We’ve all heard the saying: The first three rules of real estate are Location, Location, Location. But what sets one building apart from its peers if location is equal? When marketing properties, brokers often highlight sexy on-site amenities.
But do these amenities actually drive higher rental rates?
To form our analysis, we looked at asking rental rates to analyze how much more, on average, landlords ask for specific amenities. To control for the location factor, we analyzed each of Austin’s six primary micromarkets individually. By looking at competitive set buildings1 only, we hoped to compare only buildings that would compete with one another in their respective markets. While this does not completely control for factors such as the age of the buildings or the quality of their finish-outs, it is valuable in determining what a tenant in the market will likely see on a survey of potential properties.
Because submarkets in Austin are so different from one another, we started by looking at each one individually and determined how valuable amenities are in each area. To do this, we selected a set of six amenities (fitness center, food services, outdoor amenities, environmental certification, conferencing facility and on-site management) that are well-tracked and easily defined for the competitive set of properties and counted the number of amenities each property has marketed. We then took the average asking rental rate of the buildings with the corresponding number of amenities. Our findings tell three different stories depending on where you look:
|Asking Base Rental Rate by Submarket and Number of Amenities
|# of Amenities/Submarket||0||1||2||3||4||5||6|
In downtown Austin, buildings with a full suite of all six amenities only ask an average of $1.43/sf more than those with only three amenities. This is because the types of tenants looking for space here are primarily using the location, surrounding amenities and spaces’ finish-outs to recruit and retain talent. In an area where dozens of off-site lunch or work-out options are only blocks away from your office, the return of utilizing valuable square footage on-site is marginal when compared to suburban options. Several decades ago when downtown Austin was primarily a hub of government, legal and financial institutions this might not have been the case. Now, however, the revitalizations of the Seaholm, 2nd Street, West 6th and Rainey districts have attracted a more tech-heavy tenant mix looking to recruit the young talent that is drawn to the experience that downtown Austin offers.
Tenants looking to office in Northwest Austin are typically looking to squeeze the most value out of their space as possible, making rental rates more of a decision-driving factor here than in other areas. With a difference of only $0.73/sf in asking rates between buildings with five amenities and none at all, it seems that landlords feel that they have little reason to add amenities to their buildings. In fact, only one building in the Northwest submarket, UFCU Plaza, has all six amenities tracked, compared to five in the Southwest and five in the CBD.
Northwest office users are typically denser with more back-office, customer care and hourly employees when compared to other areas of the city. Therefore, these users are not as apt to utilize their spaces to recruit and retain talent, making amenities less of a determining factor when selecting office space.
The Southwest markets benefit the most from additional amenities, showing a steady positive trend in asking rental rates as more amenities are added, with the five properties offering all six amenities asking a staggering $6.23/ sf more on average. Much like in the CBD, employees in the Southwest are high-producing, high-profile salaried employees. Employers in the Southwest are often competing with those in the CBD for the same talent, so they are looking to use their space to recruit the top talent and reduce turnover. Because there are fewer experiences organically built into the surrounding areas, office properties in the Southwest use these bundles of on-site amenities to drive rents more than any other submarket.
After determining where amenities matter most, we decided to take a deeper dive into which amenities fetch higher prices than others.
To drill down on where different amenities have the greatest impact, we selected four amenities that are oft-touted on properties’ marketing flyers: fitness center, food services, outdoor amenity and environmental certification. Next, we found the difference in asking base rental rates between properties that do and do not have each amenity.
The analysis resulted in the table below, where the darker shaded cell indicates a higher average asking rental rate based on the amenity in each micromarket. The numbers in white indicate a nominal or negative impact on asking rental rates. The values in parenthesis represent the percentage of buildings that have the corresponding amenity.
|Asking Base Rental Rate by Micromarket and Type of Amenity
|Fitness Center||Food Services||Outdoor Amenities||Environmental Certification|
|Citywide||$0.38 (50%)||$2.74 (36%)||$2.45 (64%)||$3.00 (35%)|
|CBD||$1.27 (50%)||$1.04 (71%)||$0.52 (96%)||$2.07 (54%)|
|Arboretum||-$0.30 (30%)||$1.61 (16%)||$0.93 (30%)||$1.81 (30%)|
|Shepherd Mountain||$1.09 (59%)||-$0.38 (44%)||-$0.20 (74%)||-$2.62 (29%)|
|Far Northwest||-$0.46 (69%)||-$2.42 (31%)||$0.20 (59%)||$2.91 (4%)|
|Far Southwest||$1.99 (50%)||$2.50 (28%)||$2.02 (60%)||$1.74 (29%)|
|Near Southwest||$3.01 (44%)||$2.47 (36%)||$1.86 (88%)||$1.46 (52%)|
This analysis uncovered some interesting trends, so we’ve broken it down by amenity for you:
Citywide, roughly 50% of buildings have fitness centers on-site. These fetch an average asking rate of only $0.26 more than those that do not – the lowest delta of any of the amenities we studied when looking at Austin as a whole. When analyzing each micromarket individually, however, some stronger trends emerge.
For instance, properties in the Far Southwest and Near Southwest that have on-site fitness centers fetch substantially higher rental rates than those that do not – almost $2 and $3 per square foot respectively. Perhaps this can be explained by the fact that there are more limited workout options within close driving or walking distances to these properties when compared to the Northwest and downtown areas.
With half of the competitive set buildings downtown offering on-site fitness facilities, these buildings ask, on average, $1.27 higher rental rate than those that don’t. Surprisingly, several of the newer downtown buildings do not offer fitness facilities on-site, including 5th + Colorado, 501 Congress, IBC Bank Plaza and Shoal Creek Walk. Here, where space is limited, the missed income from adding a gym may not be worth the marginal benefit, which is why you will find fitness facilities in 75% of downtown buildings over 200,000 sf and only one in a building smaller than 200,000 sf (which happens to be the Gold’s Gym in Littlefield Building).
On-site food services, which include cafés, food trucks and restaurants, are among the most impactful amenities in the city, with properties that offer food services asking on average $2.65/sf more than those that don’t.
Once again, buildings in the Southwest micromarkets capture the highest rate differentials – about $2.50/sf – for this amenity. This makes sense as the relative isolation of buildings in this area make lunch trips much more timeconsuming if employees are not able to simply walk downstairs to grab a bite to eat. With only a handful of primary arteries in the Southwest, traveling for lunch is more cumbersome than elsewhere in the city, making on-site food services command a higher premium in the Southwest than they do in other submarkets.
One of the things that makes Austin such a unique place is the active lifestyle that so many Austinites enjoy. This, coupled with some of the most scenic landscapes in Texas and generally enjoyable weather, creates a high demand for outdoor spaces to be enjoyed by office tenants. These outdoor amenities include direct access to walking/biking trails, courtyards and sand volleyball/basketball courts – anything that provides users an opportunity to enjoy the surrounding nature. It is not surprising then, that buildings offering at least one outdoor amenity are able to ask, on average, $2.54/sf more in rental rates.
At the risk of sounding like a broken record, properties in the two Southwest micromarkets are the biggest beneficiaries of added outdoor amenities in terms of asking rental rates. This is not surprising, as employers and employees located in this area of Austin often want to take advantage of the beautiful Texas Hill Country.
While few projects in the Northwest offer outdoor amenities, there is generally less room for outdoor spaces and fewer scenic trails directly outside the offices. This is due to the higher density of both residential and commercial properties, as well as fewer impervious cover limitations in the area. Only 48% of the buildings in the Northwest submarket boast any kind of outdoor amenity while 69% of Southwest competitive set properties offer some sort of amenity for employees to hang around outside their office. Coinciding with the lack of on-site food services (26%), fewer outdoor amenities points to the trend of office buildings in the Northwest generally providing fewer comforts that entice employees to remain on-site for as long as possible.
When looking at buildings in the CBD, it may be surprising that 96% of properties offer an outdoor amenity. This is because all but one property is considered to be within walking distance to the Lady Bird Lake Hike and Bike trails, thereby skewing the data. It is worth noting, however, that this is an amenity that is taken full advantage of, as you can find hundreds of downtown employees exercising after a day’s work to let the traffic on MoPac and I-35 die down before heading home
Austin is commonly thought of as an environmentally conscious city, so a building’s environmental certifications, which can include LEED or Energy Star certifications, can play an important role when tenants are weighing their office options. However, it does not make sense to solely attribute the difference in rental rates to tenants’ preferences, as the certified buildings are typically newer, nicer, sleeker-designed buildings that tenants generally find more attractive. With LEED and Energy Star building certifications becoming more commonplace over the past decade, one-third of the rentable area delivered in our competitive set of buildings over the last ten years comes with at least one of these certifications.
With that said, environmental certification is not a building feature that should be thrown out. The difference in environmentally certified buildings versus those that aren’t see the highest difference in asking rental rates than any other amenity, fetching an average of $3.00/sf more. While the costs and regulations of constructing environmentally friendly buildings may come as a headache for landlords, the average occupancy rate of green buildings has stayed on par with the market average, showing that the higher rental rate needed to justify the increased costs is achievable.
What This Means for Landlords
Know your competitive set. When determining where your property fits into the market, know what buildings yours will be competing with, and know what amenities they have to offer. If comparable buildings are not offering an amenity that you would like to add, it is vital to understand why. Maybe it’s because tenants in the area do not demand it; or maybe they do but a new building hasn’t offered it yet, so there is opportunity to be had there.
Work with a broker who knows the position of your project in the marketplace and who can communicate openly with tenant representation brokers, as they can discuss tenants’ preferences before you get far along in the development or repositioning process. While being the only building in an area with a certain amenity might seem like a cool idea, make sure you fully understand the market dynamics – from demographics to retail spaces – that could support the opportunity costs involved with implementing a full bundle of amenities. There is a lot more that comes into play than amenities when tenants select an office space, such as accessibility, design, nearby tenants, traffic and, of course, location.
What This Means for Tenants
Understanding how amenities factor into asking rental rates can provide leverage during the negotiation process. If a landlord is trying to push that their buildings has a fitness center and therefore justifies a higher rental rate, for example, use the fact that there are three gyms within a five-minute drive that your employees would be just as likely to use. Hiring a broker that understands market dynamics such as these will help you get the best deal possible. Have your priorities well-established before looking for a new space, otherwise you might get swooned by an expensive building feature that you really do not need.
Dive deeper into this topic in our free whitepaper Do Austin Office Buildings with More Amenities Capture Higher Rental Rates?