A Look Back in Time | 6 months into 2022

DeLea Becker has Been BUSY!

See Below for an Overview of the last 6-months at Beck-Reit Commercial Real Estate, and Scroll to the Bottom for DeLea’s Notes and Takeaways from Rednews' Recent AUSTIN RETAIL FORECAST PANEL

Retail Development - “Just Building it doesn’t mean they will show up” - Mixed Use Retail needs the right tenants

Lenders putting out deal sheets - Prime Plus 1 & stressing deal at 8.5%

“People get rich when things are going up, people grow very Wealthy when things are going down”

“Watching Tech in Austin, they have announced layoffs to begin in July”

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Looking back now six months into 2022, Beck-Reit Commercial Real Estate has experienced a steady uptick in business coming out fo the whirlwind that was 2021.

DeLea Becker Joins Panel @ RedNews June Retail Forecast for Austin, TX

This year, DeLea Becker SOLD, The Cat Noir, Falcon Head, and Webberville. These WERE NOT simple transactions. Each came with its challenges — be them financial, transactional, civic or otherwise — but her expertise, resourcefulness, and creativity produced a successful closing in each scenario.

It’s feats like this that make it no surprise DeLea has made several CRE lists. The kicked off with a bang when DeLea was named one of 25 Most Influential Owners, Dealmakers, Creators & Innovators by OTSO . 2022 also saw DeLea recognized as one of, “CREi Movement List of Influential Women”, … and most recently, she was awarded #26/150 of 2022 TOP LinkedIn Influencers.

Women in CRE! We Love to See It! RedNews Retail Forecast Panel June ‘22

One of the ways DeLea stays plugged in to the CRE discourse is by attending events such as the CREiSummit. DeLea is always listening to experts and their experiences, and applying their strategies to Beck-Reit Commercial. You can expect to find her taking notes to retain the formulas, techniques, and secrets often only shared in these closed and exclusive spaces before chatting up anyone and everyone after each presentation.

She doesn’t stop there, she stays connected and is eager to share by moderating and participating as a panel expert on several platforms. DeLea knows that staying up to date on current events is critical to the success of the business. Most recently she prepared and spoke on Retail for RedNews Summer Forecast 2022. And in July, DeLea will present as a speaker for Globe St. ELITE Women of Influence Conference!

The REDNews Retail Panel took an honest look and at where we are in the economy and the headwinds against Retail in Austin Texas so we can all make wiser and more considerate decisions as we lease, sale/buy, & develop Retail Properties. See below for DeLea’s personal notes and takeaways!

REDNEWS ATX RETAIL FORECAST

Headwinds

• Inflation

• Gas Prices

• Wages going up, but cost of everything else is too.

• Labor shortage

• Material shortage

• Overstock by Retail Stores- “Swelling with inventory”- bloating inventories and squeeze from inflation 

Adam Zimel

Vice President, Endeavor Real Estate Group

John Heffington

First Vice President, CBRE

JD Torian

Director, Retail Advisory Services, Cushman & Wakefield

Talks about #delivery, #logistics, #operations, and #realestate

Hank Crane

Senior Director, Marcus & Millichap Capital Corporation

DeLea Becker - Moderator

Founder + Broker , Beck-Reit Commercial Real Estate

#1 - Lending - With Interest Rates Rising, Cap Rates Compressed, Etc

What is your prediction on how high they will go?  

• Things are changing with money

• Real trepidation on which way things are going

• Fixed rates up to 5 years and amortize over 30

• Prime Plus 1 - now 5.75%

• “Stress” - figure out exactly how much an asset can carry - stressing at 8.5%

• Looking at Lower Proceeds (for sure actually)

• Good News - there is money out there, a lot of money actually

• Adam @ Endeavor - A project they are taking to market right now - they are pricing for 1031 Buyer

• Hank - the NNN area- a lot of money Chasing Those NNN Deals

• Rack Rates

  • Looking at 10 yr fixed with a 25 or 30 year am. 4.91-6.05% - today’s rates

  • Life Insurance Co - 4.91-5.31%

Construction Money for RETAIL

Asking for 50% Pre-leased

• So people using other kinds of money

  • Bridge money

  • CMBS - Commercial Mortgage Backed Securities

  • 5.45-5.85% Interest

Banks like RBFCU are more interested in Retail Centers that have “Services’.  Concerned about Retailers that can sell what what consumer can buy on Amazon.

#2 - Many headwinds for tenants  - Which tenants are doing well in this turbulent time?  How are tenants taking new space and handling TI with construction Prices  volatile?

Construction Pricing

Construction pricing has gone up 60-100% from where it was 2-3 years ago. Most tenants go into space and wrap out what is there.  Traditionally ask for $ 50-$ 75 TI allowance. Some of the big dogs ask for $150/sf in TI.  Starting to up those ask by 60-80%.  One client usually ask for $150 just asked for $275/sf.  Makes it very hard to get a deal signed in a place like Austin 

Most tenants want the TI paid back in 2-2.5 years

Used to cost $300/sf now $500/SF

• Tenant wants investment paid back in 2-2.5 years

• Now $500/sf to build out restaurant

• Double cost - must double sales - to clear hurdle

• $250/sf in, must make $125/sf in profit

  • $500,000 Finish-out - must make $250,000 profit each of 1st 2 years.

  • 80% Increase $900,000 to finish out - expected $450,000 Profit - each of 1st 2 years.

LABOR - Big issue

A lot of retailers remain very very active.  If funded by Venture Capital / Private Equity they have to use it or give it back, and they still have big piles of money.

“Watching” Construction Prices moderate and supply chains get fixed going to to be very interesting moving forward

• Construction Prices affecting Landlords too.

• Gyms, Fitness, Theaters - profits still below 2019 numbers

• Restaurants above 2019 numbers especially in Quick Service Restaurants

• Food, Sporting goods done well - Sales numbers are up overall in 2022

#3 - RESTAURANTS - When I attempt to eat out these days - seems to be a wait at every restaurant.  My question - does this mean we need more restaurants?  Or are they limiting capacity due to Labor Shortage.  If we do go into a recession, which restaurant swill struggle?

Example: Pizza @ Halloween - everybody just happy to see it even if takes 7 hours.

We’re still isn’t his “Grace Period” from COVID: Happy to get a reservation, happy to be there

Everyone seems to be more profitable now… Forced to figure out how to do more with less.

Cost are through the roof.

• PROPERTY TAXES

• Hasn’t hit yet, will hit in October and then “turn up” in January 

• A lot of employees have different jobs, found other things to do or DON’T LIVE HERE ANYMORE

• Affordable housing is huge - there isn’t enough and this can’t be understated.

3rd Party Delivery has been clobbering folks.

• Raising sales 

• 30% Fee taken by 3rd party

• Private equity - if it is committed great, but these people are going to start going out of business. And then a huge revenue stream will dry up for these people.  Will need more people (employees) and and they are moving away (moved further away)

We have been in “Goldie-Locks” period, where people are willing to put up with high prices and reduced customer service, long waits etc.

• Dollars tighter on consumer side

• Covid created Innovation in Restaurants…5-10 years of innovation into 3 months

• Restaurants had never considered Delivery and take out- but forced to.  Some got really really good at it and created a revenue line that now accounts for 20-30% of revenue

• 3-4 years ago ATX had 4-5 $10 - Million/year Restaurants - Now we have 15-20 in 2022

WAGES: Paying $17-$18/hour for Employees

Labor market has gotten better, but not as good as 2019. Seems a lot of the labor market is driving in from Del VALLE.

We need more restaurants or more labor in existing.  Tenants achieving best sales in their history- but struggling still - spread thin- can't find labor.  Middle class restaurants will start to struggle.  Fast food do well - high class will do well.

# 4 - Austin and Outlying Areas have been booming with Big Development Projects.  Which Retail Style do you feel is doing well? Mixed Use?  Is Parking An Issue?  Do they need to have a big Anchor?

• Mixed Use is driven by Land prices here in Austin.

• It is more expensive to build

• Not going away, people will get more used to it.

Tenant Perspective: Majority don’t like it.  Default.

• Don’t like anything that creates a barrier to customer traffic

• Generally see less sales in the Mixed use vs comparable business in traditional shopping center

• Some product type works well, mainly services

• It is concerning to see outlying areas requiring mixed use- retail in the bottom..  Southern Suburbs and Northern Suburbs - “Consigning” these projects to have  empty ground floor space for quite a while.  It is not what they want… “Just Building it doesn’t mean they will show up”

Higher Density = Better Performance, only if occupied

Parking is Critical - Often see Sales Drop 20-30% in mixed project.

# 5 - How e-commerce continues to impact the retail market.  

•  On-line Returns difficult for retailers?

• Walmart VS Amazon. 

• Suburbs - Spent 8 months looking for space.

• Anything that you would “Go Out To Get” has not been affected

• Store Sales are captured way more by landlords now.

• Phones- Always have them with us and honestly they teach us to do 1 thing - SHOP

  • We seem to always be shopping now 

• 16-17% Store sales is now digital

  • People like efficiency

  • Hyper focused on efficiency

• Retailers that are going to impacted - have been impacted.

• Now some stores are just “Showrooms” to see in person, buy online.

# 7 - Future trends and leasing predictions: What retailers are leading the way?

• Local Retailers VS National Retailers - Music Lane - do they even need to make sales or is it marketing?

• Retail downtown with 60% + Back in office, but no where near before pandemic.

• Food, Fun & Fitness

• Pet is big category and growing — 1 in 5  households added a dog or cat from march 2020 - march 2021 

• Austin simply has less retail space than other large markets, which keeps our vacancy low 

• 5% Vacancy- good time to be a landlord - high demand for space

• HEB is largest Shopping Center Owner in Austin, driven by customer loyalty

• Large anchors are doing well, the junior anchors are having harder time

SOUTH CONGRESS

• $150/SF rents - expect to see $200/SF in the next 5 years

• Premier shopping streets in USA

• Now have retailers choosing to come to austin VS Houston and Dallas

DOWNTOWN

• Extremely low vacancy and doing deals are historical hig rates

• Sales of retailers are strong

• Developments -2024-2025 deliveries - and tenants already wanting to get in project

# 8 - Recession And Retail in Central Texas

• Job Growth - Austin is projected to be strong or maintain.  Will perform in top 5% of cities.

 ALL Answer - CRYSTAL BALL

• Platter of Headwinds

• Lenders putting out deal sheets - Prime Plus 1 & stressing deal at 8.5%

• Yes, interest rates will continue to increase - Still going to do deals here in Austin

• Expectations - if go into recession expect only to last 12 -18months

• Retailers- Cautiously Optimistic - Very CAUTIOUS

• Consumer Spending - Gas prices will definitely impact - Discretionary spending will go down

• Bearish  - Tenants and clients cater to upper middle class and above expect these classes will continue to be less impacted by Gas Prices

• Tenants that cater to the lower classes will struggle especially when impacted by the rising Property Tax Bills

• Very Fortunate in Austin.  Will be watching the tech industry - they have announced layoffs to start in July.  If significant will be a problem for Austin, if moderate will have less impact.

• Interesting if graduated since 2012 - have never seen a recession.

• No more cheap Uber rides, no more cheep delivery

• Gas and taxes - discretionary spending is shrinking

• Shopping Mismatch - Incredible growing inventory - everything back in stock and people stop shopping - could cause problems fro retail

  DELEA’s Takeaways

• We are in the beginning of a Recession

• When music stops playing someone doesn’t get a chair - but a lot of us in here will get a chair

• “People get rich when things are going up, people grow very Wealthy when things are going down”

• There is opportunity now matter what happens

• Inflation will affect discretionary spending especially in middle class.

• Texas Boom - State of Texas is leading nation in Growth

• Spending on durables and non-durables remains elevated; services shifting higher thanks to leisure travel.

•  E-Commerce remains relevant; savvy retailers using technology to connect with consumers and project their brand.

• Resurgent demand is pervasive across Texas thanks to strong economic and population growth.