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Austin Commercial Real Estate In-depth
Austin, Texas is one of the largest commercial real estate markets in the US supporting over 1 million residents and businesses. It is the home of the state’s capital and was the 3rd fastest growing city in the US over the last half decade. The city is named after Stephen Austin, a figure known and accepted as the founding father of ...
Austin Commercial Real Estate In-depth
Austin, Texas is one of the largest commercial real estate markets in the US supporting over 1 million residents and businesses. It is the home of the state’s capital and was the 3rd fastest growing city in the US over the last half decade. The city is named after Stephen Austin, a figure known and accepted as the founding father of Texas. Located in central Texas, Austin’s commercial real estate market is supported largely by its high-tech industry, notably by Dell Computer, Freescale Semiconductor, 3M, Apple Computer, Hewlett-Packard, Google, AMD, Cisco, eBay, and Sun Microsystems (soon to be Oracle) filling what has been dubbed “Silicon Hills”, perhaps the largest counterpart of Silicon Valley.
Austin is also supported by other industries and employers such as Whole Foods, one of the fastest growing supermarket food companies in the US, and by its local spending and consumerism. The current worldwide recession and recent job layoffs have taken its toll on Austin, certainly, but as things improve for technology spending Austin should rebound nicely due to its technology base. However, due to numerous speculative office and industrial projects being constructed in 2007-2008 it may take a little longer this time around for the Austin commercial real estate industry to rebound compared to the recent dot.com bust.
Commercial space in Austin is broken down into various submarkets of office and industrial parks within Georgetown, Round Rock, Northeast, and within the central business district of downtown Austin. Austin has seen negative net absorption for its commercial real estate base for the last several quarters with sublease space in the Austin office market spiking at levels approaching the last technology market meltdown. This is not terribly surprising given that Austin-Round Rock was one of the fastest growing metropolitan areas in the US and “what goes up, must come down”.
The industrial market for Austin is also underwater as several large blocks of space has been vacated by industrial users. With new speculative Austin commercial real estate projects finally coming online this year, notably the 457,000 square foot warehouse project Northpointe Trade Center in Round Rock, vacancy rates will reach nearly 18% in the Austin warehouse market. The office vacancy rate will likely reach 22% in 2010 if things continue to erode.
Even with a flood of commercial office and industrial space hitting the market, rents for commercial real estate in Austin has not fallen to levels observed during other market corrections. Some of this is do in part that there are very few transactions occurring and that many leases started in 2006-2007 don’t come due for another few years. Other factors gating a freefall of commercial rents seen in other major US markets include the fact that some commercial property landlords are restructuring existing leases for tenants at rents that are higher than what could be achieved in the open market, and the confluence of brand new office and industrial buildings commanding higher rents coming online.
“Blend & Extend” and other lease restructuring scenarios for existing Austin tenants might prove to the winning strategy for the continued preservation of Austin rental rates. However, Austin needs to see substantial job recovery to have any hope of truly buoying its commercial real estate market. Luckily for Austin, many graduates with technology educations enter the workforce from the University of Texas making themselves available to the Austin technology base of companies and largest employers.
Compounding the strain on the Austin commercial real estate market is access to capital and the liquidity of landlords. If tenant improvements cannot get financed for newer commercial buildings coming online those buildings will probably stay vacant as Austin’s tenant base will likely not pay for large tenant improvements required for cold shell buildings where the cost of such improvements may exceed several years of rent.
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