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The Austin office market is changing rapidly. Effective rates for many sectors have been in decline for approximately 9 months due to decreased demand from large institutional users along with a significant number of new Class A suburban buildings being delivered to market. This has primarily impacted existing Class A buildings, as they are now in competition with new buildings for long term users of approximately 5,000 SF and up. Class B and C rates have remained relatively unchanged, but we expect a downward trend as tenants upgrade offices and take advantage of the competition in the Class A sector. Advertised rental rates are misleading, as Landlords have been attempting to leave high face rates in place, instead substituting up-front free rent. While Austin is uniquely positioned to weather economic storms better than most US cities, the recession has spread into the commercial real estate market. Landlords are beginning to make pre-emptive rate cuts along with rent subsidies in order to fill up buildings as quickly as possible. Tenants are still sitting on the sidelines making short term decisions until the future looks brighter.
Forecast: “Rates heading down through the end of 2009, with a high chance of free rent.”
Everyone has different opinions of what’s going to happen over the next 12 months. Our view is based off actual deals we’re currently negotiating, along with frank discussions with owners and asset managers. We see effective rates (average rate inclusive of any free rent) decreasing over the next few quarters. This will have an immediate impact on Class A buildings in the NW and SW sectors, and will spread to the CBD soon after. Class B buildings will likely follow as there is a flight to quality and vacancy increases in B and C buildings. (Think 2001-2002… Tech bust occurs, leaving a huge amount of Class A direct and sublease space. Local companies take advantage by upgrading from B/C buildings up to A buildings for a similar price. This left a surplus of Class B space and pushed rates down). Its impossible to know how long this will last. We are confident, however, that any Tenants renewing or moving over the next 3 quarters will do so in a “Tenant’s market”. If it fits your business model, might be time to lock in long term. |
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