TEXAS SNAPSHOT, FEBRUARY 2012

Austin Office Market

Austin’s office market in 2011 rebounded in the face of a stiff national macroeconomic headwind fueled by local job growth, a steady influx of educated and talented emigrants and a reinvented high-tech industry. Led by the Central Business District and southwest Austin, office leasing enjoyed a resurgence, especially in Class A properties, with nearly 1 million square feet of positive absorption through the first three quarters of 2011 — the highest since 2006.

In the CBD, social media giant Facebook expanded its downtown presence and online coupon marketplace WhaleShark Media Inc. leased 20,000 square feet. Medical device maker ArthroCare Corp. consolidated its California and Austin operations in southwest Austin, signing a 10-year lease for 136,000 square feet at the formerly vacant 7000 West Lane.

Throughout the Austin office market, occupancy continues a slow but steady improvement, a result of the increased absorption and lack of new office development adding to supply, as well as a significant reduction in available sublease space. As a result, direct asking lease rates have increased slightly this year.

Office investment sales activity remains tepid at best, having decreased sharply during the recent economic recession. Only a handful of institutional sales have occurred this year, including the REO sale of Aspen Lake, a 205,000-square-foot Class A office property in the far nothwest Austin submarket. The building, which is in shell condition, sold for a reported $82 per square foot. More recently, Domain Gateway, a fully leased 174,000-square-foot Class A office property, centrally located in northwest Austin, sold for a reported $276 per square foot.

Austin is well-positioned to benefit as the national economy improves, capitalizing on its diverse and continuously evolving employment base, including state, county and city government agencies; the University of Texas and a handful of smaller, yet regionally respected, institutions of higher learning; high-tech firms such as IBM, Oracle and Apple; fabrication-less semiconductor design firms; social media, mobile application and software-as-a-service companies and an entreprenuerial and energetic creative class.

Austin’s venture capital firms and angel investors play a key role in seeding new software, technology and service companies, which will likely continue to snatch small chunks of available office space during the year, exploiting historically low lease rates while steadily eating through the remaining sublease space.

Although a number of high visibility office development projects have been announced recently, the new construction pipeline remains closed, adding to optimism that continued absorption will lead to higher lease rates in 2012. Recently announced projects include Endeavors Real Estate Group’s 13-story, 147,848-square-foot office tower at Fifth and San Antonio streets, developer David Khan’s proposed mixed-use project at 800 Congress Ave. and a proposed new Travis County courthouse in downtown Austin. Historical data shows that if launched, these projects will likely be completed as early as 2013 and landlords are expected to be in a full out sprint to secure long-term leases before new supply hits the market.

Areas outside central and southwest Austin remain weak — asking lease rates in the northeast Austin submarket continue a slow but steady decline amidst aging product and a shifting tenant base. In Round Rock, Dell continues to shed jobs and office space, and northwest Austin, the area’s largest submarket, struggles with excess supply and weak demand.

In sum, 2011 proved to be a refreshingly strong office leasing market, driven by population and job growth, an entreprenuerial creative class, a diverse employment base and a lack of new office development deliveries. We can expect these trends to continue and perhaps accelerate in 2012. In its 2012 Emerging Trends in Real Estate report, the Urban Land Institute ranked Austin Number 2 in the nation for commercial property investment prospects, and Number 4 in the U.S. for commercial property development markets. Companies from California and other high-tax states continue to view Austin as a more business friendly environment. Additionally, there has been extremely positive national press over the past decade that has postioned Austin as a very attractive place to live. Steady improvement in Austin’s office leasing and investment sales is expected throughout 2012.

— Ron Losefsky, associate, Investment Services with Grubb & Ellis Co.’s Austin office

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