TEXAS SNAPSHOT, JUNE 2010

Austin Office Market

Historically, in times of crisis, when pioneers expected the worse, they “circled the wagons” in a collective effort to protect themselves. These days, with a penetrating financial crisis, the tendency for companies to follow suit has been strong. Recently, however, some firms have been compelled to load up those wagons and head for Texas, particularly to Austin. Newcomers to Austin like Facebook, LegalZoom and Hanger Orthopedic Group have all selected Austin as a location to grow their businesses and have brought with them carts full of hope for the local office market.

The recent migration continues a steady trend started by companies like Google and Apple, who have already put down roots in Austin. Moves like these not only bring the obvious direct need for office space and employees, but invite indirect growth in office occupancy from businesses dependent on those companies moving to Austin. These businesses not only desire Austin’s culture and amenities, but are also acting to protect themselves from instability and unsustainable costs in other markets.

“If I hear one thing over and over from tenants moving into Austin, it’s that they like the stability,” said Nate Stricklen, Senior Associate at CB Richard Ellis (CBRE). “They like that they don’t have to overpay for people and real estate.”

The attractiveness of Austin, including the inviting culture, low cost of living, business incentives from local government, large pool of talent and intellectual capital, produces a business-friendly climate.

In addition, the current office market heavily favors tenants. This occupier’s market, created as a result of high vacancy left by overly-optimistic development that occurred before the recession, will likely continue through the end of 2011. Austin’s vacancy, 25% overall, ranks among the top five highest in the country. This presents a tremendous opportunity for companies coming from other markets, particularly on the East and West Coast, to find large blocks of open space at excellent rates.

The vacancies will not last forever, though. With the new migration activity, Austin is beginning to see a rise in employment. Further, the warm tenant climate has thawed previously frozen decision-makers into taking action. The concurrence of these events will result in filled spaces as the economy continues to recover, sending Austin’s unemployment numbers in a positive direction.

Of course, tenants are not the only ones affected by recent influx of companies and occupier movement. As growth begets growth, landlords and developers will start to see some relief. However, relief will mostly come for those owners of office product who own their assets outright or are not financially over-leveraged, which will position them to get deals done. Those who continue to be challenged by pending loan maturities and an unforgiving debt market may be forced to execute transactions outside of their comfort zone in order to fill their buildings and retain existing tenants.

Additionally, the involvement of capital partners and lenders presents another hurdle in completing deals due to the sometimes time-consuming process of approving lease proposals. Should the system tighten further and lenders pull back short-term loan extensions, foreclosures could throw a wrench into the cycle. Were a significant amount of foreclosures to come online, the market rent basis would reset. The result would put significant downward pressure on office rents, currently at $26.61 per square foot.

Austin occupies an excellent position in the economic recovery. The overall mildness of the recession, the strength of the CBD submarket, and relocation of major companies to Austin all signal a steady recovery. The Capital City is by no means free and clear, but should struggle far less than other markets. Although tenants and landlords alike will be cautious in reviewing credit profiles of the party on the other side of the transaction, deals will still get done. Further, when the global financial crisis subsides and foreclosure risk abates, the local office market will stabilize. Potentially, this stabilization could bring double-digit percentage growth of rental rates by 2012.

The healing will be slower than in times past. Hopefully, however, once full recovery is experienced, the need to “circle the wagons” will disappear for the foreseeable future.

— Tarisa Casper oversees communications for the Austin office of CB Richard Ellis.

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