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 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.

 

Tenant improvements

Tenant Improvements

When a tenant negotiates a lease with a commercial real estate broker one of the items that is addressed is alterations or tenant improvements. What is involved within a lease when negotiating or navigating thru a tenant improvement?  Tenant improvements can encompass changes such as paint, carpet, demolition, building new offices, walls, doors etc.. it all depends on what the tenant need to operate their office efficiently and effectively.

Landlord’s interests?

The landlord in this transaction is not interested in allowing tenants to alter their premises extensively or use paint colors that are typically unusual like purple, black. Within the no-go’s for landlords would be the tenant making major alterations to the permanent fixtures within the office space such as restrooms, , electrical wiring or any tenant improvements that could damage or cause issues with other tenants.  Typically in an office environment, a tenant would use the landlord’s contractors to do the job of improvements.

Tenant’s interests?Tenant improvements Austin, Texas

As a tenant you want the flexibility to modify the premises and want the modifications to improve the property’s value for you to use. There may be a provision where the tenant has to provide the landlord the premises back to them in it’s original condition when their lease expires and they vacate.  You will have 4 options or a combination of these when embarking on a tenant improvement negotiation within a lease provision. They are as follows:

Option 1:  The tenant shall make no alterations or tenant improvements without the written consent of the landlord, you will find this standard in office leases within the Austin Texas marketplace.  This does include paint or flooring.

Option 2:  The tenant may make minor alterations to the premises such as paint, wallpaper , or lighting fixtures to suit their needs.

Option 3: As the tenant, all alterations made to the premises become the property of the landlord excluding non permanent fixtures such as lighting as they are not permanently attached to the office space.  A tenant can remove personal property which is not a permanent fixture to the office space.

Option 4: The tenant can make tenant improvements to the property with written consent from the landlord, however the work will be done only by the landlord’s contractors or mechanics approved directly from the landlord. All alterations , additions or improvements shall become the property of the Landlord and shall remain and be surrendered with the premises at the termination of the lease.