June 2008

 

Who Really Knows?
By Michael Kennedy, SIOR, President, Commercial Texas

The Austin market is doing better than Texas; the Texas market is doing better than the national market.

How long is a piece of string?  It’s that kind of world right now.  Looking for a firm piece of information to build on: to make decisions, to trust and go forward confidently?
We’re seeing national companies pull back a bit due to their economic issues elsewhere.  New office and industrial product is being delivered in Austin, but there are few takers with the fortitude to commit to 7 to 10 years.

However, we continue to see local companies adding a few more people and even start-ups receiving venture capital funding.  Regional unemployment is at a low 3.8 percent, with job growth for 2008 projected to be 2.6 percent, according to the Capital Area Council of Governments.  Professional and business services are expected to see 4,000 new jobs, with manufacturing losing 1,200 jobs by year end.

Moral of the story?  It’s still a supply and demand world – Austin’s story is unfolding, but it’s better than the rest of the U.S.

Stay tuned. 


More articles by Michael Kennedy

ECONOMY: Credit crunch hits commercial real estate
Availability of loans dries up, report says
By ZACH FOX - Staff Writer

A credit crunch that has severely limited the ability of banks to make loans struck the nation's commercial real estate market in the first quarter, slashing the number of loan originations, according to a report released Tuesday by an industry association.

An index measuring the number of loans for builders of office and retail space fell by 53 percent from a year earlier, according to the report by the Mortgage Bankers Association, a group based in Washington, D.C., that tracks loan activity.

The biggest decrease in loans came in the office sector, where loans fell by 75 percent from a year ago, the association reported.

"What we've seen is that the credit crunch has had an impact on the demand for commercial-backed securities," said Jamie Woodwell, director of commercial research for the association. "That's then spilled over and reduced the availability of loans to borrowers."

Major banks across the nation tightened lending standards or eliminated products after a surge in the number of home foreclosures and unpaid mortgages.

While troubles with residential debt is making commercial loans harder to come by, commercial real estate overall has remained strong, with very few delinquent loans, Woodwell said.

That means the lack of loans will not have much of an effect on the overall economy, he said.

Companies building in Carlsbad and Rancho Bernardo will be most heavily affected by the lack of loans because the two cities have led North County in new office construction, according to an earlier report by Grubb and Ellis, a commercial real estate data tracking firm based in San Diego.

The increase of new offices in Carlsbad and Rancho Bernardo is expected to result in higher vacancy rates, reported Grubb and Ellis.

A dearth of commercial loans means companies building offices and retail space will have trouble refinancing, Woodwell said.

However, as long as those companies can continue making payments based on the loans' current terms, the vacuum of available loans will have little effect, he said.

Summer too Hot? Cool Down in the Office Market
By Russell Young, Executive Vice President, Commercial Texas

2003 was rock-bottom for Austin’s new millennium office market. While the stock market sunk in 2001, it took more than 18 months for the office market to reflect the depths of the despair. The survivors and proliferators of 2003 made a wise decision; they signed substantial, five-year leases and locked-in excellent rates. With rent levels fully deflated, many companies took advantage of savings and used the money to upgrade workspaces or make other capital improvements.

2008 is different; the Austin economy is more diverse. The region’s cache and luster have boomed since the darker days of 2003. Investors and developers have flocked to Austin and are building square feet after square feet of Class A office space. The result: by the end of this year, nearly three million square feet will have come online over the eighteen months.
Many companies who signed great leases in 2003 are now facing a day of reckoning – a high percentage has seen or will see their leases expire. Today these companies are confronting rental rates at all time highs.  With a national consumer confidence melt down and uneasiness across major facets of the economy, tenants are hesitant to add to their operating expenses.

Many companies facing lease renewal are doing what makes sense – the bare minimum. Tenants are not embracing long-term leases given the precariousness of the economy. Yet, until recently, landlords have been holding on to their lease rates as they try to drive returns for corporations and investors.

The drive for returns and the reality for businesses have reached that unbearable impasse. After all, Austin landlords are reading the same newspaper as their tenants.  With nearly six months of mounting pressure, rates are beginning to give, concessions are being offered and landlords are proactively marketing their buildings. It’s likely we will continue to see the office market soften through 2008 and 2009.

If one is an optimist, the cooling of the office market presents many strategic opportunities, including lower rents and greater leverage for tenants overall. It also shines a light on the economy; when we reach the new bottom, we can then see the promise of 2010.

In the meantime, windows will open up for today’s wisest companies.
 

More articles by Russell Young