Challenges Of An Increasingly Unaffordable And Dense Office Market
Cielo Property founding principal Rob Gandy has not ever seen a real estate cycle die of old age, but he is watching this mature cycle closely. There are no glaring signs of a bust, such as increased sublease space or companies going out of business, Endeavor vice president Anne Swift said. But Austin’s office market does have its challenges.
“Taxes are killing us, and they’ll start killing the tenants before too long,” HPI real estate founding partner Dick Anderson said.
Swift has seen large rental increases in tax valuations, but those increases are not seen on base rents. Though Austin has experienced steady base rent growth, Swift wonders if that will slow because gross rent growth is so heavily weighted to tax increases.
When office rents in Austin creep up to $65/SF, Anderson starts to wonder where the affordable space is hiding.
“Even the East Side is hitting $30/SF triple net, which causes sticker shock to many people who think Austin is affordable,” Gandy said.
Many tenants in Austin (and everywhere else) shrink their allotted SF per person to compensate for rental rates, and to foster a more collaborative work environment. That increased density gives landlords a lot of problems to solve.
"The question becomes ‘How much density can a building take and still be an enjoyable experience for the tenant?’," Swift said. When Endeavor finds tenants that want to fit 10 employees per 1K SF, the firm must discover how to accommodate the right number of parking spaces, restrooms, elevators and more.
As employees pack into Austin offices, so does equity. This time last year, equity got quiet to a degree, but 2017 has already picked up, Gandy said. He expects forthcoming big deal trades and demand for new product.
