TEXAS SNAPSHOT, SEPTEMBER 2011

Austin Office Market

West

The hardest part about putting together a quick update on any commercial real estate topic is trying to decide on what data to use to depict the most reliable market conditions.  For this article I have used information from reliable sources such as CoStar and LoopNet to try and get a handle on the statistical data.  However, what struck me the most in doing this research is finding out just how lucky we are to be living and doing business in Austin.  Despite all of the bad news that we regularly hear, Austin is one of the bright spots in what is perceived a dismal economic picture.

In earlier recessionary periods since 2000, Austin did not make out so well.   This market has sometimes been considered a boom/bust office market.  Beginning in 2000, Austin’s office vacancy rates for Class A properties were in the 7 percent range.  Over the next 2 years, vacancies in those Class A properties rose to more than 25 percent, making Austin one of the worst office markets in the country.  Surprisingly, though if you look at the statistical data for all office properties versus just the Class A properties, vacancies peaked at 17.2 percent. Today, we have a market average today of 13.3 percent.  That’s not nearly as bad as the reported 25 percent that was portrayed.

Following this same perspective, the Austin market has an overall inventory of approximately 83 million square feet.  If this were broken down another step, only 31 million square feet is attributed to Class A space.  The remaining 52 million square feet is in the B and C categories. Though there has been a lot of negative media commentary across the country, Austin’s office market has still remained strong.

In the second quarter of 2011 positive net absorption totaled approximately 346,906 square feet.  However, what needs to be taken into consideration is the amount of sublease space still available in the marketplace.  Presently, there is approximately  578,871 square feet of sublease space available.  With vacancies going down and very little new construction on the horizon, landlords are already beginning to raise rental rates and offering fewer concessions for tenant improvements.

 Typical deals being offered for Class A space are in the range of $25 to $34 per square foot in prime downtown locations with annual increases.  Concessions are averaging one month of free rent for each year of the lease with $1 to $3 being offered for tenant improvement allowances.

Sublease opportunities are still out there with aggressive rental rates being offered.  Due to these discounted rents, tenant improvement concessions are difficult to get.  However, with this much sublease space on the market, a tenant has a number of choices.  If you can find an appropriate fit in a sublease space then this could be a real score.  Unfortunately, about the most a tenant can hope for is some free rent to complete tenant improvements due to the discounted rate.  Even with these market conditions, some of the sublease space on the market is highly finished out, with computer rooms, upgraded HVAC systems, and in some cases office furniture.  Overall these are the best opportunities to find very high-end space, especially if you a tenant is looking for a short-term lease.

One new trend that is not being highlighted is the number of office users that are now finding their way into retail and service center spaces.  Opportunities are out there for less expensive space with, generally excellent parking, and decent building allowances.  This is an alternative that may become more mainstream as the office occupancies decline.  Rates in these properties are generally quoted on a triple net basis with base rents in the $10 per square foot range to as much as the $18 per square foot.

Why is Austin on the rebound and the current darling of metropolitan regions?  When it comes to economic development, Austin has done it right.  Here are some reasons: The stellar status of the University of Texas-Austin being virtually next door to the Texas State Capital; the intense multifamily development in the downtown corridor; the live music venues; and our enhanced outdoor city lifestyle.  In short, Austin has the right ingredients to attract the brightest young minds.

Our growth has not only been increased because of the poor economic conditions along the Pacific Coast and the upper Midwest, but a lot of growth has been generated locally with companies like Home Away, NetSpend and Cirrus Logic.  Combine this with the powerhouses of Advance Micro Devices, Intel and Samsung and we have the right conditions for future controlled growth.  I have recently seen a quote that says that Austin is the best place to work, play and live.  This is the best description that I have seen.

Our office market is strong and getting stronger.  With the controlled growth that we are experiencing, the absorption of existing office space, a positive business climate, and the energetic attitude of people who already live here, Austin is going to be the place for the future in the state of Texas!  As I have told many of my real estate colleagues across the country, ‘People live and do business here because they want to, not because they have to.’

— Butch West, CCIM, is managing director of KW Commercial.

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