Austin Commercial Leasing

Austin Commercial Leasing

This is a summary of Austin’s commercial leasing market for office space moving into the 3rd Quarter of 2017.  Continuing occupancy has been the theme for some time now in Austin. The current vacancy rates are now at a 16  year low.  Tenant demand remained strong for the 3rd quarter with approx 1M square feet of office space being leased for 2017. Construction wise for offices is expanding with approx an extra 2M square feet under construction . Austin commercial leasing for only 2 sub-markets was low which was Round Rock and East Austin.

Sectors producing the demandAustin office market Q2 2016

Austin’s commercial leasing for offices was lead by engineering and tech firms which accounted for more than 1/3 of the leases executed. Vacancy rates are not sitting at 8.8% which is down 50 points, the lowest since the second quarter of 2001.  Current OPEX costs have risen,up $0.30 cents per sf per year while NNN lease rates moved downward by $0.90 cents per square foot per year. The market is being supported by a very low un-employment rate coming in at 2.8% . Tenants can expect more of the same in the near term with rates staying static , most landlords are looking for minimums of 3+ year term commitments. Contact Shire Commercial to help you find a suitable office space , specialists in Austin Commercial Leasing.

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.

Capital Reserves

New Accounting Rules- Shorter Term Leases?

Banking institutions, financial service firms and other enterprises may have to take on new leasing negotiations. New rules regarding capital reserves against liabilities are going to be in place.  A Landlord -Owner can expect some of these types of organizations to negotiate leases with shorter terms and maybe fewer renewal options. This can provide some uncertainty for owners as to how they are going to manage assets with shorter lease terms for tenants.

Capital reserves must increase by 5% on a balance sheet. If a firms lease obligations total 50 million annually, then their  capital reserves would increase by 5 percent, or $2.5 million, to cover the liability. To minimize tenant turnover, the landlord will need to think more strategically regarding improvements and amenities to the property to retain tenancy.

 Example: Capital reserves to be required

A financial institution that has a 3 yr term lease in place with $1M in rent and $3M of liabilities, they would be required to have at 2X the liabilities $6M in capital reserves.

Negotiations on Office Lease OptionsAustin office expenses

Building owners will experience accounting changes regarding lease extension options.  This will require the existing tenant to review those options more carefully. If a lease offers  a tenant a better deal or discounted lease rate with a  lease extension at the end of the term, the “economic incentive” could impact how the lease is classified beginning on Day One.

If a tenant signs a 10-year lease with two five-year renewal options that carry an incentive, such as a 95 percent of market rental rate during the extension period. Even though the lease is technically a 10-year lease, it could be viewed as a 20-year lease for businesses’ accounting purposes if it there is a “good chance ” that the options will be exercised.

Within the new regulations, corporate real estate users will have to determine whether their office leases qualify for the finance or operating lease accounting treatment. This will require their assets and liabilities to appear on their balance sheets. Tenants may need additional time for lease negotiations because they have to bring additional people into the process.  An owner can expect possible delays so are advised to start the lease negotiation process as early as possible.

Parking Ratios

Parking Ratios for Office Space

Over the years, we have had folks contact us about leasing office space and there is one attribute that seems to fall thru the cracks more so than other parts of leasing an office in Austin. It comes down to parking and parking ratios.  A lot of tenants may think, no big deal, I can lease an office in Austin and parking is not a problem. Is this true? Actually, it is not true and should be of great concern. You see there are municipal codes in place called parking ratios that allow for only a specific number of parking spaces based on the type of use a tenant has and the square footage occupied.  Are there some parking lots for buildings that are overbuilt to handle more parking the answer is yes, however when it comes to a 100% occupied property the parking ratios will be more stringent.

Parking Ratios based on Office type?Parking Ratios

So how does it layout and what should a tenant expect? Well the first question that has to be answered is : What type of use is the office going to used for? Why? Because certain uses have higher parking ratios than others. Here are some quick examples a Billiard Hall will have 1 space for every 100 square feet, a Medical office will have 1 space allocated for every 275 SF.  What about a general office space? A professional office is 1 space for every 275 SF , recently a potential client called us asking for 1000SF and enough parking for 20 people, well let’s do the math. If they are using this as a professional office on 1000SF they are only going to be allotted 4 parking spaces. So how are they going to find a space that has a parking ratio for 20 people?  You see a professional broker would have flagged this and said they do not have realistic expectations and it won’t work.  Let’s take a scenario, you lease a 1000SF office and there seems to be plenty of parking because after all the property only has 80% occupancy. All of a sudden a few big leases go down and now the property is 95% occupied and the fellow tenants are complaining that you are taking up their parking spaces, is that a problem? Yes, it is going to be.  So make sure your broker covers your bases with you before you are given an impression that it is no big deal.

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.