Before headlines reached screaming proportions, theories abounded about the degree to which Austin was likely to feel the pinch. Economists and experts have pointed to the regions’ long-term prospects, buoyant local economy and ability to defy gravity in one of the most economically viable states in the nation. While it’s true Austin has unique long-term characteristics, the city’s efforts to be part of a thriving global economy both enhance its industry diversity and tie it to the ebbs and flows of a worldwide economy. The regional commercial real estate community has been center-stage for years, and in a far more challenging business environment as we approach 2009, the dynamics are once again changing.

Two Economies

The story of today’s Austin office market has been in the making for more than the last couple of news cycles. The last five years, from 2003 to 2008, reflect not simply Austin, but the global economy itself. The reality is that during the past five years there have been two distinct timeframes with very different outcomes: 2003 – 2006 and 2006 – 2008.

To understand the fundamentals, and the stratification, it’s important to look at the submarkets. Austin’s primary submarkets are defined as the Central Business District (CBD); the Southwest Market (SW), generally south Mopac Expressway and Loop 360, south of the Pennybacker Bridge; and the Northwest/Far Northwest Market (NW/FNW), generally north of Mopac Expressway, 183N to Highway 620/SH45 and east of IH-35.

From 2003 to 2006, all of Austin’s markets were on the rise, experiencing increasing absorption and comparable vacancy rates. In 2007, however, the CBD market rose to the top as the ‘place to be’ for leading companies in Austin. Yet, for the SW and the NW/FNW markets, occupancy percentages took a turn downward due to increased inventory and declining absorption.

Below is a snapshot of the market from 2003 - 2008:

CLASS A OFFICE

llllllllllllllCBD Vacancy llllllllllllllllllllllllSW Vacancy ccccccNW/FNW Vacancy

2003	2006	2008	2003	2006	2008	2003	2006	2008
20.5%	17.8%	14.7%	14.8%	4.2%	17.4%	27%	8.7%	20.9%

 

AREA OFFICE RENTAL RATE GROWTH

aaaaaaaaaaaaaaaCBDvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvSW

,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,           NW/FNW

AREA NEW INVENTORY
(Square Feet)

 

ABSORPTION LAST 18 MONTHS
(Square Feet)bbbbbbbbb jjbbbbbbbbbb ,,,,,,,,,

Market data courtesy of Capitol Market Research.

Given Austin’s job growth from 2003 to 2006, the economic turnaround following the high-tech bust, low interest rates and the free flow of capital with a significantly reduced vacancy rate in the SW and NW/FNW submarkets, there were plenty of fundamentals in-place to expect ongoing demand. Developers saw a strategic opportunity, and, in the course of 24-36 months, roughly three million square feet of new office space is being added to the market in response. In strong economic times, Austin has historically averaged absorption approximately 800,000 square feet per year. With the inventory currently available, vacancy rates will rise and may remain high for some time.

Despite this, recent headlines continue to paint a positive picture. A study conducted by the American City Business Journals Inc. finds Texas is home to America’s three hottest labor markets: Houston, Austin and Dallas-Fort Worth. These cities are top three in the the latest employment rankings of the nation’s 100 largest metropolitan areas and have added a total of 107,200 private-sector jobs since mid-2007, while keeping unemployment rates below five percent.

Making the Most of a Slowdown

Austin may be in a relatively strong position, and in a better position than other regions, but the bottom remains undefined. For business owners seeking to expand and make strategic decisions about their space requirements, it’s important to weigh options and look at the long-term. As the office market begins to soften in coming months due to increasing vacancies, particularly in submarkets outside of the CBD, landlord concessions of all types are likely to be offered.

Near-term concessions include months of free rent and/or lower upfront prices. For businesses anticipating a slowdown, these concessions are very attractive – literally cash in the pocket – over the next year. But, it’s possible the economic downturn could have ramifications on certain types of businesses beyond the next year; the longer-term cost of the lease obligation and its flexibility must not get lost in a shorter-term gain.

As Austin approaches the summer of 2009, it’s possible the cracks in the global economy will begin to surface in its office market further, and continue to transform it to a tenant-driven environment. The CBD is likely to remain tight, but NW/FNW office space is plentiful and conveniently located to the predominant portion of the region’s workforce. There are, and will continue to be, attractive terms over the next year beyond downtown.

As the second largest operating expense for most businesses, a well-conceived lease can be a significant asset. However, without flexibility to grow or retract, the value of the lease obligation can become an uncomfortable hindrance. It’s important for businesses not to make quick decisions in this market, but evaluate alternatives and options, and their impact on operating costs over the next three to five years.

Stay tuned. 


More articles by Michael Kennedy

 

Commercial Texas Welcomes Benita Dryden!

Benita Dryden joined the Commercial Texas team in July 2008 as Vice President. With over 24 years of proven expertise in the Austin, Texas commercial real estate industry, Dryden joined Commercial Texas with the desire to continue her focus on office and industrial leasing and sales.

Dryden began her real estate career in 1984, and has built a solid reputation in the industry for maintaining long and trusted relationships with her clients. Together with her in-depth knowledge of the market, this gives her the ability

to concentrate on details in the negotiation process that provide long-term value to her clients.

As a native Austinite, Dryden has been active in both local and national professional associations. She served as president in 2000 and is a current member of the Commercial Leasing Brokers Association. She is also a member of the Austin Commercial Real Estate Society.

As the news outlets continue to post bleaker and bleaker national economic headlines, Austin was supposed to be a shining example of a strong local economy within the larger, healthy economy of Texas. In 2006 through the first half of 2008 Austin was talked about as if immune to the national economy and its ailments.

As I write this article, the Dow closed at its lowest level since 2003, falling seven percent (7%) from the day before and thirty three percent (33%) from its high exactly one year ago today. Members of the government in Washington D.C. and around the world are struggling to find answers to the issues that ail the financial system. The near-term is uncertain, and it’s causing a great deal of anxiety for businesses.

Austin businesses have not been immune to the ailing national economy as many predicted from 2006 to the first half of 2008. In the commercial real estate business, we have seen clients shut their doors, and clients from other markets that were once certain to lease space in Austin, slow down the process or cancel all together. We’ve seen deals worked and re-worked— each time taking an increasingly cautious approach.

A client and I had a conversation about an upcoming renewal and it immediately moved to the global economy and the future. Our client expressed near-term pessimism and long-term optimism. They expressed concern that the economy was going to get far worse, but felt confident in their ability to grow their business over the longer-term. Our conversation turned to the need to become lean in terms of overhead expenditures and central to remaining nimble and lean was the need for maximum flexibility in their office space.

Flexibility is key in uncertain times, and we have been advising our clients to not only consider the long-term upswings and downturns of their business and the economy when leasing office space, but also the immediate need for change that comes from uncertainty.

We advise businesses by understanding their current, short term and long term objectives and negotiating a deal that accomplishes those goals. Flexibility can come in the form of a cancellation option, termination option or a short term lease depending on the needs of the clients.

Business will continue to be conducted, regardless of the national economic landscape, but by hiring Commercial Texas, businesses will work with a team that understands their clients’ needs and that the necessity to be able to make decisions quickly due to a changing landscape is central to a business’ ability to weather the current economic storm.

More articles by Burke Kennedy