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 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

Austin Texas Office Market 2016

Austin Texas Office Market 2016

The following is an overview heading into the 2nd quarter or 2016 for the Austin Texas office market. Overall it looks like Class A spaces are getting bit of correction on lease rates although it is not significant rates have come down approximately $1.00 per sf per yr. Whereas, the Class B office spaces in Austin are having lease rate increases. The reason for this could be the demand for Class B office spaces was a bit higher in Q1 due to tenants wanting a more affordable alternative as opposed to the higher priced Class A office properties in the Austin Texas office market.

There are currently 208 Class A office properties, 407 Class B office properties and 78 Class C office properties in Austin Texas.Austin Office

Austin Texas Sublease Market for Office Space

The current sublease market vacancy rate is coming in at around 1%, with this type of picture it bodes well for Landlords and shows consolidation and difficulties fulfilling lease obligations have gone down dramatically.  Currently there is about 418,000SF of sublease space available in the Austin Texas office market after the first quarter of 2016. There are still value offices available, however the closer you get to downtown Austin the tighter the office market gets as well as North Austin coming in at below 5% vacancy rates.

Retail Leasing Austin Texas

Retail space Austin TXLeasing Retail Space

As a tenant when you lease retail space in Austin, you are typically responsible for all maintenance that is provided to your retail space.

Sometimes this part of the lease can be the most confusing for tenants. Do you have a good market knowledge of what to ask for when it comes to maintenance?  A broker will and will be able to ask the right questions to apply the best leverage possible for retail leasing.

Who is responsible for Maintenance and Signage?

Can the landlord provide an estimate of monthly maintenance costs for the retail space?  What about signage? Let’s not forget about signage it is most likely outside of other marketing efforts one of the most important marketing items you have to consider regarding visibility and design.

Expenses

Who is responsible for what, what is covered by the landlord and what has to be paid for by you as the tenant. Retail leasing can be the most complicated commercial real estate transaction there is versus office and warehouse properties.Depending on the retail space you lease, some utilities may be part of your lease rate and some may not be. You may be responsible for utilities based on a percentage or based on the square footage your occupy within the retail center.

Are Water and sewer are typically included in your lease rate? What about gas if applicable, trash removal and janitorial costs? 

Landlord history?

Does the current landlord have a good reputation?

When there is an uncertain market a tenant – broker should ensure that you aren’t signing a lease in a property that is under any kind of financial hardship. Surely as a tenant you would not want to be in a situation where a property was to be foreclosed on, this is not typical for Austin however in 2016.

Asking the right questions are easy when a professional broker is asked to help a tenant acquire a retail space, it takes the guessing game out of the equation.

Quick leasing Do’s or Dont’s

  • Who pays for what repairs?
  • Additional fees?
  • Utilities , what is covered?
  • How are utilities metered?
  • Landlord history?

 

Austin Office Expenses

Austin Office Expenses

An expectation should be present that tenants will pay a portion of the additional costs a landlord incurs in operating the building they take occupancy in. How much of that increase is the responsibility of each specific tenant and how that additional expense cost is calculated are two separate equations. First, let’s touch on the two generally accepted types of “Additional Rent” from expenses and how that works.

Base Year Expenses and Expense Stop

Are all additional rents calculated the same way? No, some landlords use a BASE YEAR EXPENSE method while other landlords us an EXPENSE STOP. While both address the same expenses that the tenant is responsible for which constitutes some portion of the additional Austin office expense cost of operating the building beyond a baseline amount, and these methods differ.

Base YearAustin, TX Offices for lease

Part of your rent in year one, let’s say $18.00 PSF per year, goes towards the landlord’s debt service and profit. The remainder goes towards operating the building. In a Base Year scenario, let’s say $10 goes towards debt service and profit and $8.00 towards NNN expenses or the expenses to run and operate the property. If  a tenant’s lease calls for a base year, $8.00 is set as your foundation amount and your lease will state what calendar year is the base year expenses . Should the actual expenses increase in the second year to $8.12, you pay not only the contract rental increase, if any, but you also pay $.01 PSF (which is .12 cents /12 Months)  as “Additional Rent” or “Additional NNN Expenses,” depending how the landlord names it. If it goes down, the landlord should transfer the decrease as well to the tenant.

Expense Stops

An Expense Stop operates in much the same manner. Except…there always seems to be an Except…the landlord simply gives you a number, maybe $8 PSF, and tells you that $8.00 of your rent goes towards building operating expenses and anything above that you pay. Austin Office Expenses will benefit landlords by limiting exposure to these operating expenses being greater than expected during the course of a tenant’s  lease.

In other words, many landlords will incorporate some type of Expense Stop into Full Service leases because it protects the owner’s operating income. For instance, when the property’s expenses increase over the life of a tenant’s lease term, the landlord is then able to bill the tenant for those increases, rather than absorb 100% of the expenses on their own.