Austin Office Market | Q4 2017

Austin Office Market | Q4 2017 | Summary Report

2017 was a strong year overall for the Austin office market , although the last quarter was met with negative occupancy (absorption). Vacancy rates were at a 16 year low for the Austin office market as well.  New development is an additional 600,000SF of space with over 2M square feet of new office space available.  During the last quarter occupancy was slower  compared to the previous 3 quarters. The majority of leases were with technology companies at over 30% of the leases done , next were financial services.  OPEX costs rose approx 86 cents per square foot which translates to an Austin average of over $9.50 per square foot. 

Offsetting operational cost increases | Austin Office Market Q4 2017

Landlords were seen lowering their base lease rates to an average of approx $24.00 down from $25 in Q3 to offset the higher operating expenses. Citywide however the full service gross rate rose approx $0.07 per sf compared with the previous quarter.  Unemployment in Austin has fallen to 2.6% which is the lowest since the 90’s. Vacancy rates are as follows for the last quarter of 2017:

  •  CBD 7.9%
  •  Northwest 8.6
  •  Far NW 6.0
  • North Central 7.7                                               Austin , TX Lease Terminology      
  • Round Rock 8.3
  •  East 7.4
  •  South 12
  • Southwest 11

Sublease activity has increased as well over the past 3 months, which can show consolidation or potential expansion into new spaces, however typically the sublease activity does not show expansion as much as it does consolidations.  We do expect the office market to somewhat flat despite some marketing forecasts of it being busy, as an example we have seen sublease listings last for 6 months with no takers.

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.

Listing a commercial property

Listing a Commercial Property

If you are a Commercial property owner, you can be tempted to market and list your own properties for sale or lease. Is listing a commercial property easy and is it a one step process?

Are some brokers and agents more effective and efficient at marketing commercial property than others? Does it come down to just sticking the signs in the ground? Listing a commercial property is just the first step, there are many more steps than just listing a commercial property for sale or for lease. A good listing agent has a credible marketing plan and is responsive to requests unlike a larger percentage of average brokers who don’t return inquires or phone calls.

What are some of the factors to weigh when considering a solid listing agent -broker for your commercial property?

Visual representationsCommercial Property Listing

Will a listing broker or agent use up to date technological standards for shooting pictures of your property? Today, it isn’t just about taking photos with your mobile phone. Some brokers may or may not have good photographic skills. Are the promotional images of good quality and are they used using the tools provided to potential buyers and tenants?

Depending on the type of commercial property, will depend on what an image should look like. Obviously vacant land doesn’t require much photography that can’t be found on satellite images. Also there are drones today that can provide real time images of the land you are trying to sell. Most residential realtors use virtual tours, it has been our experience that most commercial brokers do not use them, however Shire Commercial does use Virtual Tours as a major benefit when we take on a listing.

Flyers and Collateral

Just because a flyer is made doesn’t make it effective, how is it marketed? And how often? Brochures or flyers must contain the most important information about a listing. Are the flyers detailed enough or are they missing key pertinent information? Some flyers are made without all the details just so the phone will ring from buyer or tenant reps or directly from potential clients because they are missing information. We have found over the past 12 yrs this really a time waster and doesn’t provide qualified leads.

  • Can a flyer be updated periodically quickly and easily, is it marketed consistently?
  • Flyers should be soft – copy for sure, hard copies are fine but with email today anything that you can hand somebody , you can always email them.
  • Some residential agents use a 24/7 toll free line to access information, what about QR Codes are those being used?

This is not an all-inclusive list, there are commissions to be negotiated – standards that the industry uses as well as the ability to draft purchase agreements and leases for the owner.


CAM Charges

CAM Charges and Capital Expenses

Tenants need to understand what is included in CAM charges. A tenant needs to understand what is in CAM Charges. Capital expenses- roof, structural, not normal wear and tear items can come up and  Landlords can try to pass thru these expenses.  A capital expenditure adds value to the property for more than 1 year, whereas OPEX or NNN charges are more about maintaining the property near term.

New laws that may allow the LL to not show capital expenditure expenses itemized and they may be passed thru to the tenant. It is almost a form of double dipping when adding capital expenditures to CAM charges. Whatever expenses are being used to maintain a building ( as an example free standing) to maintain the building in an on going long term basis could be considered as a capital expense.Cap rates for commercial property

Capital expenses may be removed from the accounting expenses but may not be excluded from a lease document. Developmental costs should be excluded , as where a parking lot improvement should be expensed out of a longer period of time such as 7 yrs for CAM. CAM charges may have a hidden maintenance fee in a lease as a percentage management fee. Cap protections can be negotiated.

Example: Perhaps a top coat on a parking lot is required maintenance which is just a coating on the parking lot versus digging up a parking lot and putting in new concrete which could be considered as a capital cost. However there are some grey areas , if a portion of the parking lot is done as opposed to the whole parking lot,  that may be considered as common area maintenance and not a developmental cost or capital expenditure.

Benefits and Detriments to Landlord

For the landlord or the REIT, they it is possible for them to pass thru costs and expenditures to squeeze tenants to improve their P&L. In a NNN deal, line items can be audited as a judgment call. If a tenant goes to a landlord and asks for line itemization it is entirely possible to get into a judgement call which may not be correct and consequently this would upset negotiations. So it is important to be clear on perspectives and what is reasonable.

Landlords tend to have a sensitivity to keeping costs in alignment to keep tenants, if they pad or keep CAM charges out of control, then the consequence would be their tenants moving out.

Mis-charges of CAM

NRTA – National retail tenants association, is an organization for tenants to protect each other. A tenant can reach it by viewing :

Most tenants do not pay as much attention to CAM charges as they should. Tenants should be provided a reconciliation statement before the end of the year. There should be a provision for this in your lease this can keep the landlord honest to reimburse a tenant if it is required.