COVER STORY, OCTOBER 2010

OFFICE MARKETS VIEW BETTER 2011 
Austin, Dallas and Lubbock report on their local markets.  
Compiled by Daniel Beaird & Jon Ross

As Texas office markets look to a better 2011, the key, in good times and bad, still remains tenant appreciation. Brokers from the Austin, Dallas and Lubbock markets share strategies for attracting and retaining tenants, and the future of their office markets.

Austin

Austin’s 39.5 million-square-foot office market consists of three main submarkets: CBD, Southwest and Northwest/Far Northwest. Citywide, the vacancy rate sits at 21.5 percent and average quoted rates are at $25.87 per square foot full service, a slight decrease from 2009. Most landlords are offering free rent and generous tenant improvement packages to remain competitive, all subject to credit.

Downtown continues to be the strongest submarket due to its status as the best location for law firms and its continued attractiveness to hip/young companies such as Cirrus Logic, which plans to build and occupy 135,000 square feet in one of the limited office sites downtown. The CBD consists of 8.5 million square feet and is 15.7 percent vacant with an average quoted full service rental rate of $33.12 per square foot. With no new office construction immediately eminent, rates are expected to maintain subject to increasing vacancy in the Southwest sector, particularly in South Mopac. The combination of rental rate differential, higher operating expenses and parking costs will continue to put pressure on downtown tenants forcing many to consider relocating to the suburbs.

Generally speaking, 2010 has seen more activity than 2009 as tenants, who have adjusted to the economic climate, are beginning to feel increased confidence in their businesses and can see recovery on the horizon. An increase in activity has occurred in each of the main submarkets and is likely to further increase based on lower rates on troubled assets.

Traffic is also a factor that will potentially have a significant impact in the market during the next three years. Decisions to relocate further out and closer to cheaper housing will continue to be made incrementally, and will likely instigate the segmentation of Austin.

Bottom line: it’s good to be in Austin, Texas. Austin has fared the recession better than most though still impacted. It’s all part of the cycle. Stay tuned.

— Chrissy Cornelius works in the Austin office of Commercial Texas.

Dallas/Fort Worth

The Dallas/Fort Worth (DFW) office market ended the second quarter of 2010 with an overall vacancy rate of approximately 18 percent across all classes, an increase in vacancy from the previous quarter. The net absorption for the quarter was 42,402 square feet of Class A office space, while both the Class B and Class C office sectors experienced negative absorption. Rental rates averaged $19.54 per square foot, representing a decrease from the previous quarter. Seventeen new buildings totaling 554,384 square feet were delivered in the first half of 2010, and there is approximately 2 million square feet of new office space under construction.

Landlords are constantly challenged to attract new tenants while existing ones are either exiting or downsizing. Tenants survey the market and use this as leverage with their own landlord, who will renew and restructure their lease early in an effort to maintain their tenancy. Free rent, often in excess of one-month per year, and lowered rental rates are also prevalent in the market.

An example of how landlords are reacting to this challenging leasing environment is found in the reaction of KBS Realty Advisors. Earlier this year they reduced their rental rates across the board by 23 percent in an effort to increase occupancy. Additionally they offer brokers an over-market commission of 8 percent as well as providing high-end spec suites ready for immediate occupancy. This strategy has served them well and delivered increased occupancy.

The next 6 months should be very positive for the DFW office market. The Texas economy, while not exempt from the recent recession, appears to have stabilized to the degree that positive office absorption is more likely for the final few months of the year, leaving the market in position for a more productive 2011.

Some of the largest office leases already signed in 2010 in the DFW market include Blue Cross Blue Shield’s 1 million square feet, Denbury Resources’ 325,000 square feet, Quicksilver Resources’ 115,000 square feet and Rexel’s 94,000 square feet.

— Sharon Friedberg is senior vice president of Bradford Real Estate Service/CORFAC International in Dallas.

Lubbock

The Lubbock office leasing market has remained fairly stable during the past year, as has the local Lubbock economy. Occupancy rates in the southwest suburban market have held steady in the mid- to upper-90 percent range. Full-service lease rates are running $15 to $20 per square foot per year for existing Class A and B buildings. Single-story and low-rise smaller suite garden office space is available in the suburban areas in the $9 to $13 per square foot per year on a modified gross basis (utilities and janitorial extra). With rates holding fairly level, Class B and C tenants have taken the opportunity to move up to Class A and B space.

Another trend has tenants building their own buildings for owner occupy. Several newly constructed office buildings that were build-to-suits for the primary tenants/owners have excess space available for $18 to $20 per square foot per year modified gross. Outside of these buildings, however, there has been very little speculative office development.

Lubbock’s central business district (CBD) has seen a decline in occupancies as tenants migrate to the suburban areas to be closer their customer bases. With the exception of several mothballed downtown buildings, occupancy is running in the high 80 to mid 90 percent range. CBD lease rates are generally being quoted in the $12 to $15 per square foot per year full-service.

Due to little construction in the past several years, LEED-certified buildings are virtually non-existent in the Lubbock market and it doesn’t seem to be an important issue for owners or tenants. Given the fairly stable market, there are few concessions being offered beyond a couple months of free rent or painting and carpet allowances on tenant turnover.

— Wes Hallmark is managing director at SVN/Hallmark & Associates.

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