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.

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 Tenant Representation

Austin Tenant Representation

Why go with being “Represented”?

Let’s say you are a startup or moving to Austin Texas  and need to find office space? Most tenant’s have a strict budget for office space expenditures.  As a new business in the Austin area , let’s say you need the following or want the following attributes as well.

  • Downtown Austin
  • Parking for alot of employees
  • Modern finish out and look for image purposes

What happens when a tenant has expectations of a budget for a specific area? Is it realistic , who would know they answer to that?  Let’s say the Austin tenant representation provided you  strong alternatives to a downtown location that would your expectations.  Unfortunately, a tenant who have

Austin tenant representation

a fixed perception and is not flexible beyond their strict and unrealistic parameters and focused only on what they perceive versus what is truly available.  What can happen during a lease negotiation where the tenant is strict is the landlord may get another offer that is more beneficial to them and cut the negotiations off only to keep the tenant in limbo trying to find another office space that is suitable- which may not exist.

During professional and responsible Austin Tenant Representation you may be urged to review other options,  What if there is an office space with the upgrades, restaurants, retail, entertainment, that is close to your initial downtown location?  A tenant rep if they are good will help you be on budget, get the parking you need and the image you want, keep in mind a professional works with you as a team, they are not a go through person to just comply with bad assumptions.  With the help of tenant representation, and handle on the market you can find alternatives. Unfortunately, alot of tenants hit the wall with this scenario

Understanding Lease Negotiations

Commercial real estate leases will contain provisions to  regarding the terms of your lease – with tenant representation that is professional, you will receive  throughout the contract process expertise that you cannot buy.  Examples of some of the interactive negotiations that take place are as follows:

  • Termination clauses – can be done or can’t be done
  • TI negotiations
  • Ways to provide security deposits
  • Caps on expenses

It comes down to , do you know what to ask for and “How to get it done”?  If you don’t have the contacts and the market experience and knowledge the question is , why find this out on your own time?

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.

 

Austin Office Report Q3 2015

Austin Office Report Q3 2015

Austin Office Report Vacancy

Austin’s office market continues to drive vacancies downward, as a matter of fact for the state of Texas vacancies are at the tightest in 2015 , demand nears 1M square feet.  When look at a graph of vacancy versus lease rates , vacancy is the inverse of the lease rate line , meaning vacancies moving down while the lease rates for Austin offices are moving up and to the right with a slight decline from Q1 to Q2 in 2015. Averages are now hovering above $30.00 psf per year for office space in Austin.  There has been a 2 % increase in available office rental space for the Austin area as well which is new product. Overall Latest Detailed Rates are coming in at 10.2%.  Near term forecasts are for the office run to continue.

 

Austin Office Lease Rates moving up

Expect lease rates to move upward as vacancy drops

Austin Office Market

The Austin office market had its 18th consecutive quarter of positive net absorption and finished at 489,183 sq. ft. That was a 46,501 sq. ft. increase over Q1 2015, and a year-over-year gain of 336,122 sq. ft. most of the occupancy was in the Central Business District while the other 197,545 sq. ft. was in the suburban areas. Market stats report the highest vacancies to be in North Central Austin @ 16.3%  with the lowest vacancies in Round Rock Texas @ 8.5%.  Highest lease rates for Austin office space are still in the downtown Austin area @ $41+ for Class A space and $36+ for Class B space.

Austin office space sublease

Austin office space sublease

As a tenant you may want to sublease an office space , sometimes the advantages outweigh the disadvantages of a direct lease. In this blog, we will review the benefits to subleases for an office as well as the disadvantages which there are some believe it or not. So, why does an existing tenant decide to sublease their office space? Typically there are 3 reasons why a sublease comes available. The first reason is out of the control of the existing tenant and that is the economy, if the economy is in a downturn and business cannot stay afloat or have to consolidate they will resort to a sublease. The tenant of the office space may also vacate the office when the economy takes a nosedive but they are still on the hook for the lease, hence the sublease solutions comes into play.

Why Sublease an office?

Second reason an existing tenant may want to sublease an office property is because they are consolidating even if the economy is good, they may have decided to move their offices to another part of Austin or completely move out of the city.  The third reason a tenant would want to sublease their office space in Austin would be they can’t carry their business anymore and they cannot pay the rent anymore.  When this happens the tenant will engage with a commercial real estate broker to list their office space for sublease.Austin office condos for sale

The benefits to you as a potential sub-lessee (terminology used for someone subletting) is usually the term can be shorter than a direct lease , also you may be able to get into the office property in Austin at a reduced rates. Typically, the tenant wants to be able to sublease their office space at the same rate they are paying so they are net zero when it comes to rent payments per month. The existing tenant becomes your landlord or called the sub lessor in the transaction.

There are distinct disadvantages to a sublease space such as no finish out is usually provided by the existing tenant, therefore you will have to take the space “as is”.  Unless there is some type of agreement with the main landlord to provide finish out to a sub-lessee where they would convert to a direct lease after the sublease expires, you can expect no to very little tenant improvements to the office.  Also, another disadvantage could be that the sub-lessor who is your new landlord does not pay the direct lease landlord (owner of the office property).  Keep in mind you are just stepping in and taking over the lease payments and finishing out their term. The sub-lessor is still on the hook with the landlord for the original lease that executed.  Austin office subleases do not typically have signage in front of the buildings, therefore a commercial real estate broker like Shire Commercial is vital in helping you find this type of office property for sublease.