Austin Real Estate

AUSTIN REAL ESTATE

Office market holds steady, but rents up

Outlook is healthy as employment continues to grow

By Shonda Novak

AMERICAN-STATESMAN STAFF

Friday, September 28, 2007

Austin's office market remains on solid ground, with rents continuing to rise and occupancies holding steady in the third quarter, new figures show.

Rents for top-flight, or Class A, office space averaged $29.84 a square foot, up from $25.15 a foot in the same period a year ago, according to Oxford Commercial, a member of the Cushman & Wakefield Alliance. Tenants filled 88.3 percent of that space, down slightly from 88.4 percent a year ago, according to Oxford, which tracks the market.

The trend held for all classes of space in the market overall.

Citywide, the occupancy rate was 86.2 percent, down from 86.6 a year ago. Rents rose to $25.37, up from $21.62 a year ago.

"A sizable portion of that increase in rental rates is due to rising property taxes, which are typically passed straight through to tenants, said Jeff Coddington, a senior vice president with Oxford Commercial. "A number of landlords, in fact, have re-estimated their operating expense estimates to include rapidly rising property taxes."

Office rents and occupancies are an important barometer of the economy, because job growth fuels demand for office space. Since 2004, Austin's office market has been steadily recovering from the tech downturn of 2001.

Pace said Simmons Vedder expects demand to be strong through 2010, if job growth holds.

Rents also are rising as new landlords have entered the market, paying high prices for office buildings based on anticipated rent increases, said Jeff Pace, vice president of office development for Simmons Vedder & Co.

"Rents have continued to rise as office buildings sell," Pace said.

A record sale came in March with the $1.15 billion purchase by Los Angeles-based Thomas Properties Group Inc. of several Austin office buildings, including the Frost Bank Tower. It was the largest office deal in Texas history.

Rising rents help explain the slight slide in occupancy, Coddington said.

"I'd say that precipitous recent increases in rental rates have served to temper tenants' demand for space — because of 'sticker shock' as tenants go to market to renew and expand," Coddington said.

Two sizable chunks of sublease space that came on the market also helped nudge up vacancies, he said.

Simmons Vedder broke ground Thursday in Round Rock on Frontera Vista, two five-story office buildings, each with 135,000 square feet.

Another Simmons Vedder project, the Crossings at Lakeline, will add two more buildings with a total of 235,000 square feet of space in June 2008.

Simmons Vedder is building both projects with no tenants lined up. But both are in areas where space is tight and rents are rising. New toll roads and planned commuter rail near the Crossings at Lakeline are expected to spur interest, Pace said.

The projects may be a good bet. Local companies are hiring, and the region is seeing keen interest among companies looking to expand or relocate here, said Dave Porter, senior vice president of economic development for the Greater Austin Chamber of Commerce.

"We remain a very positive sell," Porter said. "Austin has outperformed the Texas economy, and Texas has outperformed the U.S., and all indications are it's going to continue well into 2008."

Austin employers are expected to create 29,400 positions by year's end, an increase of 4 percent, according to a recent report by Marcus & Millichap Real Estate Investment Services, the nation's largest real estate investment services firm. Employment of office workers is forecast to gain 6.1 percent in 2007, with the addition of 10,100 jobs, the report said.

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