The Austin Chamber of Commerce likes to boast that the local population doubles about every 20 years, about three times faster than the national average. Retailers can barely catch their breath. “We are still catching up on serving the market we already have,” says Don Martin, development partner for the La Frontera shopping center, and president of Martin and Salinas Public Affairs.

With a metro population of 1.4 million, Austin is the 16th largest city in the country. That was in 2000. Since then the area has grown about 3 percent a year.

Even during the darkest days after the tech bubble burst, when the city was particularly hard hit, retailers kept coming. “The market has been on a solid footing for the past year and even during the so-called economic downturn our market held very strongly,” says Chris Ellis, a principal at Austin-based commercial real estate company Endeavor.

Topographical Determinism

Retail remains strong in Austin because supply is kept in check. “The challenge in Austin is topography,” says Roger Anderson, president of retail real estate company UCR. “It's very hilly with a lot of lakes and rivers. …What it does is funnel retail in certain areas.”

Strict environmental regulations limit development, especially retail, in the hill country west of Austin. Development is also tough in the city's southwestern corner due to the Edwards Aquifer, which is an underground source of drinking water for Texas.

Although barriers are high, retailers still find it attractive. The area's demographics explain why. Annual household income is $51,600, about $8,000 higher than the national average. The population is also well educated. According to the 2000 census, Austin is the sixth most educated metropolitan area in the United States, with almost 40 percent of the inhabitants having a college degree.

It is also a tech hot spot. IBM has a research laboratory there and Dell's headquarters are located north of the city. The state government and the University of Texas are huge employers, and also provide a diverse workforce. With more than 50,000 students, the university also adds a cultural vibrancy to the area.

“One of the things that we've noticed is that in the late 1970s and early 1980s, after you graduated from University of Texas, you usually moved somewhere else,” says Les Morris, a spokesman for Simon Property Group. “That has sort of changed with the technology incubator here.”

Even during 2003, when unemployment reached 6.5 percent, retailers were loath to leave the Lone Star State's capital. “When people dump properties, Austin is one of the last markets people bail out of,” says Anderson. “Sales are average or above average and sites are hard to come by, so people hold on to them.”

At 95.5 percent, Austin has the highest retail occupancy of any major city in Texas. It's also a very competitive market. When the Vitamin Shoppe looked to open its first store here this year, it found Class-A space a little scarce. “Austin is a very difficult market to enter,” says Corey Bialow, vice president of real estate for the discount vitamin retailer. “We only take prime A real estate, but freestanding buildings at Main and Main are not empty.”

Bialow says prime A space in Austin runs from the mid-to-high $30s a square foot; about equal to markets like Houston and Dallas, which are four or five times larger.

The Main Players

Unlike those other cities however, Austin tends to have a few players. “The thing that characterizes Austin is that it's dominated by Simon,” says Martin.

The Indianapolis-based REIT owns the Arboretum at Great Hills, which is the heart of the city's most popular trade area. Located at the intersection of three freeways in the city's northern center, the Arboretum is 3 million square feet of unenclosed retail space. Built in the mid-'80s, the Arboretum was an open-air mixed-use center long before the concept became trendy. The Container Store, Barnes & Noble and Saks Fifth Avenue all have stores here that rank among their top 10 in terms of sales.

Simon also owns two of the three enclosed malls in Austin, including No. 1 Barton Creek Square. The remaining mall, Highland, is owned by the Rouse Co., soon to be part of General Growth Properties.

Despite the waning popularity of enclosed malls among fickle shoppers, Highland still remains vibrant, says Monica Blackburn, retail marketing manager for the mall. Of course, having an average income of $51,000 in the immediate area and the main campus of the University of Texas nearby certainly helps.

Built in 1971, Highland Mall is the oldest mall in the city. With over 1 million square feet, it is anchored by JC Penney and Dillard's. “Diverse customer base in the area also gives us an advantage,” says Blackburn. The mall is trafficked by college students, nearby office workers and out-of-town visitors.

However, the real retail action lately has been north of the city in the fast-growing suburbs of Williamson County. The new hot market is Round Rock, especially around Dell Inc.'s headquarters.

One of the most ambitious of Round Rock's many new shopping centers is La Frontera, a 330-acre mixed-use development that will have 850 residential units and a Marriott Hotel. “La Frontera is the next major retail center,” says Martin. Its growth is being precipitated by the expansion of major highways in the area.

So far, the center's retail component consists of three parts containing more than 1 million square feet of shopping. The first part, the 880,000-square-foot La Frontera Village, was developed by David Berndt Interests and Developers Diversified Realty Trust. It includes big-box retailers like Barnes & Noble, Old Navy and Bed, Bath & Beyond.

La Frontera also incorporates the Vintage Plaza, which was developed and is owned by Waterstone Development. It is a specialty retail center with 50,000 square feet including Tweeter's, Ben & Jerry's and Nothing But Noodles.

And just announced this month, Cousins Properties Inc. plans to add one of its signature Avenue open-air retail centers to La Frontera. Encompassing 250,000 square feet of retail, the Avenue at La Frontera will be the company's first property in central Texas. While tenants have yet to be identified, rumor has it that Cousins is looking for a movie theatre to anchor.

Near Saturation

Other new players in the market are also attracted to Round Rock's growth and demographics. Recently, Honolulu-based Alexander & Baldwin Inc. purchased the Boardwalk Shopping Center off Interstate 35 for $23 million after selling properties in California and Colorado. The center is 100 percent occupied and includes PetsMart and Office Max. It also has an adjacent Super Wal-Mart and Home Depot. “We liked it because it was a good mix of large-box retail and in-line retail,” says Norbert Buelsing, executive vice president of A & B. “There's also a good mix of income stability as well as income growth in that area.”

However, the older market around the Arboretum is still appealing. Simon Properties has teamed up with local real estate company Endeavor to create the $150 million Domain project, north of the Arboretum. Domain will be an 800,000-square-foot, mixed-use outdoor center anchored by a Foley's. It also will have Austin's first Neiman Marcus, a store that originated in Texas in 1907 and is just now setting up shop in the state capital.

Since Simon is not new to Austin, the company just keeps forging ahead, even with the help of market rookies like Chelsea Property Group, which Simon acquired this year. The two are working together to build a $100 million high-end fashion outlet mall. Scheduled to open near the end of 2006, the 430,000-square-foot Round Rock Premium Outlets will have about 120 high-end fashion and home furnishing boutiques.

However, with all this new development, previously under-saturated markets may soon be built out. “In general, I agree that the market has not been over saturated,” says Anderson. “But some areas like the Arboretum and Round Rock are nearing saturation.”

With an eye on Austin's booming population growth, retailers are busy scoping out the next big area for development. “Austin has been hot for quite a while now and it doesn't show any signs of abating,” says Martin.

According to Ellis, the area east of the city is now ripe for growth. A new international airport and a new highway (state highway 130) could accelerate development. “There are a lot of things that drive new growth, like roads and airports, that are now in place in that part of Austin,” he says.

Market Profile/Austin

DEMOGRAPHIC OVERVIEW

  • Total Metropolitan population: 1.4 million

  • Expected population (2035): 3.2 million

  • Median Age: 29.6

  • Retail Occupancy rate: 95.5 percent

  • Unemployment rate: 4.9 percent

  • New Retail in 2004: 1.5 million square feet

  • Total retail space (at the end of 2003): 27 million square feet

Sources: Census 2000, The Weitzman Group and Cencor Realty Services