FEATURE ARTICLE, DECEMBER 2005

LOOKING BACK, MOVING FORWARD
Commercial Texas traces the history of Austin's office market to see what lies ahead.
Michael Kennedy

The future of opportunity in Austin, Texas, can be traced by its past. The pace of the cycle may vary, but its premise and its principals of operation remain intact throughout the decades. This three-part series, which will follow the development Austin's office from the 1980s to now, provides an insight gained through actual experience and observation of the events and trends that have shaped the Austin commercial real estate market during the past 25 years. The first part of the series looks at Austin in the 1980s.

The small city of Austin, a town almost, had a city population of 345,000 and a MSA population of 536,000 coming out of the 1970s. As the capital of the third most populous state in the nation, major employers at the time were the state of Texas, the University of Texas and the city of Austin. Major private sector employers were IBM, recruited in the 1960s, Motorola, AMD, Lockheed Martin and Data General.

The Austin office market in 1982 was approximately 10 million square feet. The main driver of the Texas economy was oil and gas, representing more than one-third of the state's economy. Austin, other than from a regulatory and legislative perspective, was a non-player in the fossil fuels industry, which had grown exponentially in the late 1970s.

Leading up to 1987, Austin had a great story throughout the decade. The city boasted the highest education per capita statistic in the nation, a quality of life envied by all Texans, and the 1983 successful recruitment of the Microelectronics and Computer Consortium (MCC) to kick off the new technological age.

Major road infrastructure in the decade of the 1980s included the completion of the Pennybacker Bridge over Lake Austin on Loop 360 in 1983, and the addition of a seventh major road crossing linking north Austin to south Austin [Interstate 35, Congress, First Street (Cesar Chavez), Lamar, MoPac and the low water crossing below Tom Miller Dam]. MoPac North ended at 183 with MoPac South ending at Loop 360 South. FM 2222 and 2244 (Bee Cave Road) were two-lane roads anywhere past Loop 360. Frankly, there was not a lot of reason to go past them from a commercial real estate point of view.

When price per barrel of oil plummeted from $35 to $10, Dallas and Houston, Texas oil and gas hubs, fell into a devastating recession. With Texas closed to interstate banking, Texas holding company banks looked to regions of the state that were still viable. Austin and San Antonio were major targets, and the rapid real estate market growth in the early- to mid-1980s in Central Texas was largely a product of the zapped economies in Houston and Dallas. Texas banks were scouting for business.

With the relaxation of the savings and loan lending regulations, whereby allowing financial institutions to be partners in commercial real estate developments, a new level of capital was available for development. New income tax laws encouraging financial losses and tax sheltering projects offsetting up to 70 percent of marginal tax rates contributed to Austin's office space growth from 10 million square feet in 1982 to 22 million square feet in 1987.

In 1985, with the commercial real estate market propped up by outside entities attracted to the region, Austin went over the top — the political pendulum swung from pro-growth to pro-environment.

The largest building in town, the approximately 505,000-square-foot One American Center opened in late 1984 with $20 NNN rents. It would be 20 years before a building larger than this would open, and about 15 years before rents would reach the $20 mark again.

A 1985 edition of Austin Magazine states, “Austin's office market is no longer all boom but, certainly it is not all bust either.” Commercial real estate was not the “…safe middle ground…” the 1985 Austin Magazine publication referred to it as. It was headed for a depression unlike any other in River City.

With office vacancy eventually approaching about 40 percent citywide by 1988, many Texas savings and loans banks were wiped out by the deflation in real estate values as the decline in oil and gas values caught up to the region. Austin's incredible overbuilding in all types of commercial space resulted in mass devastation. The courts were filled with litigation and bankruptcy — “see-through” buildings were everywhere.

Despite all this, Austin's office market still had positive absorption each year of the 1980s including approximately 500,000 square feet in 1987 and 1988. Although no one believed it, and would not for 5 years or so, the recovery began in 1989 when absorption totaled 1.2 million square feet.

Michael Kennedy is president of Austin-based Commercial Texas.

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