Data shows commercial rents, vacancies expected to increase as small businesses navigate higher operating costs

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Amy Sinclair, the owner of Cobalt Blue Salon, relocated her business from an old space on West William Cannon Drive that she had been leasing for 12 years to a newly constructed storefront at Lantana Place in Southwest Austin last fall.

The cost of rent at Lantana Place, which opened in 2018, is higher than what she had been paying previously; however, she said the new space offered benefits such as ample parking that had not been present at the older shopping center. Also, a growing list of tenants in the new retail center has her optimistic about her business.

“Financially, it’s still a little tight in this new location now, and it’s a little crazy to build out a new space, but now that it’s done I’m very pleased with it,” she said.

Commercial real estate professionals project that rents and property taxes in the southwest region of Travis County will continue to rise, and so, too, will the number of vacant spaces within traditional commercial centers as some businesses get priced out and others look to upgrade to newer spaces.

Although more spaces are available for lease, brand new spaces continue to be brought online.

New vs. old

Sinclair said she looked at a number of both new and second- or third-generation spaces before settling on Lantana Place.

Beau Armstrong, the CEO of Stratus Properties, which developed Lantana Place, said newer spaces being built cater less to traditional retailers that sell goods and are designed more for service industry and entertainment businesses.

“We’re more focused on entertainment, fitness, wellness, and food and beverage. That is a direct response to the internet and Amazon,” Armstrong said. “If you can get it on the internet, we're really not trying to build space for you.”

Modern retail centers also focus more on finding a mix of tenants that can complement one another to help the associated businesses grow, he said. The goal, he said, is to have customers come to the center for one service, and then to go to two or three others before they leave.

“That's kind of a triple threat in our world,” he said.

Sinclair said that her previous location at 4220 William Cannon Drive, while more affordable in terms of rent per square foot, had limitations with parking and did not target her desired demographic of clients.

“It really didn't allow us to get a lot of walk-ins and build our clients that way,” she said. “It wasn't a great location to get [organic] new business, and we really couldn't get bigger there and become the look and the style of what we want to be in that location.”

However, cost is a factor for many businesses, which look to second-generation spaces that, while prices are increasing, continue to be more affordable.

“First-generation space for the tenant tends to be a little bit more expensive,” Armstrong said. “Because of that there are certain tenants that just prefer second-generation spaces because it's frankly just more cost-effective.”
He said that the new inventory being added to the market Is healthy for the local economy.

“Somebody may move out of an older center to get into something newer that targets more of their demographic, and that in turm creates vacancy space that can be backfilled at a lower cost,” he said.

The issue of vacancies and rent prices

Sinclair said she looked at a number of both new and existing spaces before settling on Lantana Place.

Beau Armstrong, the CEO of Stratus Properties which developed Lantana Place, said newer spaces being built cater less to traditional retailers that sell goods and are designed more for service industry businesses.

“We’re more focused on entertainment, fitness, wellness, and food and beverage. That is a direct response to the internet and Amazon,” Armstrong said. “If you can get it on the internet, we’re really not trying to build space for you.”

Modern retail centers also focus more on finding a mix of tenants that can complement one another to help the associated businesses grow, he said. The goal, he said, is to have customers come to the center for one service, and then to go to two or three others before they leave.

Sinclair said that her previous location at 4220 William Cannon Drive, while more affordable in terms of rent per square foot, had limitations with parking and did not target her desired demographic of clients.

“It really didn’t allow us to get a lot of walk-ins and build our clients,” she said. “It wasn’t a great location to get [organic] new business, and we really couldn’t get bigger there and become the look and the style of what we want to be in that location.”

However, cost is a factor for many businesses, which look to second-generation spaces that continue to be more affordable.

“First-generation space for the tenant tends to be a little bit more expensive,” Armstrong said. “Because of that there are certain tenants that just prefer second-generation spaces because it’s frankly just more cost-effective.”

He said that the new inventory being added to the market is healthy for the local economy.

“Somebody may move out of an older center to get into something newer that targets more of their demographic, and that in turn creates vacancy space that can be backfilled at a lower cost,” he said.

Strengthening strategies for small-business owners

With vacancy rates and costs projected to continue rising through 2023, real estate professionals maintain it is crucial for people to create a solid plan for starting a business.

Gayle Berkbigler, the senior vice president at St. Croix Capital Realty advisers, said factors that can create pitfalls for small-business owners include overestimating their square footage needs and not understanding triple-net payments. But she also said more businesses are failing now than five years ago because they simply cannot maintain the costs.

Cathy Coneway, a representative of Stanberry & Associates Realtors, said that while it is common for retail and office centers to have vacancies, rising rent costs coupled with triple-net costs are making it more difficult for new business owners to survive.

“I would say retail in particular has been hit hard over the last few years,” Coneway said.


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