The Austin market is appreciating rapidly. Rates are approaching 6 year highs with more increases on the horizon. The tenant friendly environment we enjoyed in the wake of the tech bust is but a distant memory now. Landlords are back in the driver seat.

 

The office market had a very healthy absorption of vacant space in 2006 but the latest round of rate increases doesn't seem to be driven by  basic  supply and demand economics.  A couple of potential explanations: 

 

(1) Several large portfolios of office buildings have changed hands at record sale prices with new owners looking to achieve "forecasted income" for their investments. Office buildings are sold based on the current income of the property but in a rising market, more emphasis is put on the anticipated future rental rates and values. Big investors are placing big bets that Austin will see California-like appreciation in the future. Several new building owners raised their quoted rental rates several dollars immediately after the office sale was complete.  These high sales prices also increase each building's tax basis, therefore increasing operating expenses (another component of rent) as well. 

 

(2) Development and construction costs have gone through the roof. In the wake of Katrina & Rita building materials are more expensive than ever, plus contractors seem to be in short supply and are often "too busy" to even bid on some of the smaller jobs. This abundance of work is not helping Austin landlords get very competitive pricing on office finish-out jobs. All of this is making new buildings just plain expensive!

 

(3) Austin is a relatively small office market with just a few landlords holding most of the Class A office product. When one major landlord decides to press rates higher, that means they are moving a large chunk of the market all at once (8+ buildings at the same time). When other large landlords follow suit with similar increases, the market has moved. It will probably take a sizable slip in occupancy for this upward trend in rates to be reversed.

 

We believe the Austin market will continue to trend upward through the end of 2008. Economists have predicted a recession on the horizon and many predict it may hit in early 2009, but that crystal ball is always cloudy. Texas tends to be more resilient than the rest of the U.S. in recessionary times so we are cautiously optimistic that Austin real estate market will not be hit too hard. We believe that Austin has been officially "discovered" by companies and workers outside of Texas. Our hope is that the amazing lifestyle we enjoy here will continue to attract growth to Austin but hopefully it will remain an affordable place to do business too.

 

The biggest question in the minds of the Austin commercial real estate community right now is how new construction will effect rates. Many big office projects are scheduled to be completed in the next few years. It will be interesting to see how many of those projects actually make it out of the ground.