AUSTIN RETAIL | Q2 2018

Quarterly Market ReportJULY 2018

HOUSTON | AUSTIN | SAN ANTONIO

2%

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Q22009

Q22010

Q22011

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Q22013

Q22014

Q22015

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Milli

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(SF)

Completions Net Absorption Vacancy

Supply & Demand

www.naipartners.com/austin

EXECUTIVE SUMMARYTight market conditions result in rising rents

Austin’s retail market remained tight during the second quarter of 2018, with the overall vacancy rate rising slightly to 4.2%, an increase of 30 basis points quarter-over-quarter, and 50 basis points year-over-year. With the rate at such a low level, small fluctuations up and down are not particularly significant. Net absorption was down 13.8% quarter-over-quarter to 365,580 sq. ft., though up 31.6% year-over-year. In addition, metro Austin leasing activity is at 529,683 sq. ft., on par from the previous quarter. The retail market saw overall average asking rates rise $0.13 per sq. ft. quarter-over-quarter to finish at $22.03 per sq. ft.—an all-time high—on a triple-net basis. Austin’s retail market has been gradually tightening for the last ten years and has seen occupancy rates at or above 95% for fifteen consecutive quarters, or Q4 2014.

Austin labor market

Austin jobs grew at a 0.9% annualized rate over the three months through May. Leisure and hospitality employment surged, adding over 4,200 jobs. Retail and wholesale trade continued to grow, pushing trade, transportation and utilities employment well above its pace last year. Growth was varied across industries, with all goods-producing sectors and several large service sectors shedding jobs. Professional and business services and health and education services sectors experienced declines and dropped nearly 3,300 jobs over this time. Austin’s seasonally adjusted unemployment rate fell to a low of 2.9% in May from 3.0% in April. This is well below the May Texas and U.S. jobless figures of 4.1% and 3.8%, respectively.

Market Indicators

Current Q2 2018

Prior Quarter Q1 2018

Year Ago Q2 2017

Vacancy Rate (%) 4.2 3.9 3.7

Net Absorption (SF) 365,580 424,061 277,793

Leasing Activity (SF) 529,638 523,843 649,860

Deliveries (SF) 656,752 473,401 204,640

Construction (SF) 821,657 1,177,565 1,787,640

Inventory (SF) 93,850,261 93,392,671

92,639,839

Avg Asking NNN Rent ($) 22.03 21.90 21.55

MARKET OVERVIEWAustin retail maintains high occupancy

Austin retail market fundamentals are on fire, with occupancy at 95.8% and 366,000 sq. ft. absorbed in Q2 2018, down slightly from the previous quarter’s 424,000 sq. ft. Negative net absorption has not been realized in the Austin retail sector in 28 consecutive quarters—seven years ago in Q2 2011. Supply and demand have been equally aligned for the last 10 years with supply averaging 315,000 sq. ft. and demand 360,000 sq. ft. per quarter. Construction activity evened out at 822,000 sq. ft. at the end of Q2 2018, after averaging 1.5 million sq. ft. per quarter since Q2 2017. This controlled growth will support the steady retail evolution taking place in the retail market. While new development has been slower to deliver, all of the current projects in the pipeline are scheduled for completion within the next 12 months.

Private equity arm buys retail center in Hays County

Real Capital Analytics data reports retail sales volume year-to-date through June 2018 in the Austin area at $290.5 million, resulting in a year-over-year change of -49.0%. The buyer composition is made up of primarily private investors at 85.0%; institutional buyers account for 13.0%; and user/other investors make up the remaining 2.0%. A recent significant investment transaction in the Austin area retail market is the NAI Partners’ Investment Fund II acquisition of San Marcos Place at 900 Bugg Lane, a 73,105-sq.-ft. retail shopping center from Lindenmuth Realty LLC. The property was 80% occupied with tenants such as Pizza Hut, Half-Price Books and Nationwide Insurance at the time of sale.

Leasing activity remains steady

Leasing activity was unchanged during the second quarter, with a total of 530,000 sq. ft. leased in the Austin market—compared to 524,000 sq. ft. at this time last quarter. The amount of square feet leased by submarket remained comparatively even, with the Northwest and South submarkets leading the way with 18% each; the Georgetown and Central submarkets next in line both at 14%; and the Southeast in third place at 9%. The largest lease signings occurring in 2018 included Flo Sports sealing a deal leasing 31,000 sq. ft. at 1300 E. 5th St. in the East submarket; the 29,000-sq.-ft. lease signed by Altitude Trampoline Park at IH 35 & SH 45 in Round Rock; and the 20,035-sq.-ft. contract

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Quarterly Market Report

Net Absorption

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Occupancy

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97%

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2018 2014 2015 2016 2017

Austin Retail Cumulative Monthly Sales Volume Source: Real Capital AnalyticsYear-to-date volume ($): 290,501,914Year-over-year chg: -49.0%

www.naipartners.com/austin

AUSTIN RETAIL | Q2 2018

inked by Tech Office in The Linc – Building 1 at 6406 N. IH 35 in the Central submarket.

Furniture store’s 530,974 sq. ft. delivers in Pflugerville

Of the 657,000 sq. ft. delivered in the Austin retail market during Q2 2018, over three-quarters of that space was represented by Living Spaces’ new 530,974-sq.-ft. showroom and fulfillment center. The store is located at 19024 Heatherwilde Blvd. and includes a fulfillment center and a restaurant, Becks Prime. Construction on the facility began in the summer of 2017. Of the 823,000 sq. ft. of construction underway in the Greater Austin area, the majority is taking place in the Georgetown submarket (271,000 sq. ft. or 28.5%) and the East/SE submarket (266,000 sq. ft. or 28.1%). The long-awaited Plaza Saltillo broke ground in East Austin last summer after decades of planning. The development will span six contiguous blocks with approximately 125,000 sq. ft. of specialty retail and restaurants; 800 multi-family units; and 150,000 sq. ft. of office space. In addition, the center will be anchored by a Whole Foods 365 store and is scheduled to deliver in the Fall of 2019.

All-time high rents follow high demand

The tight retail market continued to push Austin metro asking rents up, reaching $22.03 per sq. ft. to start H2 2018 at a record high. At the end of the second quarter, prices climbed 26.2% above the price five years ago of $17.46 per sq. ft. While retail availability is especially limited across the Austin area, it is particularly tight within the East/Southeast area, with a total inventory of approximately 6.5 million sq. ft. with a vacancy rate of 2.8% and the average asking triple net rent at $23.00 per sq. ft. The squeeze is also on for space in the Georgetown submarket, representing 6.6 million sq. ft. of rentable retail area with only 230,000 sq. ft., or 3.5% of inventory vacant, and an average asking triple-net rent for projects under construction in the $26.00-per-sq.-ft. range.

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Quarterly Market Report

www.naipartners.com/austin

AUSTIN RETAIL | Q2 2018

Average NNN Asking Rent by Submarket

$14.65

$19.86

$20.38

$22.27

$22.28

$22.35

$22.44

$22.54

$23.00

$24.45

$27.09

$27.61

Georgetown

North/Domain

Northeast

Round Rock

Hays County

Northwest

Central

Cedar Park

East/SE

South

CBD

Southwest

Completions Year-To-Date

0 100 200 300 400 500 600 700

Central

North/Domain

Cedar Park

Round Rock

East/SE

Georgetown

Hays County

Northeast

Thousands (SF)

Leased Available

0 50 100 150 200 250 300

Cedar Park

South

CBD

Northeast

Hays County

Round Rock

Southwest

East/SE

Georgetown

Thousands (SF)

Leased Available

Under Construction

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Quarterly Market ReportAUSTIN RETAIL | Q2 2018

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

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Austin Retail Submarkets

1. CBD

2. Cedar Park

3. Central

4. East/Southeast

5. Georgetown

6. Hays County

7. North/Domain

8. Northeast

9. Northwest

10. Roundrock

11. South

12. Southwest

AUSTIN RETAIL | Q2 2018

Quarterly Market ReportJULY 2018

NAI Partners Austin Office 701 Brazos Street, Suite 320Austin, Texas 78701

tel 512 580 6208

www.naipartners.com/austin

Leta WausonDirector of Research

leta.wauson@naipartners.comtel 713 275 9618

MARKET OVERVIEWSubmarket Stats

SubmarketNet Rentable

Area Vacancy

Q2 2018 Total Net

AbsorptionYTD Total Net

Absorption

Q2 2018 Leasing Activity

Q2 2018 Deliveries YTD Deliveries

Under Construction

Total Avg Asking Rent

NNN

Austin Total 94,776,316 4.2 365,580 789,641 529,638 656,752 1,130,153 821,657 22.03

SubmarketNet Rentable

Area Vacancy

Q2 2018 Total Net

AbsorptionYTD Total Net

Absorption

Q2 2018 Leasing Activity

Q2 2018 Deliveries YTD Deliveries

Under Construction

Total Avg Asking Rent

NNN

CBD 2,418,550 1.4 5,205 9,276 5,028 0 0 36,000 27.09

Cedar Park 8,570,872 4.0 42,634 -7,400 28,120 12,500 20,900 23,200 22.54

Central 8,766,027 6.1 -2,906 3,690 71,936 0 5,280 0 22.44

East/SE 6,502,531 2.8 -44,436 1,153 8,884 16,000 54,700 152,000 23.00

Georgetown 6,616,682 3.5 10,999 141,853 74,729 0 121,398 270,549 14.65

Hays County 9,679,096 3.3 46,489 247,415 26,495 51,527 319,070 70,795 22.28

North/Domain 7,401,324 3.2 34,071 7,766 9,041 13,650 18,930 0 19.86

Northeast 7,100,245 6.7 404,465 423,109 31,052 563,075 575,875 17,500 20.38

Northwest 9,663,020 3.7 52,661 126,278 96,737 0 0 8,436 22.35

Round Rock 7,894,655 6.1 21,864 38,364 36,873 0 14,000 109,855 22.27

South 11,167,743 3.3 -35,781 -31,075 93,809 0 0 35,952 24.45

Southwest 8,995,571 4.4 -169,685 -170,788 46,934 0 0 97,370 27.61