TEXAS SNAPSHOT, JUNE 2005

Austin Office Market

Renee E. Hicks Office Specialist NAI Commercial Industrial Properties Company

Austin’s northwest sector has several smaller buildings beginning construction this year and a new 60,000-square-foot medical development by The Kucera Company, which is currently under construction at 6500 N. MoPac Expressway. An additional 800,000 square feet also is proposed in the northwest sector, but there have been no exact starting dates or pre-leasing to occur as of yet. This additional space comprises notable projects such as the 63,000-square-foot Riata Corporate Park I, the 80,000-square-foot and 50,000-square-foot Riata Crossing IV & VI, respectively, and the 150,000-square-foot Riata Gateway.

The southwest sector also is seeing several smaller buildings going up, particularly near William Cannon and along Southwest Parkway. Another new development, and by far the most noteworthy, is Prentiss Properties’ The Park, which will take the next 2 years to complete. Located on the southeast corner of MoPac Expressway (Loop 1) and Highway 360, the two-building project has broken ground and will comprise 211,000 square feet. An additional 1.8 million square feet is proposed with no set starting dates, but will include projects such as the 78,000-square-foot Lantana VI, the 153,000-square-foot Terrace VI, the 300,000-square-foot Rollingwood Town Center and San Clemente.

Of the 4.7 million square feet proposed in Austin, only 12 percent has actually broken ground or is scheduled to break ground in 2005.

Citywide absorption for first quarter 2005 was negative 206,429 square feet. The negative absorption incurred during the first 3 months of 2005 was due to Trilogy’s move out of the Plaza on the Lake building and CyberTrader’s move out of its building in Austin’s southwest market — accounting for 170,000 square feet of the quarter’s negative absorption.

Average citywide rental rates rose 20 cents per square foot per year, from $19.50 at year-end 2004 to $19.70 at the end of first quarter 2005. Class A rental rates, in particular, have increased in the northwest market to $19.59 per square foot per year and $21.79 per square foot per year in the southwest market. However, CBD Class A rental rates saw a decrease of 82 cents per square foot per year in first quarter 2005.

Citywide effective vacancy is 20 percent, with 18 percent of that direct vacancy. (Effective vacancy is the space vacant and available for occupancy either directly or through sublease.) The CBD submarket has the highest effective vacancy at 24 percent and the southwest submarket rings in with the lowest at 16 percent. (Per the criteria of The Source, published by NAI Commercial Industrial Properties Company, sublease space is “leased” and therefore is only calculated in effective vacancy rates.)

The office market will continue to stabilize throughout 2005 and we should begin to see a reversal of the negative trends the market has experienced over the last few years. Throughout 2004, the market experienced a continued increase in leasing activity and notable positive absorption, resulting in the first decrease in overall vacancy since 2000. The amount of sublease space on the market continues to decrease and is now exerting a minimal impact on the market. In addition, 2005 also should bring continued job expansion with more tenants expanding and new companies establishing a presence in Austin.

The sublease market continues to decrease, declining from 3.7 million square feet at the end of 2001 to 764,506 square feet at the end of first quarter 2005. Sublease space currently represents only 2 percent of the overall office market. Right now in Austin, the average sublease term is 30 months, the average quoted sublease rate is $17.61 per square foot and 51 percent of available sublease space has less than 3 years of term remaining.

The northwest submarket, which has carried the bulk of the sublease market since 2001, now represents 38 percent of the overall sublease market while the southwest submarket represents 37 percent and the CBD submarket represents 16 percent.

— Renee E. Hicks is an office specialist with NAI Commercial Industrial Properties Company in Austin.

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