The competition for talent and premium space in Austin is very intense and rivals similar “bidding environments” at hand in Cambridge, Massachusetts and the Bay Area of Northern California. In the last six months, there has been a sharp increase in the number of off-market deals and pre-emptive strikes on space. Tech firms scaling up operations are very focused on securing talent and the space to house it despite the obstacle of rising costs.
Additionally, sublet space, when it comes on the market, is often trading at par with or even, in some instances, at a higher rate than remaining lease obligations. Already built-out space can provide the right tenant savings in terms of relocation costs, and so far firms have been willing to pay a premium for such space.
Pre-leasing of the relatively restrained development pipeline has been brisk. Companies relocating from California, the Midwest or East Coast will not blanch at $45.00 to $55.00 gross rent, and many rapidly expanding local tech firms are also more willing to bear this cost. New construction delivered in Austin with significant pre-leasing. The Colorado Tower, for example, was constructed in 2015 and is completely leased. So, too, is the IBC Bank Plaza, which delivered in 2014. Trammell Crow’s 500 West 2nd Street project, a 500,512-SF development on the site of the former Green Water Treatment Plant, will deliver in January 2017 and already leased 207,939 SF to Google in March 2015. The strong landlord-favorable market has led to several suburban projects, including two speculative projects in The Domain totaling 365,862 SF.
The Austin market, with a current overall availability rate at 15.4%, remains as tight as during the previous quarter (15.5%) and a year prior (16.0%). In turn, Austin has some of the lowest concession packages for an office market in the U.S. Compared to Austin, rental rates are still higher in Manhattan, San Francisco or Boston but landlords in these markets are generally more generous in terms of concessions. Landlords in Austin will provide some tenant improvement allowances, but free rent periods are low or non-existent and few other options, such as expansion rights, are offered. Flexibility is limited to the largest, most creditworthy tenants whom landlords want to lock in.