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

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.

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.

Austin office market 2016

Austin Office Market 2016 Report

  • Overall vacancy rates moving into 2016 hit below 10%
  • Average asking rates for office space hit $31.00+ per square foot
  • 75% of office demand is in Northwest and Southwest Austin
  •  New overall rate is record citywide

Austin Office Market Snapshot 2016

Austin’s office market recorded new records in 2015 for occupancy since 2011.  There has been a new influx of people and the subsequent demand has increased over the past 5 years in the Austin office market. Lease rates hit new records as well passing up the previous lease rate increase record in the first quarter of 2015. Vacancy is now at the lowest it has been since the dot.com surge . For Austin, this is the third quarter in which vacancies have gone below 10%.

North West Austin

Northwest Austin represented up to half of the demand for office space. Much of it was because of one tenant which took occupancy of 230,000 square feet of space.  After the Northwest office market , the Southwest market came in second with 2 large tenants covering most of the square footage taking 217,000 square feet of office space.  Downtown Austin has the lowest vacancy rates of all the sub-markets coming in at below 7% vacancy.  There is still quite a bit of new construction activity which has 12 buildings currently under construction.

Unemployment has shown a slight increase although still low below 4%. Population of Austin is still increasing, in the Round Rock area the population swelled to plus 800,000 which is a 61% increase of 2000.

  • 12 Office buildings under construction moving into 2016
  • Oracle plans to build a 560,000SF building
  • New construction square footage 1.9M
  • Lowest construction sub-market Southwest area
  • Pre-leasing activity high in the CBD area