Commercial real estate stays strong

Austin Business Journal

After several quarters of relatively low absorption, Austin's office market is picking up steam.

Companies leased about 245,181 square feet of office space during the third quarter, up from just 35,835 square feet in the previous quarter, according to the latest report from Austin-based Oxford Commercial.

With roughly 2 million square feet of new, mostly Class A, product recently delivered or in the works, the new figures may allow developers to breathe a sigh of relief.

"There's been a lot of discussion on why our absorption has been so low despite the job creation figures and other factors," says Rick Whiteley, senior vice president with Oxford focusing on tenant representation. "I think the absorption numbers this quarter are going to be received very warmly" by developers.

The citywide occupancy rate among all classes of space stands at 86.2 percent, roughly the same as it was for third quarter 2006. But the market has added about 1.2 million square feet to the inventory roll in the last year, indicating a significant amount of vacant product has been absorbed.

Rents meanwhile have gone up considerably.

Across all classes, the average rental rate rose to $25.37, up 17 percent from this time last year. Class A rents have risen even more dramatically, climbing 18.6 percent year-over-year. Rents for Class A space in the Central Business District and Far Northwest submarkets both rose 20 percent to $35.38 and $28.01 respectively.

Whiteley attributes the general rate jump to four factors: decreasing vacancy, rising costs of bringing new product to market, an increase in operating expenses and the outcome of significant investment sales activity.

Property sales have had the most dramatic effect on CBD rates, says Whiteley. Companies including Thomas Properties Group (NASDAQ: TPGI) and Hines Interests Ltd. have paid high prices for downtown properties and are now upping rents to make their investment work.

Rising rates, the extra expense of parking and other factors continue to keep companies out of the CBD, says Kevin Kimbrough, vice president with Oxford who works on the landlord rep side of the office sector. Occupancy in downtown stands at 82.8 percent, up about 2 percentage points from this time last year, but still not an activity level in line with the exorbitant rise in rents. Still, Kimbrough says he's heard from quite a few tenants expressing renewed interest in downtown as the area's overall vibe improves with new residential and retail projects and other draws.

Kimbrough says while landlords have been pushing rates up in previous quarters, they've largely reached a threshold. For rate increases to continue, there will need to be considerable additional absorption.

Troy Holme, senior vice president in brokerage services with CB Richard Ellis, says the increased absorption is certainly good news, but it's still far below the levels the city saw last year.

"It's definitely gotten better as the year has progressed and I think overall there's a sense that the market is stable, but we're hoping it will get better," he says.

Holme says in recent weeks, there seems to be a renewed charge in the market with more phone calls and tenants showing movement, but he cautions that doesn't always translate into hard numbers.

As rents increase, Holme says price-sensitive tenants like call centers are looking for more affordable options in the North Central and Northeast parts of town.

The top three submarkets in terms of absorption, according to the Oxford report, were Far Northwest (82,528 square feet) North Central (65,521) and Northwest (34,560). Gains in the Far Northwest were led by expansion deals for Lombardi Software and Conexant Systems. In the North Central area, absorption at the first office building in The Domain and buildings like Donley Plaza and Centennial Tower.

In the Southwest submarket, one of the most in-demand in recent quarters and the site of much new construction activity, vacancy has increased to 13.9 percent as at least three companies have put significant space on the sublease market, says Kimbrough. Still, rents there remain healthy at $27.18 and the submarket absorbed 17,785 vacant square feet. A series of new projects, including the virtually-complete Park at Barton Creek I and II and the next phase of San Clemente will add a significant amount of inventory and push vacancy up in the near term.

Industrial

The industrial sector absorbed 454,049 square feet in the third quarter, a decline from the 594,729 square feet taken in the second quarter, but still quite strong. Market-wide industrial availability is getting scarce. Total occupancy stands at 91.5 percent. The Northeast submarket--the largest with an inventory of 9.8 million square feet--is 93.1 percent leased. The Southeast submarket, where millions of feet of new product is being developed, is 89 percent occupied.

Whiteley says some of the lack of office absorption in recent quarters may help explain the health in the industrial sector as traditional office tenants seek out less-expensive industrial flex space.

Greg Marberry, first vice president with CB Richard Ellis who focuses on the industrial market, says the sector continues to see a lot of deals--both organic growth of existing companies and new ones coming into the area.

"We're seeing that this time around, the recovery is much more diverse," Marberry says, adding that from manufacturing to distribution, space is getting snapped up. One of the tenant types driving the market is expanding construction companies that are growing with the number of new-build projects in the area.