Savills Studley Report Austin office sector Q4 2018

Savills Studley Research Austin

SUMMARYMarket HighlightsLEASING DECELERATING

Tenants leased just under 900,000 sf, falling below 1.0 million square feet (msf) and the third consecutive quarter with a decrease. Deal volume totaled nearly 6.0 msf in 2018.

CLASS A AVAILABILITY RISES

Following a sharp decline in the third quarter, the region’s Class A availability rate rose by 50 basis points to 13.6%. The overall availability rate jumped by 70 basis points to 13.2% and has spiked by 130 basis points compared to year-end 2017.

RENT JUMPS

Class A asking rent for the entire region rose by 2.9% to $40.86. Class B and C asking rent averaged $30.39, a 7.9% spike from a quarter ago.

SALES DOWN

Office property sales during the first eleven months of 2018 totaled $1.2 billion, a 38% decrease compared to the same period of 2017.

"Apple’s $1-billion HQ2 expansion

overshadowed any sting associated with

being bypassed by Amazon. Austin was

already Apple’s second-largest outpost

domestically, the innovator will more than

double its workforce and solidify its position

as Austin's top employer."

Brad Hauser,Research Director

02

Savills Studley Report | Austin

Apple Doubles Down

The tech sector rally and strong profits among top corporations have spurred a flurry of mega-campus developments across the U.S in the last several years. The rash of acquisitions and developments began in Silicon Valley, Seattle and Dallas a couple of years. More recently, it has spread to major East Coast markets such as Manhattan, Washington, DC, Boston and Atlanta as well as secondary tech centers. This includes Austin, which with one of the most qualified tech workforces in the nation and certainly in Texas, is a top destination for tech firms desperately in need of talent.

A long list of cities lost out on the Amazon stakes, including Austin. Silicon Hills may have taken little note, though, of Amazon's HQ2 and HQ3 after Apple’s announcement of a massive investment in its local headquarters. Apple, despite some recent woes surrounding flagging iPhone sales, is flush with cash. The Cupertino, California-based firm said it will spend $1 billion to construct a campus in Austin. The 133-acre campus will be located less than a mile from its current complex. Upon completion the campus will accommodate a planned increase of local payroll from 6,000 currently to 11,000 in the short term. Apple may eventually ramp up to 15,000 employees in Austin.

Apple also plans to grow in several other markets around the country, including Culver City and San Diego in California, while also adding hundreds of jobs in Boulder, New York and Pittsburgh. The company said that it will invest $30 billion domestically, noting that the major investment is thanks to a windfall that resulted from the 2017 corporate tax code revision.

Expansion Charges On

Independent of this massive stimulus from its top employer, Austin’s overall economy and office market is already charging along at a steady clip. The region added nearly 6,000 office-using jobs during the last 12 months (a 2.1% jump), just above the national growth rate, but a step down from the 5.6% increase locally in the prior 12 months.

Leasing activity has been trending down slightly during the last several quarters, dipping from nearly 2.0 msf at the start of 2018 to an average of 1.5 msf in the last several quarters. The tech sector continues to drive demand. Despite a dropoff in the number of 100,000-sf plus leases, several

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

0.00

0.05

0.10

0.15

0.20

0.25

0.30Millions

Austin Office Emp. Austin % Change U.S. (% Annual Change)

Office-Using Employment Trends

$36.18

$26.88

$53.19

$38.34

$0

$10

$20

$30

$40

$50

$60

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14Q4 '13

Rental Rate Trends ($/sf)

Austin Region CBD

Asking Rent Trends ($/sf)

13.2%12.6%

9.3%

26.3%

0%

5%

10%

15%

20%

25%

30%

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Availability Rate Trends

Austin Region CBD

Availability Rate Trends

savills-studley.com/research 03

Q4 2018

Tenant Sq Feet Address Market AreaCorning 50,000 8201 N FM 620 Far Northwest

CACI Inc 41,391 9500 Amberglen Blvd Far Northwest

Razorfish 29,142 300 W 6th St CBD

Zoho 27,209 6800 Burleson Rd Southeast

MHNet 22,328 9606 N MoPac Expy Northwest

Nano Vision 21,651 1705 Guadalupe St CBD

WorldStrides 21,639 5301 Southwest Pky Southwest

Armbrust Brown 20,662 100 Congress Ave CBD

Dwayne Morris 14,374 900 S Capital of Texas Expy Southwest

NSR Holdings 13,687 6800 Burleson Rd Southeast

Sum of Leases 262,083

mid-sized deals of note were completed. CACI committed to 41,391 sf at 9500 Amberglen Boulevard. In the CBD, Razorfish took 29,142 sf at 300 W 6th Street. Finally, Zoho leased 27,209 sf at 6800 Burleson Road in Southeast.

Despite the recent flurry of larger leases new construction activity has started to boost availability rates. The region ended 2018 with an availability rate of 13.2%, up by 130 pp from 12.0% at year-end 2017. The region’s Class A availability rate fell by 60 basis points to 13.6%. Tenants face particularly tight conditions in the CBD. There is only one existing Class A building offering a contiguous block over 50,000 sf. Tenants have a few more options across the entire region, there are 14 Class A buildings offering such a block.

New construction activity has offset some of the leasing. Quite a bit of the space scheduled to deliver in 2019 and 2020 has been preleased. As of year-end 2018, Austin had nearly 900,000 sf of speculative development underway, with nearly 50% pre-leased. The fourth quarter brought a few more leases at the latest set of properties underway. The next set of mega-developments such as The Republic in the CBD and Broadmoor may not get started until 2020 or later.

Tenants across the region have felt directly the impact of a fundamental shift in rent levels in this cycle. The influx of firms from California and other markets has transformed demand levels. Rent in the newest amenity laden buildings in the CBD have pushed into the mid-$50/sf range, while new product in the Domain is about $10/sf lower. Nevertheless, the mid-$40/sf mark in North is a big jump from the last cycle when Class A rent topped out.

Sales Cool

Investment activity has slowed a bit in the last several months of the year. The market lacks a deep pool of prime assets on the market for sale. Even so, the rent hikes that tenants are feeling across the region show up in sales activity as well. Pricing for quality suburban office product routinely exceeds $300/sf. In early December Walton Street Partners and Vanderbilt Partners – both based in Chicago – paid $82.5 million ($326.16/sf) for Prominent Pointe I & II in the Northwest submarket. Constructed in the 1980s, the two buildings totaling 252,943 sf were nearly 95% occupied at the time of sale.

Looking Forward

Equity markets have been very jittery of late. The tech sector has survived similar hiccoughs in the last few years, but ample funding from private equity firms seeking the next big thing, kept thanks to ample funding from private equity firms seeking the next big thing. Even so, any tech-centric markets such as Austin will need to keep an eye on conditions. If investors start to take a tougher stance on valuations, much as they did back in 2015.

A risk-off environment and gloomier sentiment may spell more volatility and fluctuating valuations ahead for major tech firms. The biggest tech companies are in position to ride out these gyrations for quite some time, however, this could spell trouble for startups and even mid-sized firms that seeking the next round of funding.

In the short term, tenants can anticipate

additional rental rate growth. The short-term supply and development pipeline remains tight and competition for top-level space is still brisk.

*Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$53.19

$41.18

$37.67

$37.41

$36.18

$36.05

$34.69

$34.48

$33.90

$32.26

$31.48

$29.83

$26.11

$22.20

$0 $15 $30 $45 $60

CBD

West Central

South

North

Austin Region

Southwest

US Index

Northwest

Round Rock

East

Far Northwest

Central

Southeast

Northeast

9.1%

9.3%

9.3%

10.0%

10.7%

12.4%

13.2%

13.9%

14.2%

15.3%

17.6%

17.9%

19.1%

19.3%

0% 5% 10% 15% 20% 25%

West Central

CBD

Southeast

South

Round Rock

Central

Austin Region

Southwest

Northwest

Far Northwest

East

US Index

North

Northeast

*The availability rate in Outer Williamson is 48%

Savills Studley Report | Austin

04

Map Submarket Inventory LeasingActivity

SF(1000's)

Last 12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr.(1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

CBD 11,804 1,717 1,096 -10.0% 1,387 9.3% -1.0% 11.9% $53.19 2.4% $52.14CBD - Class A 8,516 1,584 800 -15.8% 1,139 9.4% -1.8% 13.6% $55.70 3.0% $54.43Central 3,317 259 412 4.5% 330 12.4% 0.5% 9.9% $29.83 3.1% $28.89Central - Class A 472 72 44 11.1% 67 9.3% 0.9% 14.2% $41.16 15.1% $41.63East 2,032 151 357 3.0% 330 17.6% 0.5% 19.7% $32.26 24.2% $27.57

East - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Far Northwest 4,015 376 616 -12.0% 326 15.3% -2.1% 8.1% $31.48 1.6% $32.07Far Northwest - Class A 2,741 348 279 -22.6% 284 10.2% -3.0% 10.3% $34.07 4.8% $33.55Hays County 91 4 0 0.0% 0 0.0% 0.0% 0.0% $0.00 0.0% $0.00

Hays County - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

North 6,054 1,008 0 54.7% 0 19.1% 6.1% 8.6% $37.41 8.6% $30.69North - Class A 2,580 803 0 66.6% 0 24.1% 7.6% 5.9% $42.81 2.0% $36.49Northeast 2,742 124 529 7.7% 0 19.3% 1.4% 13.4% $22.20 5.9% $21.33Northeast - Class A 856 49 116 -22.6% 48 13.5% -3.9% 5.6% $23.10 0.5% $27.69Northwest 12,632 870 1,788 5.8% 1,912 14.2% 0.8% 15.1% $34.48 8.1% $33.58Northwest - Class A 7,168 590 1,239 19.7% 1,493 17.3% 2.8% 20.8% $36.25 3.3% $35.01Outer Williamson County 97 0 0 N/A 0 0.0% 0.0% 0.0% $0.00 N/A $0.00

Outer Williamson Co - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Round Rock 1,338 14 144 N/A 36 10.7% 0.9% 2.7% $33.90 -0.7% $26.82

Round Rock - Class A 597 0 119 N/A 1 19.9% 3.4% 0.2% $36.74 -0.6% $36.50

South 4,751 426 477 254.9% 192 10.0% 4.5% 7.4% $37.67 2.5% $40.25

South - Class A 2,963 342 365 25.2% 422 12.3% 2.3% 14.5% $40.68 4.0% $42.36

Southeast 3,436 223 321 45.0% 209 9.3% 2.9% 6.1% $26.11 -0.7% $23.81

Southeast - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Southwest 7,948 680 1,105 -20.8% 1,436 13.9% 0.1% 14.2% $36.05 5.5% $35.10

Southwest - Class A 5,075 483 761 -7.8% 818 15.0% -1.3% 16.1% $37.86 5.8% $36.80

West Central 508 25 46 44.2% 40 9.1% 2.8% 6.7% $41.18 1.5% $39.30

West Central - Class A 370 15 40 47.9% 29 10.8% 3.5% 7.8% $43.28 0.8% $43.815 876 0

Austin Region 60,766 5,876 8,047 6.0% 7,133 13.2% 0.7% 11.9% $36.18 4.4% $36.22

Austin Region - Class A 32,688 4,380 4,444 5.4% 4,489 13.6% 0.5% 14.1% $40.86 2.9% $40.90

5

4

3

10

9

8

7

6

1-14

14

13

12

11

2

1

AvailabilityRate

Asking RentsPer SF

AvailableSF

@SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

Savills Studley300 W. 6th Street Suite 1510Austin, TX 78701(512) 256-8430

Local ContactAlan PetersSenior Managing DirectorBranch Managerapeters@savills-studley.com(512) 256-8436

Corporate Research ContactBrad Hauser Regional Director, Researchbhauser@savills-studley.com (713) 237-5515