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Austin office space absorption signals rise

Premium content from Austin Business Journal by Cody Lyon , ABJ Staff

Date: Friday, May 13, 2011, 5:00am CDT – Last Modified: Thursday, May 12, 2011, 3:16pm CDT

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Last September, Vcfo Holdings Inc. went shopping for a new home, having outgrown its 4,000-square-foot headquarters on Spicewood Springs Road in Northwest Austin. In June, Vcfo will move its 65 employees into 7,000 square feet on the second floor of Northpointe Center One at 6836 Austin Center Blvd.

The increased space and option for more if the company continues to grow during the next five years were perhaps the chief concerns for CEO Ellen Wood.

“I think we were, and are, at an inflection point, and for us, there was a window of opportunity to secure a pretty attractive facility,” Wood said.

Wood has had plenty of company lately when it comes to seeking new space. It also appears such opportunities to find it may be dwindling, and that increased absorption of office space may be restoring some pricing power to landlords.

In the first quarter 2011, there were 245,427 square feet of positive direct office absorption, according to Austin’s Oxford Commercial Real Estate. That’s the highest quarterly positive absorption since the fourth quarter 2008. Much of that space, 191,198 square feet, was taken by big deals in the far northwest sector, which, at just over 12.4 million square feet, has the largest stock of office space in the city.

As the market tightens, even in softer spots like the far northwest, the likelihood of obtaining sweet deals from landlords will shrink with it.

“I think our rents have bottomed, but that hole was deep,” said Walter Jenkins, associate managing director at Integra Realty Resources Inc.

While Jenkins said rents have dropped 15 to 20 percent at a number of properties, making it difficult in some cases for owners to cover monthly expenses, some in the industry agree that’s changing.

“It feels like the market has turned, or at least, is turning,” said Chad Marsh, managing principal at Endeavor Real Estate Group    .

Some are saying blue skies are on the horizon for city landlords. And for tenants, they say it’s time to start planning, especially because Austin is a hot spot.

“Tenants need to evaluate their real estate needs now to mitigate paying inflated lease rates [on the way],” said Nathan Smith, owner of Austin Tenant Advisors    .

A 2011 national office market report by Marcus & Millichap Real Estate Investment Services Inc.    called Austin the healthiest job market in the country.

Dave Porter, senior vice president of economic development with the Austin Chamber of Commerce    , said the chamber has reached out to several companies that are aware of Austin. He said the most popular areas those companies trend toward are downtown and the northwest and southwest sectors. Typically, businesses looking need 10,000 to a few hundred thousand square feet.

Of the 120 projects the chambers is tracking, about 50 percent can be expected to take action, he said.

Right now, real estate agents have a variety of product to show clients, but there are fewer choices downtown, the most expensive sector, and prices there are already rising. Oxford Commercial said the average rental rate for Class A space downtown is $37.39 per square foot, compared with $25.01 per square foot in the far northwest.

Downtown has Austin’s “nicest Class A buildings,” Jenkins said, adding that it “has a wider range of product than any place.”

At the same time, others worry downtown space is becoming increasingly scarce. There are only four buildings downtown that can currently offer a 25,000-square-foot or greater continuous floor plan in downtown, according to experts from CB Richard Ellis Group Inc.

The downtown market is tight as a result, said Will Douglas, a senior associate at CB Richard Ellis.

Douglas and Jerry Frey, a senior vice president at CB Richard Ellis, said existing tenants have been asking about future expansion options, including curiosity about the proposed redevelopment at the Green water treatment plant site downtown.

Meanwhile, Marsh at Endeavor thinks downtown has become much stronger and energetic. “The area has become more exciting and, with all the condominiums and new apartments, continues to transform into a 24-hour community.”

He also said The Domain, the Arboretum and the Hill Country Galleria    — a property that experienced foreclosure — have seen absorption in the office sector.

Despite Austin’s presence on international investors’ radar screens, it’s unlikely Austin will see significant office construction in the near future unless there is an uptick in rent, Jenkins said.

“I wouldn’t expect to see any appreciable amount of construction through the end of 2012,” he said, although he said the dynamics could be more positive in cases where a developer already owns land. “If the numbers don’t work, it’s not going to happen

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Written by codylyonreporter

January 28, 2012 at 1:08 am

Posted in Uncategorized

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