Tim WingfieldResearch Manager
Tenants currently exploring space options in Austin are well aware of the current challenges in this market. Multiple companies are often bidding with one another for the same space. Some larger firms may have the upper hand based on their creditworthiness as it pertains to office leasing, but bigger blocks of space are currently scarce in Austin regardless.
Creditworthy tenants with an established track record may have the upper hand. Some of these tenants have escaped the quickly escalating rents and scant vacancies of the CBD in favor of the North and Northwest submarkets. Most of these tenants seek out amenity-rich areas for employee retention, which is particularly important in the relatively younger tech market. Some have moved into campus-type buildings while others have sought out clustered master planned amenity-rich developments like the Domain, that provide a live/work/play setting with ample retail and residences nearby. However, other tenants have significant investments in their existing spaces and may stay put, even if their landlords consider them captive and apply pricing pressure accordingly.
Very small tenants (around 2,000 SF) have more opportunities available but are certainly price takers and lack negotiation leverage. Moderately larger tenants (around 10,000 SF) are in a sweet spot - if it can be called that - within the current market environment. They are flexible enough to squeeze into a partial floor while also just large enough to have a bit of negotiating leverage.
Tenants are getting in the market sooner and having to react to opportunities faster as they come and go quickly in this “hot” market. Tenants who are coming up for renewal need to be alert and attentive to their renewal options and need to budget for a significant increase in rental expense. They must quantify their growth projections as expansion rights are at a premium or unavailable. Anyone with available space, particularly in the CBD and Northwest submarkets, is realizing much higher rental rate growth than they could have every predicted. While the Austin market is in a bit of lull currently in terms of its development pipeline, the strong leasing and sustained rental growth will presumably expedite the time-line for some of the proposed product – assuming approvals and financing can be secured.
Following a pattern seen in other tech fueled markets, Austin is registering strong expansion both among locally-based innovators and out-of-market firms eager to tap into the market’s talent. State government, the other primary driver for the Austin office market, has been stable of late. Other sectors that depend largely on tech growth and state spending such as law firms and private equity have squared away most of their space needs. Following a trend seen nationally there continues to be a mix of mergers and spinoffs in the legal sector, supporting some movement. The upcoming University of Texas Dell Medical School may have a ripple effect in the market in future years to come.
Tim is the Research Manager for the Houston and Austin offices of Savills Studley. Tim specializes in analytical research, financial modeling, information, numerical analysis and statistical modeling.