Research. The Growing Influence of Technology in Austin AUSTIN 2Q16 OFFICE MARKET. Current Conditions

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Georgiana Young
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The Growing Influence of Technology in Demand for office space in technology-centric markets is robust, vacancies are low and rents are rapidly climbing.

1 The Growing Influence of Technology in Demand for office space in technology-centric markets is robust, vacancies are low and rents are rapidly climbing. The computer, semiconductor and electrical component industries may be tied to s past, but the city is well-positioned to benefit from the rapid technological evolution of the present day. This dynamic city offers an enterprise-friendly environment, entrepreneurial focus and a unique culture that welcomes innovation and creative possibility. Over time, this blend has transformed a local economy once dominated by government and education into a diversified, $115 billion economy with strong ties to the technology sector. Today, technology represents approximately 17% of the economy and 13% of the jobs in. The impending launch of the Dell Medical School at The University of Texas at will strengthen the city s position as a national destination for life science and biotech innovation. Silicon Hills is Rapidly Becoming the Location of Choice As real estate and human capital become increasingly expensive in toptier technology markets like Silicon Valley, New York and Boston, companies are searching new markets for expansion opportunities. With a deep talent pool, access to venture capital and leading-edge ideas driving innovation, has risen to the top as a viable option. Nearly 75% of corporate relocations and expansions in 2015 and 2016 (to date) involved technology companies. The venture capital flows into area companies suggest the current technology cycle has yet to slow down. is Operating above Full Employment The people of benefit from low unemployment and robust employment growth. added 38,300 new jobs in the year ending April 2016, which represents a 4.0% expansion of the employment base. As a result, the local unemployment rate dipped below 3.0% for the first time since 2000, and the average hourly earnings for private-sector employees increased 2.5% year-over-year, according to data from the U.S. Bureau of Labor Statistics. By industry, trade/transportation/utilities added 9,100 new jobs, closely followed by professional/business services (7,300) and leisure/hospitality (6,900). Office Fundamentals Turning to the office market, despite the long-term structural story of healthy demand and limited construction, the office market suffered a disappointing second quarter of 2016, which saw the end to a streak of 14 consecutive quarters of positive absorption. Net move-outs during second-quarter 2016 resulted in negative overall absorption of 314,021 square feet and an uptick in vacancy. Impacting the quarterly performance was softness in the North submarket, but this softness can be described as constrained and limited to one-time events. Specifically, IBM moved out of its Broadmoor campus located at Burnet Road, Current Conditions Construction activity was limited with 1.2 million square feet underway, representing a modest 2.0% expansion of the existing inventory base once completed. Net absorption turned negative in second quarter. This snapped a streak of 14 consecutive quarters of positive absorption. The overall vacancy rate stood at 10.7%, the lowest among the three major Texas metros. Market Analysis Asking Rent and Vacancy $34 $32 $30 $28 $26 $24 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 Net Absorption Square Feet, Millions Q11 2Q12 2Q13 2Q14 2Q15 2Q16 Market Summary Average Asking Rent (Price/SF) Vacancy (%) Current Quarter Prior Quarter Year Ago Period % 12 Month Forecast Total Inventory (SF) 57.7 M 57.6 M 55.8 M Vacancy Rate 10.7% 10.0% 11. Net Absorption (SF) -314, , ,327 Average Asking Rent $32.13 $32.13 $30.89 Under Construction 1,172,991 1,287,195 2,573,950 Deliveries 114, , ,634

2 resulting in 144,818 square feet of negative absorption. Brandywine purchased IBM Corporation s 50.0% interest in the seven-building campus in 2015 and is moving forward with a mixed-use master plan to develop 66 acres of land. In another significant move, Houghton Mifflin Harcourt moved out of roughly 200,000 square feet of office space at North MoPac Expressway, as the company downsized into its new office space in Round Rock. In the end, for the city that tops Forbes list of America s Next Boom Towns, one quarter does not constitute a trend, and the office market is expected to pick up steam in the second half of 2016, as the multiyear growth cycle continues. Vacancy Decline Hits the Pause Button After hovering around 10% for three consecutive quarters, vacancy at the end of the second quarter stood at 10.7%, 30 basis points higher than in first-quarter 2016 but lower than the 11. vacancy recorded at this time last year. The longer-term downward trend appears intact, as the metro enjoys a multiyear growth cycle with limited new supply. Two submarkets recorded vacancy below : the Central Business District (6.) and Central/West Central (7.1%). Moving forward, NGKF expects vacancy will dip below 9.0% in the next two years. Rent Growth Flatlines for at Least One Quarter Asking rents, which had been on a tear in, took a breather in second-quarter However, it is important to note, the slowdown is not expected to last long. The average asking rent stood at $32.13/SF at the end of the second quarter. That tally was flat quarter-over-quarter, but up 4.0% from one year ago. By comparison, rents increased 9.7% in 2015 and 4.1% in By submarket, the CBD remains the most expensive area of town, as average rents shot up to $43.79/SF, a 6.5% increase from the same time last year. Meanwhile, the suburban areas offer some reprieve, with rents at $30.26/SF, although the gap could soon shrink. For example, the North submarket saw the average asking rent climb 18. to $32.53/SF, and Southeast recorded an above-average gain of 7.3% to $29.80/SF. By property classification, a $10.14/SF spread exists between Class A and Class B rents, which is higher than the historical $8.00/SF norm. This would suggest that tenants demand prime space as a method to attract and retain the best talent. Moving forward, asking rents will continue to climb, based on healthy fundamentals and continued strength within the technology sector. Expect asking rents to increase by 7.1%, 5.7% and 4.5% in 2016, 2017 and 2018, respectively. Lease/User Transactions Tenant Building Submarket Type Square Feet Trend Micro Alterra Parkway North/Domain Direct/New 74,804 State of Texas 7701 Metropolis Southeast Direct/New 24,000 Telogis Braker Pointe III North/Domain Direct/New 29,220 Deloitte 1101 S Capital of Texas Hwy Southwest Direct/New 13,607 Deloitte 7700 W Parmer Land Far Northwest Direct/New 13,153 Select Sales Transactions Building Submarket Sale Price Price/SF Square Feet Plaza on the Lake I & II* Southwest $37.6M $ ,561 Lakewood On The Park B&C* Northwest $32.1M $ , Congress* CBD $18.4M $ , Shoal Creek Blvd. Central $305K $ , South Interstate 35* Northwest $2.8M $ ,866 * Loan amount, Real Capital Analytics 2

3 Submarket Statistics Total Under Total Qtr YTD Direct Sublet Total Total reflects Class A/B/C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF) CBD Total 10,608, , ,444 20,567 $44.33 $39.08 $43.79 Class A 7,119, , % 20,792 84,005 $45.83 $40.02 $45.38 Class B 2,802, % -28,225-63,896 $37.15 $37.45 $37.20 Cedar Park/Georgetown/ Round Rock 1,765, , % -2,586-1,224 $26.34 $25.38 $26.34 Class A 888,704 24, % -2,480-6,897 $26.40 $25.87 $26.44 Class B 697, , ,673 $26.11 $22.00 $25.95 Central/West Central 4,391,577 46, % 80, ,832 $26.71 $30.28 $27.21 Class A 1,112,043 46, % 74, ,333 $34.73 $41.98 $36.81 Class B 2,140, % 9,742 22,875 $26.34 $22.10 $25.82 East/Northeast 4,201, % 26,467 31,425 $19.70 $16.81 $19.64 Class A 839, % 31,981 29,714 $ $23.78 Class B 2,918, ,514 2,711 $19.38 $19.27 $19.37 North 5,495, , , ,415 $32.87 $28.49 $32.53 Class A 2,005, , , ,738 $35.77 $33.44 $35.67 Class B 3,403, ,160-79,677 $26.72 $25.80 $26.58 Northwest 16,115, , ,548 $ $27.95 $30.84 Class A 9,479, % 48, ,400 $34.34 $29.20 $33.05 Class B 5,383, % -12,056-50,243 $27.45 $21.15 $27.10 South/Southeast 4,593, % -35,569-38,769 $29.75 $30.22 $29.80 Class A 669, % -21,366-12,588 $36.70 $35.84 $36.55 Class B 3,029, % -13,017-19,317 $29.03 $31.59 $29.19 Southwest 10,519, , ,636 $34.84 $32.40 $34.54 Class A 7,545, ,451-37,221 $36.04 $32.54 $35.41 Class B 2,769, % -24,034-57,938 $29.64 $28.22 $29.93 Suburban Total 47,083, , % -304,577-47,239 $30.49 $28.36 $30.26 Class A 22,540, , % -117, ,003 $34.42 $30.30 $33.76 Class B 20,342, , % -169, ,916 $26.54 $24.30 $26.43 Total 57,691,763 1,172, % -314,021-25,672 $32.36 $29.84 $32.13 Class A 29,659,124 1,041, % -96, ,008 $36.90 $31.83 $36.17 Class B 23,145, , % -197, ,812 $26.08 $24.79 $

4 Economic and Office Construction Conditions Texas Vacancy Report Top 10 Submarkets by Lowest Vacancy Rate Employment By Industry, April 2016 Rank Submarket Total Vacancy Rate 1 CBD 6. 2 Central/West Central 7.1% 3 Houston Bellaire/Medical Center 8.7% 4 Houston Sugar Land/E. Ft. Bend 9.0% 5 DFW South Ft. Worth 9. 5 Northwest 9. 7 DFW Lewisville/Denton 10.1% 8 DFW North Ft. Worth DFW Preston Center 10.7% 10 DFW Uptown/Turtle Creek 10.9% % % 12.3% 5.7% 6.1% 11.7% Information Other Services Financial Activities Manufacturing Mining/Logging/Construction Education/Health Services Leisure/Hospitality Professional/Business Services Trade/Transportation/Utilities Government Source: Newmark Grubb Knight Frank Unemployment Rate Not Seasonally Adjusted 10% 0% Payroll Employment Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change 5% 3% 1% United States United States, Payroll Employment Select Texas Markets Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change 0% - Dallas Houston, Employment Growth by Industry, April 2016, 12-Month % Change, Not Seasonally Adjusted Total Nonfarm Mining, Logging and Construction Manufacturing Trade, Transportation, and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Services Government -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 4

901 S MoPac Expy Suite 300, TX 78746 512.329.2782 Newmark Grubb Knight Frank United States Office Locations David Wegman, CFA Director of Research - Texas 713.599.5151 dwegman@ngkf.

With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents.

5 901 S MoPac Expy Suite 300, TX Newmark Grubb Knight Frank United States Office Locations David Wegman, CFA Director of Research - Texas dwegman@ngkf.com Leta Wauson Research Manager - Texas lwauson@ngkf.com Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Grubb Knight Frank Research Reports are also available at All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Grubb Knight Frank (NGKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NGKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

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