Where will retail outlets in your town be found ten years from now? If you knew the answer, you’d borrow all you could and start buying property tomorrow. Fortunately, you don’t need a crystal ball to figure out future local development. You just need to understand agglomeration. This basic real estate concept strongly influences where an area’s real estate growth occurs.
Agglomeration means retailers like to lump together. It’s related to the “gravity theory” of retail: the more square footage of related retail you have concentrated in one area, the more gravity or pull the area generates on consumers who live farther and farther away.
Car dealers are a common example of agglomeration. In College Station and Bryan, one car dealership moved to Earl Rudder Freeway. Another soon followed. Nearly all were located along that same stretch of highway within a few years.
Retailers don’t view nearby related businesses as competition. They see them as a benefit. Having the widest possible variety of vehicle shopping in a small area draws customers from miles away. Being able to view the widest assortment of offerings in the shortest time helps consumers make comparisons quickly.
Agglomeration works well for other retailers, such as dry cleaners. They locate near a supermarket where the drawing power of the bigger store works for them. Outlet malls are another example. Together, the individual outlets have the power to draw consumers from 50 miles away.
Las Vegas is an example of an entire city that is an entertainment agglomeration; people aren’t going to fly four hours to the Nevada desert unless they have countless reasons to go. Or, drive by Six Flags Over Texas in Arlington and count the number of dining, lodging and entertainment opportunities available in one large agglomeration.
Convention centers are typically one part of an overall convention and tourism strategy designed to bring vacationers and business travelers to the community.
Ideally, a convention center is within walking distance of convention-quality dining, entertainment and lodging. Another popular option is to have the agglomeration linked by local transportation, such as a regularly scheduled trolley that weaves throughout the convention district.
In many communities, physicians like to locate their homes near the hospitals where they work. Upscale housing developments near the health-care district may readily attract physicians and related caregivers.
In university-oriented towns, agglomeration works well with eating establishments. One stretch of University Avenue in College Station has become known as “restaurant row” for that very reason.
To research where agglomeration might be occurring in a particular Texas metro, check out the market research section of the Real Estate Center website.
We have market overviews and data on area population, demographics, education, employment, hotels, ho
On this week’s Real Estate Red Zone podcast, our chief economist, Dr. Jim Gaines, talked about some of the challenges the Texas economy will be up against in 2016. He mentions three things in particular to keep an eye on: the energy sector, the national economy and the value of the dollar.
If you haven’t listened to Jim’s insights, I highly recommend it. It’s a good listen (click here and play the first episode).
In the meantime, here are a few of his key points.
“The job losses in the energy sector have not stopped and, in fact, are probably going to pick up this coming year. There’s already been an initial wave of job losses — service companies have cut back, and Schlumberger, Baker-Hughes and Halliburton have announced layoffs. What doesn’t make the headlines was that that industry — or that group of companies — was really dominated by a whole bunch of small companies, from just a couple of employees to about 30, 40 or 50. Those companies are fragile in this market setting, and a lot of jobs will be lost there.”
“Texas is not an independent country. We’re part of the United States, and if the U.S. economy is prospering and doing well in other industry groups — manufacturing or business services, or what have you — that buoys up the state. Fortunately, the national economy is still chugging along at a pace that, at least for the past five or six years, has been a slow to modest level of growth. But at least it’s positive and moving forward. That’s helping to fuel employment growth here that’s not energy-related.”
Value of the Dollar
“[The dollar] being so strong is really hurting our exports, and Texas is a number one or two state for exporting in our country. A lot of our industrial and investment dollars are based on exports and exporting activity.”
What direction are commercial rents headed? Is the environment ripe for new construction?
A region’s industry mix often leads to a wide variety of answers to these questions at the local level. Commercial real estate (CRE) markets within the “Texas Triangle” (see “Texas Triangle”) are no exception. A comparison of actual and natural vacancy rates provides valuable insight for those who put their money in CRE.
Three CRE classes — office buildings, retail structures and industrial warehouses — accounted for more than half the value of all private, nonresidential construction occurring between January 1980 and July 2015. Because of their relative size, these three categories within the four major Texas MSAs are assumed to represent the bulk of Texas CRE.
The Austin MSA’s overall office market has continued to improve since vacancy peaked in fourth quarter 2009 (2009Q4). Vacancy fell steadily from a high of 16.9 percent in 2009Q4 to 10.4 percent by mid-2015 (Figure 1). This level is well below the average 14.3 percent observed between 2000 and mid-2015, the extent of available data.
Changes in demand are measured by net absorption, or the net change in square footage leased during a given period, including space leased in newly delivered buildings. Net absorption since 2011 has remained strong, moving closer to 2006 pre-financial crisis levels as the Austin office market continues to benefit from a resilient high-tech sector.
New relocations and existing firm expansions have steadily increased demand for Austin office space. Employment growth in the combined financial and business services sectors has averaged 4.8 percent annually between 2009Q4 and mid-2015. This is well above the 15-year average of 3.2 percent observed since 2000.
The real annual rental rate increased by an average of 3.5 percent in the three years since mid-2012, an impressive growth rate in real terms. On the supply side, new construction has begun to decline in the overall office sector (which includes owner-occupied space) as well as new buildings being constructed solely for lease.
The Austin MSA’s retail vacancy peaked in 2007Q3, steadily improving since then, reflecting the dynamism of the Austin economy (Figure 2). Vacancy fell to a low of 4.5 percent by mid-2015, well below the average of 6.2 percent between 2006Q1 and mid-2015. CoStar’s retail data is not as historically deep as its office data.
Net absorption has remained positive since the second half of 2011 and continues to grow. Retailers continue to expand in the region, increasing the demand for retail space.
The average annual growth rate of retail sales increased 5.2 percent in real terms in 2014, higher than the historical average of 3.5 percent registered between 2006 and mid-2015. Alternatively, retail employment has slowed since 2014Q1, registering a 2.1 percent annual growth rate by mid-2015 compared with a historical average growth rate of 3 percent between 2007 and mid-2015.
The Austin retail CRE market remains strong, registering average annual real rent growth of 4.2 percent quarterly in mid-2015. On the supply side, new retail construction overall is declining as are rentable buildings under construction.