Austin Office Market Q2 2017

Austin Office Market Update Q 2 2017

There are always differing opinions as wide as there are people in the CRE market , brokers, agents and owners. Austin has been on a very long run approximately 8 years and some say this cannot sustain itself and some say it will continue. Truthfully, nobody really knows the answer. If we take historical into account every long up-cycle has an eventual down cycle and vice versa that is the law of the universe.

So where is the Austin office market for Q2 2017? Currently, the news for the most demand seems to be Downtown Austin and the East Side. This sub-market is expected to be the leader as far as momentum however, lease rates are expected not to change too much. There are properties to be delivered in 2017 that will hold the lease rates in check unless the spaces are pre-leased at a fast rate then the formula would change.
Nine office buildings has been completed in Q2 2017 in Downtown Austin with an 80% pre-leased occupancy. Citywide leasing averages increased approx $0.28 cents per sf per yr to $34.02 as an average for the downtown Austin office market.

Among the best tech cities to live in, Austin still came in at number 1 against cities like San Francisco, New York, Boston and Seattle. As long as the media touts Austin as a number one city, the population growth will most likely continue regardless of growing traffic congestion and higher taxes and expensive housing relative to the rest of the state.

Suburban Office Market
The suburban market vacancy rates are a bit higher approx +3% and demand remains somewhat steady, however we are seeing a lot more sublease listings coming onto the market which shows consolidations, changes to locations preferences or slow-downs in Austin office demand. Class A Office space is still leasing at a flat to slight increases.

Austin Office Space Market | Q1 2017

Austin Office Space Market for Q1 2017

The one word that can describe the Austin office space market is “new construction underway” for the first quarter of 2017, 1M SF of new space has been delivered to the Austin market. In addition to the 1M SF , approx 1.7M SF is expected and is currently under construction. Sub-markets with the most new construction activity consist of Downtown Austin, Northwest Austin and Southwest Austin.  Although there is new construction the occupancy rate has slowed somewhat. Vacancy rates ticked up to 9.7% from 9.2% in the previous quarter.  Near term forecasts for positive momentum are in place still due to new population growth and employment activity.  With the softening of occupancy and office lease rates may be more adjustable in the tenant’s favor, however they may not be at a significant discount. Shire Commercial is starting to see more sub-lease activity which is a gauge of what the overall market may be doing. 

 

Lease rates for Austin office space came down to $33.89 versus $34.89 in the last quarter which was a record high. 

Tenant improvements

 

Potential More of the Same to Slightly Downward?

 

The commercial real estate market for Austin office space has been on an up-swing for sometime and just like all things that ebb and flow , so does commercial real estate. Shire Commercial tracks Austin office space consistently and does see room for movement a bit more towards the tenant’s favor eventually.

Austin TX Office Market | Q42016

Austin office properties for leaseAustin Office Market for Q4 2016

Here is an overview of the Austin Texas office market ending for 2016.  Austin’s office market maintained itself with a consistent performance for all of 2016.  Growth and expansion continue moving into 2017. Lease rates for the Austin office market hit an all time high at almost $35.00 per square foot. New construction of perhaps the tallest building in Austin have been discussed which will cover almost 2M square feet of space  Class A office spaces hit a new high as well with a $0.55 cent increase compared to the 3rd quarter of 2016.

Increasing Expenses for the Austin Office Market

Landlords for 2016 pushed leasing rates higher along with higher expenses , which play an important stimulus on the rising lease rates. Class A lease rates moved up $0.55 cents tp $38.85 per square foot.  Occupancy continued a positive move with Downtown Austin, Northwest Austin and the Southwest Austin sub-markets along with more development in each sub-market.

Vacancy for Office Properties

Year over year vacancy moved downward in 2016. Overall vacancy came in at just under 12% down from close to 15% in 2015. The near term forecast for office space is for continued demand.  Also the sub-markets mentioned in the above paragraph are still the hottest sub-markets for demand and look like they will continue. There are currently 21 office development projects on the ground in Austin which equates to over 2M square feet , there is optimism about the future and influx of a growing population.

 

Austin Office Market | Q3 2016

Austin Office Market Update for Q3 2016

Here’s the latest on the Austin office market for Q3 2016, looks like more of the same folks. New records are being set with supply and demand at opposite ends of the spectrum. Lower vacancies overall and higher rents are forecasted for the balance of this year.  Vacancy rates are not in the single digits for Austin area wide.  The 2 largest tenant leases were tech companies expanding their current occupancy. One of the major tech companies coming to Austin is Oracle with a 25 acre, 560,000SF campus with the Austin office market. Citywide lease rates are now at $34.00 per sf which is a new all-time high for the area. Lowest vacancies remain in Downtown Austin, Round Rock and Northwest Austin.

Population Growth Austin office market Q2 2016

Forecasts for Austin’s population growth are expected to double to 4M people by 2040. The Austin office market will be tied to the residential and job growth over the next 25 years.  23 Quarters of consecutive growth has now hit the office market in the area with the Northwest area of Austin being the most popular area for office occupancy. There are currently 21 office projects under construction across 7 different sub-markets equating to approx 2 M square feet of space.  The city still faces major challenges in infrastructure with transportation issues.

Master Lease

Master Lease

Making money and profits in commercial real estate require an investor or owner to control a property. The most common way of course is ownership. Some investors though do purchase the property at least not right away. Instead they can choose to master lease the property. Example: Let’s say you are looking at a multifamily property that needs quite a bit of upgrading.  The investor could offer to purchase the property , but perhaps you do not have the ability to acquire the financing and maybe the owner does not want to sell the property using a land contract or a mortgage deal.

SolutionCap rates for commercial property

Continuing with the property example, this property let’s say is not cash flowing to pay expenses , property taxes, and mortgage payments. The current owner wants to turn this money losing property into a profitable property but they don’t want to spend the time and effort it will take to bring the property up to speed. The investor offers a master lease on the entire building and then guarantees the owner a steady income with no hassles. In return as the investor you retain the right to upgrade the property and the property management so you can increase the NOI. Generally master leases give the lessee terms of 5-15 years, with an option to purchase at an agreed upon sales price down the road. During the period of the master lease, the investor would pocket the delta between what you pay to operate the property to include lease payments to the owner and the lease payments collected from tenants. This becomes a profitable venture if you upgrade the property and increase the NOI as discussed above. Obviously your goal is to collect higher rents than what you are paying to the owner of the property.

Austin Office Market |Q2 2016

Austin Office Market | Q2 2016

Austin’s office market has been up on the upswing since 2012. However,  Austin’s office market is now experiencing negative occupancy. The actual figures are approx -24,000SF of negative occupancy in Q2 2016.  Lease rates have had small changes for the most part in low vacancy sub-markets such as Downtown Austin.

Here is a quick review,  lease rates for offices in Austin did not move much , only up +.9% to $34.65 psf per yr. The largest move was in Class A office space in the downtown area are coming in at an increase at approximately 2.7% to a whopping $47.31 psf per yr. Suburban Class A office lease rates only moved up on average $0.03 cents per sf per yr to $35.74 psf per year.  Current vacancy is coming in overall at 12% which is up from the last quarter by 1% point.

Indicators for Q2 2016

Indicators are as follows:

Vacancy down, Occupancy down, New Construction down , Under Construction down

Offices for Sale Overview Q2 2016

The current trend for Austin offices for sale is showing an increase in sales asking prices of 8% , compared to last years asking prices there is a +31% increase in asking prices, coming in at averages of $237 per square foot.Austin office market Q2 2016