With a new year of commercial real estate underway in Austin, Texas, we looked to our AQUILA experts to make predictions about the year to come.
Nine trends rang through from their responses, from landlord concessions to tenant expectations.
In this article, we explain the nine trends to watch for in Austin’s commercial real estate market in 2019.
1. Continued Growth of Coworking Companies
In 2019, we will continue to see an emergence of coworking and coworking-style office spaces, à la open, dense office spaces and an abundance of on-site and walkable amenities.
This means we’re likely to see even more expansion of both local and national coworking brands. In fact, at the beginning of this year, it was reported that WeWork (now The We Company) purchased 4.7 acres in downtown Austin.
And it’s not just startups and small companies taking space at WeWork and the like.
“This past year showed an increase in tenants’ affinity for flexible lease terms with companies of all shapes and sizes leveraging WeWork en masse,” says Matt Wilhite, AQUILA Principal and tenant representation broker.
Companies like Facebook and Microsoft are finding value in leveraging these flexible, prepackaged work environments. And now the Army is getting in on the action; the Army Futures Command is officing part of its new Austin headquarters within Capital Factory.
2. Increasing Density & How Landlords Respond
While some companies are leveraging coworking spaces to achieve the desired dense and amenity rich workplace, others are sticking with traditional office leases and looking to the landlords to provide (or at least allow for) these environments.
Some landlords are beginning to respond to these changing demands, while others are pushing back.
“In order to limit the number of employees in the building, many landlords in the CBD [and in some suburban properties] have tried to implement density clauses, which is proving to be problematic for many tenants,” says AQUILA tenant representation broker Max McDonald.
The reasoning behind the restrictions are understandable. Landlords are trying to limit the load on the building and its restrooms, elevators, HVAC, etc., as well as maintain appeal to traditional downtown tenants, like law firms and professional service firms.
Interestingly, these traditional tenants are, in many cases, getting priced out of the downtown submarket.
New, denser tenants are reducing their price per employee with efficient office space design, and, in fact, AQUILA Principal Kristi Svec Simmons predicts that “landlords who understand and are willing to give the density could potentially get a slight rate premium.”
This premium may be enough to incentivize hesitant landlords to remove density restrictions in the coming years.
Read more about how office density trends are impacting office design in our article How Office Density Trends Impact Commercial Building Design.
3. New On-Site Amenities for Today’s Tenant
On the other hand, many landlords are working to entice today’s tenants with new, innovative on-site amenities.
Particularly “landlords that may not have the abundance of walkable retail are attempting to bring the services to the building, like Fooda, an office lunch service,” says Wilhite.
“The idea of pop up retail is hugely popular and I see that happening more and more,” agrees Svec Simmons. “Concepts like Fooda will become increasingly popular as people/tenants want things quick. They don’t have a 1.5 hour block for lunch.”
4. Higher TI Allowances or More Spec Space
Tenant improvement (TI) allowances will be another interesting area to watch as we move into 2019. With construction booming in Austin and many tenants opting to move into brand new space, these allowances will be an important factor during lease negotiations.
However, we may see some changes in TI allowances moving forward. Miles T Whitten, Senior Associate on AQUILA’s project management team, says “rising construction costs are impacting what TI allowances will cover. If landlords are going to ask for higher rents, I think they’re going to have to compensate with higher TI packages.”
On the other hand, AQUILA tenant representation agent Max McDonald foresees landlords taking initiative and creating more spec suite options for tenants in Austin’s fast paced market.
“Tenants (just like most consumers) seek instant gratification. With the lengthy construction timelines and high costs to build out space, I would look to more landlords to take on the risk of building out spec suites in order to offer tenants the ability to to move in on a shorter timeline,” says McDonald.
5. Last Mile Expansion
In the world of Amazon and same day shipping, there is a quickly-increasing need for industrial space. While Austin has historically not been as involved in the industrial market as Houston or Dallas, the addition of major corporations like Amazon and Apple have vastly increased demand.
“The continued growth of the eCommerce business in the industrial sector is driving an increased need for ‘Last Mile’ facilities in industrial markets like Austin,” says Leigh Ellis, AQUILA Principal and industrial specialist. “You will start to see more two to three story warehouses in heavily populated areas with limited infill land like New York, San Francisco, Los Angeles to provide ‘Last Mile’ distribution.”
Austin’s location in the Texas Triangle and the city’s booming population makes it a prime location for these eCommerce businesses to house their goods, so be on the lookout for more industrial construction down the road.
6. Property Taxes & Operating Expenses
Perhaps not unexpectedly, the continued increase in property taxes in Austin is another area of contention to keep an eye on in 2019. Landlords and tenants alike across all property types are impacted by property taxes, and most agree that these taxes are rising too high too quickly to be sustainable.
“High property taxes are adversely affecting both tenants and landlords,” says Jason Faludi, AQUILA Principal. “They’re driving operating expenses for retail tenants through the roof.”
Ellis concurs, saying “In regards to the industrial market, the operating expenses (read: property taxes) in Travis and Williamson County are getting out of hand and causing some of our larger tenants, like Calendar Club, to relocate to more affordable surrounding markets like New Braunfels, Schertz and San Antonio. With that will come huge chunks of vacancy that will need to be backfilled.”
On that same note, Ellis says “This will be of significance in the southeast market which is already losing one of its biggest leasing tenants, Travis Association for the Blind, to a build-to-suit purchase.”
It will be interesting to see whether tenants and landlords will have to continue struggling with this issue or if the taxing authorities will offer some relief in the future.
7. Continued Demand for Austin Office Space
If you have even had a passing glance at Austin over the last year, you know that the real estate market here is booming. Vacancy is low, rental rates are high and tenants from all over the country (and world) have started calling Austin home.
Large leases were the name of the game in 2018, and all indications point to that trend continuing in 2019. “Even without Amazon’s HQ2, West Coast tech giants (plus Indeed) have taken up the vast majority of new inventory and will have significantly larger effects on Austin’s economy over the next few years than anyone could have anticipated,” says Wilhite.
McDonald agrees, saying “it is really amazing how many large blocks of space have been pre-leased by big companies. The demand for Austin is still there!”
As projects like the Army Futures Command and Apple’s new Austin campus begin to attract more complimentary companies to the area, it stands to reason that this demand will only increase in the years to come.
8. New Office Markets
Taking a drive through East Austin today, you may be surprised at the number of cranes dotting the landscape. An area that was once primarily residential homes mixed in with Class B and C commercial properties now has multiple Class A projects underway that are commanding rental rates similar to that found in the CBD.
“The emergence of the Eastside as a viable, independent submarket, as validated by the creditworthiness of the tenants who signed leases there (including HEB/Favor, Google and GoDaddy) is in my mind most impactful,” says Wilhite. “Nearly all of the new product on the office and retail fronts have been leased, so once the multifamily and hotels stabilize, the submarket will be activated around the clock.”
Due to recent legislation, other areas of Austin not traditionally seen as office hotspots could soon begin seeing similar development as well.
“The Opportunity Zone legislation and what this means for development over next 10 years will be an interesting trend to watch,” says Whitten. “Particularly, which areas of Austin could be as-yet-unknown diamonds in the rough, maybe even the next Domain, Eastside or East Riverside.”
9. Earlier Leasing Process
In a competitive real estate market like Austin’s, it becomes vital for tenants to lock down space as early as possible. Pre-leasing has become a common occurrence for tenants in Austin, especially those looking for large amounts of space. Major tenants like Facebook, Amazon and Google have all pre-leased in recent years, taking space before other tenants have a chance.
“As noted by Talledega Nights, ‘if you ain’t first [or the largest], you’re last.’ Tenants that make Austin, Austin were pushed aside for larger national tenants taking enormous blocks of space,” says Kristi Svec Simmons. “Landlords were able to lease buildings to tenants over 50,000 square feet, meaning they were not willing to demise to smaller spaces and accommodate smaller tenants, which is a first in the Austin market.”
This trend will be important to watch moving forward, especially if vacancy remains low and new developments continue to deliver with most of the space already accounted for.
Svec Simmons says “larger tenants will continue to have to look earlier and earlier as large blocks of space are few and far between,” and due to rental rates being at all time highs across the city, “we could see office tenants look at industrial or flex space, thus pushing up those rents.”
Because of this, our tenant rep brokers recommend tenants begin looking for space at least six to 24 months in advance of their requirement, depending on size.
To keep a beat on how the 2019 commercial real estate year progresses, be sure to subscribe to our Learning Center.
And for the latest insights into market trends and rates, download the latest copy of our Austin Office Market Report.
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