Summer 2017 CBRE TECH SERIES AUSTIN REAL ESTATE TRENDS

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1 Summer 2017 CBRE TECH SERIES AUSTIN REAL ESTATE TRENDS

Scott Senese Sr. Managing Director WELCOME Tech and Austin go hand in hand, so we are pleased to release the Summer 2017 Austin edition in CBRE s Tech Series.

Additionally, we cover the evolution of workplace strategy.

2 Scott Senese Sr. Managing Director WELCOME Tech and Austin go hand in hand, so we are pleased to release the Summer 2017 Austin edition in CBRE s Tech Series. This new real estate trends report provides thoughtful and succinct analysis on Austin office activity and the implications for tech firms today and in the future. Additionally, we cover the evolution of workplace strategy. CBRE continues to invest significantly in its research in terms of people, technology and resources to provide our clients with world-class insight into commercial real estate markets around the globe. This report leverages these research investments and places powerful information at your fingertips. While this report touches on the technology sector in Austin, CBRE offers insight and expertise in a variety of industries locally and around the globe. We invite you to reach out to our professionals at the local level to help you turn real estate into real advantage. Thank you. Scott Senese Senior Managing Director CBRE Austin Photo source: istock.

Why Austin? Austin has remained a beehive for innovation and cultural activities, which has continued to attract top talent in tech Ssource: istock. 27 44.

3 Why Austin? Austin has remained a beehive for innovation and cultural activities, which has continued to attract top talent in tech Ssource: istock % colleges and universities attained bachelor s degree or greater 4, % more than 4,000 patents were awarded to Austin area investors in 2016 population growth rate projected into , mobile food vendors craft breweries live music venues music-related festivals in Austin, including SXSW 2017 CBRE, Inc. 3

4 Austin Market Overview Investors and users in the office market demonstrate calm optimism despite softening market fundamentals ASKING RATES UP MARKET-WIDE Figure 1: Direct Vacancy / Gross Weighted Asking Rate Asking Rate ($/SF/Yr) Direct Vacancy (%) Source:, Q Gross Asking Rate (L) Direct Vacancy (R) The Austin office market ended the first half of 2017 with high occupier demand marking the 26th consecutive quarter of positive net absorption and tech tenants occupying 35% of the total office market. Although a slight uptick occurred during the first half of 2017, direct vacancy continued to hover under 10% for the fourth straight quarter, while a tightening supply of office space has driven up asking rates marketwide. As of Q2 2017, gross asking rates held steady at the historic high of $34.83 per square foot set in late Figure 2: Tech s Share of the Office Market by Sq. Ft. Occupied All Other Industries 66% Tech Companies 34% Source:, Q CBRE, Inc. 4

5 Fresh Ideas Happen Here Austin accounted for 30.8% of all patents granted to Texas inventors in 2016, up from 28.7% in CHIP DESIGN STILL A MAINSTAY OF AUSTIN S TECH STRENGTH With more than 36,000 utility patents for inventions awarded since 2000, Austin shines as an innovation hub. The majority of Austin s patent activity stems from advanced manufacturing and electronic chip design. IBM, which opened an engineering plant in Austin in 1967 and Dell, founded in Austin in 1984, continue to produce the largest individual shares of patent production. AMD, which opened its first Austin production facility in 1979, tapered off their production of patents reflective of their decreased market presence. Patents from individuals increased 19% from 2014 to Figure 3: Austin MSA Patents for Inventions 3,000 2,500 2,000 Patents Awarded 1,500 1, Source: U.S. Patent and Trademark Office, July IBM Dell AMD Freescale AT&T Individuals Total Patents 1 Austin Chamber of Commerce, Q Photo source: istock CBRE, Inc. 5

6 Demand Fuels Flight to Quality Asking rates, saturation in multiple submarkets may drive new development projects to east micro market THE CHANGING FACE OF AUSTIN Figure 4: New Construction Deliveries and Currently Under Construction MSF Under Construction Delivered Construction Source:, Q During the first half of 2017, developers delivered approximately 1.3 million square feet to the market, with an additional 1.9 million square feet under construction. Tech firms account for approximately 67% of all pre-leased space in Class A office buildings currently under construction primarily in Austin s hottest three office submarkets. As the CBD, Southwest, and Northwest office submarkets are saturated with occupier demand and asking rates continue their monumental climb, Austin s near east micromarket is poised to see the brunt of new development, with 19 proposed projects totalling 2.3 million square feet waiting to be kickstarted. Figure 5: Committed Pre-Lease by Tenant Industry (Class A, U/C) Business Services 4% Financial Services 5% Retail 10% Technology 76% Other 4% Source:, Q CBRE, Inc. 6

Austin Tech Transactions AVERAGE ANNUAL GROSS ASKING RENTS $29.32 per sq. ft. $37.47 per sq. ft. $42.88 per sq. ft. Class B Class A U/C Class A On average, landlords are asking $37.47/sq. ft./yr.

7 Austin Tech Transactions AVERAGE ANNUAL GROSS ASKING RENTS $29.32 per sq. ft. $37.47 per sq. ft. $42.88 per sq. ft. Class B Class A U/C Class A On average, landlords are asking $37.47/sq. ft./yr. for existing Class A office product compared to $42.88/sq. ft./yr. for Class A office product currently under construction as of Q On average, tech occupiers are paying $25/sq. ft./yr. for existing Class A space on a 5+ year deal. OPERATING EXPENSES For 5-10 year deals, tech companies are typically paying $12.89/sq. ft./yr. for operating expenses. TENANT IMPROVEMENT ALLOWANCES For 5-10 year deals, landlords are willing to contribute $20 (existing) to $60 (new construction) per sq. ft. on tenant improvement allowances for tech firms to build out office space. This is in excess of negotiated base building work. $20-60 per sq. ft. RENT ABATEMENT For 5-10 year deals, tech companies are typically receiving 4 months of gross free rent. 4 months Photo source: istock CBRE, Inc. 7

8 Austin a Co-Working Leader Downtown Austin was the pioneer market in Texas to welcome national co-working space operators Co-working space or shared working space emerged from the Great Recession as a choice office alternative among entrepreneurs, small businesses, and freelancers seeking to maintain a flexible work-life balance free of the financial obligations of traditional office leases. Regus remains supreme; however, modern co-working providers are gaining steam with multiple expansions in the books. With the expansive growth of 70 co-working providers in recent years, the 700,000 sq. ft. of shared space on the market is available to the local startup economy which has attracted $8.1 billion since Q CO-WORKING OPPORTUNITIES CONTINUE TO EXPAND IN THE MARKET Figure 8: Largest Co-working Providers by Square Footage Occupied Market-Wide 264,955 sq. ft. 16 locations 56,703 sq. ft. 1 location 27,000 sq. ft. 1 location 23,592 sq. ft. 1 location 165,382 sq. ft. 3 locations Source:, Q ,740 sq. ft. 2 locations 19,000 sq. ft., 1 location 1,663 sq. ft., 1 location 2017 CBRE, Inc. 8

Austin s incubator climate Tech opportunities continue to drive venture capital momentum in Austin VC INVESTMENTS HAVE ECLIPSED $8 BILLION Austin has developed a reputation for startup activity due

9 Austin s incubator climate Tech opportunities continue to drive venture capital momentum in Austin VC INVESTMENTS HAVE ECLIPSED $8 BILLION Austin has developed a reputation for startup activity due to its warm business climate and stout talent attraction. Co-working space has contributed to the growth of Austin s startup activity by allowing small operations space to grow their businesses free from the financial obligations of traditional office leases. Figure 9: Historical Venture Capital Funding for the Austin MSA Investment ($M) $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $ Q Q Q Q Q Q Q Q Q Q Q Q Source: PwC MoneyTree Report, Q Investment (L) Deals (R ) Photo source: CBRE CBRE, Inc. 9

10 A City of Problem-Solvers WHO MAKES UP THE CREATIVE CLASS? Pivotal to Austin s success has been its attraction of creative human capital. The source of much attention over the last decade, the creative class engages in innovative problem-solving, creating meaningful new solutions that are often transferable on a larger scale. As such, these creative professionals are employed in knowledge-rich industries requiring a high degree of formal education, from software engineers to writers and physicians to musicians. Figure 10: Austin s Creative Class Techies, Artists, Sales Professionals, Scientists, etc. Employees (#) 120, ,000 80,000 60,000 40,000 20,000 0 Management Sales Mgmt. Education/Training/Library Source: Bureau of Labor Statistics and ESRI, Q Business/Financial Operations Computer/Mathematical Healthcare Practitioner/Technician Architecture/Engineering Arts/Design/Entertainment/Sports/Media Legal Life/Physical/Social Science STACKING UP WELL AGAINST THE NATION Figure 11: Tech Talent Ranking Score San Francisco Seattle New York Washington, D.C. Atlanta Toronto Raleigh-Durham Austin Boston Dallas/Ft. Worth Source:, Scoring Tech Talent, Q CBRE, Inc. 10

11 Tech Labor Hotspots The top 100 tech companies in Austin employ a labor pool of 90,616 employees, which is 8% of the total employed workforce. Figure 12: Top 100 Tech Companies by Number Employed Austin Submarket Breakdown ROUND ROCK FAR NORTHWEST 14,512 Employees 8,950 Employees NORTHWEST 17,766 Employees NORTH CENTRAL SOUTHWEST CBD 10,646 Employees EAST 15,149 Employees 8,391 Employees SOUTH 2,635 Employees 12,567 Employees Source: Austin Business Journal, CBRE, Inc. 11

Changing the Way Tech Works According to CBRE s 2017 Americas Occupier Survey Report, 67% of the companies surveyed said they measured the success of their workplace strategy program by employee

12 Changing the Way Tech Works According to CBRE s 2017 Americas Occupier Survey Report, 67% of the companies surveyed said they measured the success of their workplace strategy program by employee satisfaction. Today s successful tech occupiers prioritize workplace strategies that foster community and drive employee value, while catering to a diversifying workforce. WHAT ARE THE MAIN DRIVERS OF AN ORGANIZATION S WORKPLACE STRATEGY APPROACH? 55% 53% 40% TALENT ATTRACTION AND RETENTION PROMOTE COLLABORATION OPERATING EXPENSE SAVINGS The workplace can be a benefit to employees that differentiates you from the competition. Source: CBRE Americas Occupier Survey Report, The workplace can act as a catalyst for drawing people back into the office voluntarily. The workplace can achieve real estate savings to be reinvested into enhanced technology and offerings. WHAT IS MOST IMPORTANT TO YOUR LABOR FORCE? 64% 47% 45% 41% 37% 25% 9% Amenities Flex Workspace Source: CBRE Americas Occupier Survey Report, Flex Working Public transportation Indoor environment quality Connectivity Sustainability It s not just about shiny office commodities anymore. Employees are being siphoned away by the competition due to involvement in valuable projects, access to amenities, and convenient concierge services making life easier. Photo source: CBRE. CBRE Senior Vice President, Advisory & Transaction Services Occupier 2017 CBRE, Inc. 12

13 FUTURE TRENDS IN THE TECH WORKPLACE Service is the new amenity. CBRE First Vice President, Advisory & Transaction Services Occupier The needs of the current tech workforce are changing as many are buying homes and building young families. The following are potential trends developing in the recruiting landscape for workspaces to retain top talent: Refocus from amenity one-upmanship to amenity access Cater to the young family life-stage by providing convenience services making the office the best place to get work done Drive employee loyalty through eventbased branding and the commercialization of products Adaptable space catering to occupational preferences creating hackable workspaces that enhance visibility while preserving focused workstations for traditional work styles Centralizing a heart center to promote collaboration and integrate social space Create a sense of belonging Work and client events held in highest visible space Investing in the right amount of space Taking back the best real estate for communal spaces Figure 13: Current vs. Desired Amenities In The Workplace 45% 40% Over-Provided Amenities Cafeteria Coffee Bar 35% Provided by Employers 30% 25% 20% 15% 10% 5% Bike Racks Dry Cleaning Deliveries On-Site Convenience Store Game Room Day Care Showers Green Space Wellness Facilities Rest Areas Under-Provided Amenities 0% 5% 10% 15% 20% Source: CBRE Live-Work-Play Survey, % 30% 35% 40% 45% Wanted by Millennials Photo source: CBRE.

Sublease Space Rising TECH TENANTS RETURNING THE MOST SQUARE FOOTAGE Figure 6: Sublease Space by Submarket North Central 68,816 SF available 8 spaces Northwest 442,404 SF available 57 spaces CBD

Retail 5% All Other Industries 10% Southwest 441,108 SF available 48 spaces Business Services 6% Creative Industries 7% Financial Services 9% Source:, Q1 2017. Photo source: istock.

14 Sublease Space Rising TECH TENANTS RETURNING THE MOST SQUARE FOOTAGE Figure 6: Sublease Space by Submarket North Central 68,816 SF available 8 spaces Northwest 442,404 SF available 57 spaces CBD 225,776 SF available 40 spaces East 44,036 SF available 5 spaces South Far Northwest 116,506 SF available 13 spaces Figure 7: Total Available Sublease Space by Tenant Industry Energy 3% Legal 3% Retail 5% All Other Industries 10% Southwest 441,108 SF available 48 spaces Business Services 6% Creative Industries 7% Financial Services 9% Source:, Q Photo source: istock. Health Care 14% Technology 44% Available sublease space in Austin totaled nearly 1.3 million sq. ft. market-wide, up approximately 400,000 sq. ft. from Q Tech firms account for approximately 556,000 sq. ft. of available sublease space currently on the market. Larger subleases compete with one another offering reduced rates and funded tenant improvement allowances, while smaller subleases are seeing less frequent viewing activity CBRE, Inc. 14

15 Build Out Costs With 1.9 million sq. ft. under construction and delivered construction hitting a three-year high in 2017, firms will need finish-out assistance CURRENT AVERAGE TECH FIRM PROJECT COSTS IN AUSTIN Construction $ $129.00/RSF Median cost: $89.00/RSF Furniture Workstation Product: $25.00/RSF Ancillary Furniture: additional $10.00/RSF Design/ Engineering Architecture Median: $3.50/RSF Engineering Median: $1.25/RSF Moving/ Contingency With move coordinator: $3.65/RSF Without: $3.00/RSF Consulting $2.00/RSF $6.00/RSF Median: $4.00/RSF Photo source: CBRE.

PERCENTAGE OF PROJECT COSTS IMPACTING TECH FIRMS 50% FIRST GENERATION SPACE 42% FIRST GENERATION SPACE 45% REMODEL VERTICAL SPACE: Millwork Hardware Acoustic Tile Glass & Glazing Audio Visual

16 PERCENTAGE OF PROJECT COSTS IMPACTING TECH FIRMS 50% FIRST GENERATION SPACE 42% FIRST GENERATION SPACE 45% REMODEL VERTICAL SPACE: Millwork Hardware Acoustic Tile Glass & Glazing Audio Visual Painting and Wallcoverings Partitions Kitchen Equipment Washroom Accessories Elevators Drywall Signage Photo source: CBRE. 8% FIRST GENERATION SPACE 10% REMODEL HORIZONTAL SPACE: Concrete Latexing Terrazzo Ceramic Tile Stone Carpet Wood Flooring Access Flooring 45% REMODEL ABOVE THE CEILING: Fire Protection Plumbing Communications Security Occupancy Sensors HVAC Electrical WIFI Distributed Antenna System

FOR MORE INFORMATION, PLEASE CONTACT: Robert C. Kramp Director of Research & Analysis Texas-Oklahoma Division +1 713 577 1715 robert.kramp@cbre.

17 FOR MORE INFORMATION, PLEASE CONTACT: Robert C. Kramp Director of Research & Analysis Texas-Oklahoma Division Follow Robert on Erin Morales Senior Vice President Tech Media Practice Group John Gump Senior Vice President Kelly Woodruff Senior Associate Luke Goebel Research Coordinator Alan Halter Research Data Analyst Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE. CBRE and the CBRE logo are service marks of CBRE, Inc. and/or its affiliated or related companies in the United States and other countries. All other marks displayed on this document are the property of their respective owners. Cover Photo Source: CBRE. Back Page Photo Source: SkyCam Photography.

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