] DeLea Becker: I know Nick, you're seeing the same thing. And one of the things I loved about our panel call is the anecdotes. I want to hear what are the pieces you did or the cells that you did that, you know, you didn't put in the ABQ. J because you're not going to but matter to the rest of us that require those anecdotals to then price our retail for lease for sale.
[00:17:55] Wes Babb: Talking about self congress like we did on panel. Yes. Yeti. It was, yeah. Correct. So everyone, we knows this, but really what a retailer restaurant can pay per square foot is driven. It's a math formula. It's driven by what they think they're those projected sales are going to be out of that unit, right?
[00:18:16] Wes Babb: Whether it's retail or restaurant, but what's changed so much is how do you, you know, are you're predicting using historical data and some regression analysis, And all the things we use when we're modeling. But there's been so much growth with rents and everything, especially South Congress.
[00:18:35] Wes Babb: We were talking about this on the panel, and I was involved. A client of mine bought the retail Yeti building here, right there on the, I guess, Riverside in Congress several years ago. I was involved with the transaction. And so we were underwriting and it was like, okay, are we, you know, people are talking about 50 and 60 something dollars per square foot on South Congress and it's like, wow, that's you know, that's kind of the highest that's hard to really absorb.
[00:19:02] Wes Babb: And we were able to do acquired the asset. It's a long term hold for my clients as are all of their assets. But then you fast forward a few years, right? And you look at Music Lane and the who's who of music, or who's who of retailers that are at Music Lane. Love Sack Fancy, Blue Lemon Equinox Hermes.
[00:19:25] Wes Babb: I mean, it's the So location in Austin, right? They chose to do this. Part of the reason is because of the huge amount of tourists that are actually shopping there. But rents now, you know, 100 per square foot plus. Would you have, I would have never said and nor would anyone that was involved with our transaction back with the acquisition of the Yeti retail.
[00:19:49] Wes Babb: That there would be 100 a square foot. I mean, we could kind of joke about it, maybe guess that there would be, but there was really no data at the time that really would support that. But here we are. So while we were also talking on the phone, it's like. How? How? How far can this go? But what we've noticed on retail, whether on the investment side of the sales side, on the development side, on the leasing side, what we've noticed here in our market, and I would say this is similar to the other growth markets, that when one tenant goes out for whatever reason, they just can't afford the rent because they can't do the sales.
[00:20:26] Wes Babb: Another tenant comes back in. Look at all the death knell from years ago about you know, the internet and how the apocalypse of retail and blah, blah, blah, blah, right? And so you look at the circuit cities and you look at the party cities and you look at the numerous retailers that have gone BK or they're completely out of the market and restaurants too.
[00:20:49] Wes Babb: But all that space is leased. No it's 97% leased. And so for every one of those, there's a new concept, a new age, a new tenant that comes down the pike that can't afford to pay those rents. And so therein lies the. the backfill. Therein lies the predictability, the stabilization and the risk that institutional owners are now comfortable with.
[00:21:17] Wes Babb: That if I have a vacancy, given the demand and the supply and where we are, we're gonna fill I'm going to fill it at a higher rental rate.
[00:21:27] Michael Noteboom: But you're also going to fill it with, you know, two or three tenants that want to be there. And you get to pick and choose whoever's got the best credit. And that's where you're going to get the cap rate at the end of the day.
[00:21:38] Michael Noteboom: The supply demand thing is huge when it comes to cap rates. Because again, if I've got ten tenants wanting to go in a single space, I'm just going to look at financials. They're probably all going to be willing to pay what I want them to pay, but at some point someone's got better credit than all the others, and that's what's going to trade at the end of the day at a lower rate.
[00:21:57] Nick Tarantino: Well, one thing that's also made it hard here is everyone's thought, you know, over the years, like, Hey, that looks like a great shopping center or a strip center. I'm real interested in that. I'm not even close and I find out it's because the multifamily developers just bought their entire whole thing down.
[00:22:13] Nick Tarantino: They don't even want to keep it as a shopping center. I mean, so multifamily was able to buy dirt and that also constricted the supply of retail. The other thing is look at the supply of lock space. I mean, you know, in Houston, you've got box space everywhere. In Austin, you have very limited box space.
[00:22:29] Nick Tarantino: And You know, and you know, if you're an indoor pickleball player, for example, the Austin market is not going to have as much pickleball because box space is not as incredibly as available. So anyways, that's my pickleball plug. I like pickleball. Uh, but, No spirit Halloweens for us. That's right.
[00:22:44] Nick Tarantino: Halloween, right? So it's, you know, it's, again, it's all good if you're, you know, as long as the retailer sales continue and the occupancy is there and you own the real estate right now that, that part works.
[00:22:56] Shea Patrick: Back to high-end the South Congress. I can make both sides of the argument. It's there, but I see a lot of like the tenants that can't come in and can't pay their rent.
[00:23:05] Shea Patrick: I guess they're the national brands and the high end brands. And I think a lot of it is because they are able to attribute, or maybe do attribute, a lot of that rent payment to advertising and customer acquisition costs, instead of just looking at a straight P& L, like what are we going to store, what are we paying in rent but I think that will just inherently lead us to a South Congress that isn't recognizable and isn't, that has basically no soul.
[00:23:35] Shea Patrick: And, you know, I think if you look at, if you look at other high street markets around the country, a lot of times it popped up to 100, 150, you know, South Congresses at 220. You know, barrels that went up to 200 has now plateaued and is down at 150. Like, I feel that, you know, we might not have a ton of supply on South Congress, and that might keep it elevated for a while, but I could see it you know, One tune it goes and the music kind of starts to slow down and you have a ton of negative sentiment bailing out of South Congress and saying these rents aren't sustainable.
[00:24:10] Shea Patrick: They're going to drop down to 150 and you just plummet because the moment you've worked on that first rent, it just nukes the entire corridor. Look at St. Vincent, which we traded last year. It's the John Deere office, King Ranch down below Maywell. When we traded that majority of the market was looking at the office, which is paying $50 a foot.
[00:24:32] Shea Patrick: It's John Deere's tech innovation center. And you know, I think that location, John Deere feels a little weird, but I think that location and office makes a lot of sense for their workforce. But groups, were looking at the office that has five years left. On their term, and saying, this is a 50 rate, but I can go spend upwards of 250 to 300 a foot to convert this to retail and pop their rent to 100 a foot.
[00:25:00] Shea Patrick: So you have people starting to think second story retail in South Congress, and driving that cap rate down into the week. Plus the, let's say mid five and the moment that the sentiment starts to shift and people are looking at those rents as soft saying, I don't know how much longer I can get those rents, that type of underwriting goes out the window, that cap shoots up to, to, you know, the IT six range or probably trade.
[00:25:25] Shea Patrick: I'm a little wary and if I wouldn't feel like the music is going to go on forever if I hadn't done South Congress. You kind of already hit the lottery once. I would be pulling the ripcord as fast as humanly possible to get out of South Congress if I could spare you.
[00:25:39] Wes Babb: We'll take your point, Shea.
[00:25:40] Wes Babb: The hundred I $100 is really where we've got to be, or in that range, 150 on underwriting. 200 is, I mean, it's there, but it's fairytale. When you look at most of it, fairytales went forward. When you look at, in my opinion, when you look at most of those leases, when they were done, then it's back to, of course, what we think are, what we think are sustainable.
[00:26:07] Wes Babb: At least, none of us have a crystal ball, but what we seem to be. Sustainable, given the tenant sales that are 200 a day or dry.
[00:26:18] DeLea Becker: Well, there's the, I'm an investor and I'm buying. And then once you own it, now you're a landlord. And there's things that you need to be paying attention to. I know Nick and I both Sit and look at our triple nets all the time. Yeah, all of my tenants may pass through triple nets, but insurance and taxes and all of those things are skyrocketing, which starts to squeeze the tenant that Michael puts into my space.
[00:26:45] DeLea Becker: As a landlord, I personally do not care about having the highest rent on the street. Actually, I'm concerned if I do. I really care about having tenants that stay in hang. So I gotta have rents that they can handle. And I got to be projecting where my triple nets are going, because at the end of the day, the tenant cares about that all in gross rent, not base rent, because if your triple nets are 30 versus 15, you got to make out that there's a gap there.
[00:27:12] DeLea Becker: So I want to hear your insight, Nick and Michael. In the construction world, we say we look for potholes and we avoid the big ones. What are the big potholes in owning retail real estate?
[00:27:26] Nick Tarantino: Well, the expenses on the retailer are tremendous right now. And we've had insurance expense going up in the shoppers and the taxes always seem to go up.
[00:27:36] Nick Tarantino: Something that, that I don't think is talked about enough is the security costs. I think security is a cost that we're starting to see more and more the landlords having to provide more shopping center security, as well as the tenants and those retailers. You know, the retailers internally have more operating expenses with their good costs or cost of labor.
[00:27:56] Nick Tarantino: So it's a, you know, I'm glad that the retailers are paying the rent, doing well, seemingly doing well, but their expenses are certainly going up. And So those are definitely the challenges. I mean, again, if you're a retailer and you're going, well, I'd like to pay less rent and I'm looking at my triple net cost and maybe I can move down the street.
[00:28:15] Nick Tarantino: Well, then you're hit with, yeah, but the construction costs to move are so high. If you even have an opportunity in space, and if you have an opportunity in space, you're competing against multiple, otherwise on that other space. So it's a tough time for retailers, and the question is, you know, and we've talked about this for years.
[00:28:31] Nick Tarantino: How long can the retailers pay for the triplet? I've been asked that question for so many years. And here we are today with a robust retail market. So evidently they can continue to absorb it. The thing to watch is that, you know, tenant sales. And as long as the consumer has money, then there will be sales.
[00:28:50] Nick Tarantino: You know, but there are some things to watch on the consumer side. But anyway.
[00:28:54] Michael Noteboom: I think about renewals. When there's a tenant that's been there for ten years. And they've got the opportunity to get signed back up on a $20 triple net number, or go down the street and pay 10 bucks, but the base rent's the same.
[00:29:07] Michael Noteboom: I mean, what am I gonna do as a landlord if I fight? But in reality, I'm either gonna do one of two things. I'm gonna lose my tenant. I don't have to do a deal that's at a lower rate than what they're in there for. Not many landlords can, you know, drop the base rent on a renewance. You know, hopefully there's tenant demand to backfill that vacancy.
[00:29:26] Michael Noteboom: But I mean, we're looking at triple nets sometimes more than we're looking at base rates because like D'Lee said, it's a gross rent game. It's not really a base rate game. And 20 in round rock on six 20 is. It's a tough situation on renewables, especially.
[00:29:42] DeLea Becker: We have kind of the cat's meow of retail has been grocery-anchored .
[00:29:47] DeLea Becker: But I want to hear from my panel, what do you think is a different property type? And it could be mixed-use mixed use, it could be something else. That has the greatest investor potential.
[00:30:02] Shea Patrick: I'd say right now an anchored strip is most like in favor. I think there's, you know, there's just been so much institutional capital based around that product type.
[00:30:12] Shea Patrick: I could see it getting to the point where it's as sustainable and a little too frothy. But I would say all product types. It's just different sources of capital that are chasing each. You know, I think, when we talk about like institutional capital going into an infrastructure space, there's certainly groups doing it themselves, and like, you know, SiteCenter's spinoff, Reed Kerbaline, is kind of the 800-pound gorilla in that space.
[00:30:36] Shea Patrick: But, you know, the private guys spending and syndicators who have been doing it for 20 or 30 years are now starting to see endowment funds and life goes allocating hundreds of millions of dollars for them to go spend because if you know, if you're trying to get out billions of dollars a year you know, you can't go do it yourself and you can't go do it efficiently.
[00:30:58] Shea Patrick: into the space where the typical check sizes are 10 to 20 million, but I have just been doing it for 20 or 30 years is able to at a much better clip and it's worth paying that promo too. Or you could go the GIC route and go recalc and crow. But I would say like the downside of that is that they crowed, but they did it at.
[00:31:21] Shea Patrick: You know, a high six cap at the time, which is good value for, I thought it was good value for Kroger's portfolio, but now Kroger's having a hard time going and beating the current one, being capped out in terms of luxury spend. And I'd say that's the most, that's probably the best performing, I think the best product type right now, but across the board, we're seeing demand.
[00:31:42] Shea Patrick: You know, we did growth shrinker last year, we did high stream. same incident. We did an anchored strip and they all priced pretty similarly to where there's not a ton of disparity between between each product type. Grocery was, you know, grocery, I'd say it's like mid fives low fives and strip, and you can get down into the kind of high five range.
[00:32:02] Shea Patrick: There's not a lot of disparity between what restaurants do as long as it's retail.
[00:32:06] Wes Babb: Which is a great point. That's exactly, because there's, in retail, there's a hierarchy of Between typically long-term highest price and lowest cap rate, right? Shifts up from there to grocery anchor. You've got our center
[00:32:28] Wes Babb: neighborhood slash retail. And so for each of those tranches, there's a rise in cap rates for that to chase point that has been compressed. And so even now, the unanchored strip may garner a higher price per square foot, lower cap rates, certainly the power center, but even sometimes more so than well-located particular grocery anchors .
[00:32:51] Wes Babb: Depending on where it's located. And so that's the examples that he was using on an unanchored strip that we were talking about. And then you've got your different classes, right? So the focus being class A on unanchored strip, well located areas, where an advantage to that is, is multi-tenant typically with rental growth because you've got smaller tenants, they're shorter term leases.
[00:33:13] Wes Babb: And so the markets such as Austin, you can pencil in a higher rental growth as those leases expire and they're well located, right? And so there are corners and things like that.
[00:33:25] Wes Babb: Is it interesting, like, one time where industries have driven up single tenant Nelly's product to a point where the spread between that and multi tenant is as tight as it's ever
[00:33:35] Wes Babb: been?
[00:33:36] Wes Babb: 100%. compressing. Yeah, with the 10 year treasuries, I didn't check it today, but, you know, we're in the mid 4s, right? And have been. And all things, Pull from that. And then your cap rates are adjusted from the risk-free rate there that we know a 10 year. So what, a few years ago that we were all in the middle of when we've had Starbucks, Chipotle's B of A's and seven Elevens, all of the bunch of the, that Chick-fil-A Caliber lease.
[00:34:06] Wes Babb: product. You know they were trading in the high threes, fours before the increase in interest rates. And so once those pushed up and it's like are you going to go buy a those type of assets in the fours from the 10 year treasuries at four and a half? Probably not. Certainly not going to do it with any sort of debt or negative leverage situation.
[00:34:31] Wes Babb: So the lending markets, the capital markets are part and parcel to all of this and impression and these different categories for these different product types. It is super interesting though about how tight it's been, you know.
[00:34:44] DeLea Becker: Clearly we all love shopping centeries. Garry's Tree anchored all of those.
[00:34:49] DeLea Becker: But what about vertical mixed use? Where does that fall in? Are the investors loving it or are they like, I'd rather take a shopping center with a lot of
[00:34:56] Shea Patrick: Yeah, I think, um, certain deals that are driven by the retail from a mixed use perspective are really in favor. I mean, again, like St. Ed's employees, the cap rate was 500 basis points inside of what we've seen for typical office because the majority, not a big majority, but 55 percent of the income was retail.
[00:35:18] Shea Patrick: And people saw the upside of what you can do. Yeah, but I would say like the standard,
[00:35:22] Shea Patrick: some of the panelists hit it on the last panel, but some of the multifamily products that put retail down at the bottom do such an unbelievably poor job of planning retail. And it's, I think, some of the worst product out there. But the more that you, the more that you increase the retail exposure, and get it to a point where it's over 10, 15, 20 percent of your income stream, that starts to not be included as other income in a multi family sale.
[00:35:56] Shea Patrick: Whereas, you know, typically if you're building a multi product, a family project, and you have 10 percent retail income, that gets looped in as other income and capped at the same cap rate as well. Well inside of standard retail. And you go and do it correctly, you're actually expanding out your cap rate you're creating a better result.
[00:36:17] Shea Patrick: That's what I would never touch, is multi that's poorly thought out which most multifilm developers don't care and don't think about retail. I'm kind of speaking to the choir here, I should do an NMHC and go on this rant. But, it's just such a I can think of ten projects around town that I've just It's just the most poorly planned out retail for the product.
[00:36:42] Shea Patrick: It has to be tenanted well. It has to have good co tenancy. It has to be low. Parking to retail is not thought about. And um, I would not say multi over retail is good mixed use. But I think if you create something that has, like, thing. How are drivers like music playing?
[00:37:01] Shea Patrick: Then, you know, it's gonna price as well as anything.
[00:37:04] DeLea Becker: I enjoyed all hearing everything that they have to say so much that we've run up on time, but I'm going to go down the panel and ask them a question. As we finish out instead of asking a prediction for 2026 27 28, which we often do at all of these events, I'm gonna do something more fun because I'm curious what they're gonna say because I might run out and do it right out.
[00:37:27] DeLea Becker: This superdishes for the future. We will start with the West and this question is for all of you. I'm going to hand you 10 million. You have 14 days to spend all of it in something retail. What is it?
[00:37:44] Wes Babb: That's gonna be challenging from a due diligence standpoint. It is. You better feel real good about what you're doing.
[00:37:50] Wes Babb: On what I'm gonna do, but I from, in terms of the answer to the question on time, let's shift the time frame out a little bit. No. 14 days matters. You don't get due diligence. I guess I'm taking a risk. I'm looking for entitled small tracts of land, corners, where I'm going to develop, either pad out, or, and, or, do some pre leasing on a small multi tenant building, and, but it's got to be zoned and titled for that use because the service won't have the time to basically expire, I really believe that given what's going on both nationally and certainly at the local level in cities like Austin there's just pent up demand for leased space and it's not out there.
[00:38:39] Wes Babb: And that's why our occupancy is such and that's why demand is high. And so that's what I'm gonna do with my 10 million.
[00:38:46] DeLea Becker: Nick, 10 million is tax free.
[00:38:48] Nick Tarantino: You know, our challenge has been buying in Austin. Very difficult. So we just bought a shopping center in South Carolina that is target shadow anchored.
[00:38:56] Nick Tarantino: We bought a grocery anchored center in Phoenix, Arizona. So we've had to go outside of Texas to chase cashflow. We're cashflow buyers. You know, and we got those, you know, above an eight cap. So as soon as Shea can bring a retail deal in Austin, Texas at above an eight cap. I know, right? But I would say this Austin remains.
[00:39:15] Nick Tarantino: A a difficult market to enter and a easy place to exit. To the extent that we had to use the 10 million here I'd just be chasing something that, you know, I feel like is, has location, and hopefully we can raise some rent. So,
[00:39:27] Shea Patrick: I would target the multi, and similar to what you said earlier, that when it was harder.
[00:39:32] Shea Patrick: Harder to buy a few years ago, where some of the multi developers were buying colored man plays and then retail assets and burning off that rumor while getting it entitled. Go back the other way and buy it from them, add values to them, because I think where you for those types of deals and how how much construction costs.
[00:39:52] Shea Patrick: I think it's now equivalent with where retail values are. I would go buy that and re burn it and go back into retail and say, you know, whatever this infill site on Burnit, on, you know, wherever it may be kind of inside like the loop of Austin, I would go buy from the multi developers and rehab and reposition it.
[00:40:18] Shea Patrick: High and just the values are just starting to get basically equivalent to perfect sense of them.
[00:40:26] Michael Noteboom: We do a lot of suburban work I'm finding the master plan communities getting in there and kind of like what Wes said, 10 acres, 20 acres. on the commercial track right out front of them, path of growth, maybe not even path of growth, but getting in with the master plan community developers has, well, frankly where we do a lot of our work, but it has paid off for a lot of our clients and developers.
[00:40:50] Wes Babb: And I'm less than 20 acres, by the way, I'm talking 10 acres or less maybe on some sites, 15, but I'm Talking about smaller projects, you can delete 1000 square feet on an acre and a quarter, an acre and a half pieces that are less than 10 acres.
[00:41:09] DeLea Becker: Okay, I have lots of things that I want to buy, but it's funny. I thought of this one after I told everybody the question and I've got it back here on a sheet. It's called my bird dog or cheat sheet because I am seriously looking for this. I would take my 10 million. No problem.
[00:41:23] DeLea Becker: Closing in 14 days on All of them. I just got to find them, but I can upgrade because I didn't pay taxes on it. And I would buy 2, 000 to 3, 000 square foot cinder block buildings, vintage style, 60s, 70s, 80s. It's fine with me. Across the state of Texas, I would buy them cash. I would tenant them with CBD, smoke shop, you name it etc.
[00:41:45] DeLea Becker: I don't care what's going on in there. Because I've made cash and I got no lender fussing about what I'm doing. I turn around and I lease it for 35 percent more than the previous tenant. I've done this several times. And I only sign one year leases. I'm looking right now. I got money. Seriously. It's a money hole.
[00:42:05] DeLea Becker: Now, you got smaller properties to deal with. But, that is a money maker. Whatever's giving all this CBD, THC, and I'm not into that. The legal side of it. It's a boom. I'm sure it'll hit a saturation point, but it hasn't yet, so I don't think we have to run off the stage. If there's anybody that's got a burning question, they want to ask the panel.
[00:42:27] DeLea Becker: Quiet crowd higher. Okay, we are very grateful for your time. We're thankful that you stayed to listen to our panel. I don't think anybody here is running off. So please come up. If you've got questions that you're too shy to ask out in front of everybody. Thank you.
Conclusion
Retail and real estate professionals must stay ahead of industry trends to remain competitive. By focusing on flexible spaces, strategic tenant placement, community-driven developments, and workforce alignment, investors and developers can navigate future challenges while capitalizing on new opportunities.
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WORKBENCH: Delivering January 2026