Office- Tenants Perspective

The commercial office market is much like the general economy, there are some signs that things could improve but there are plenty of signs that it will be some time before we see true stabilization. The second quarter reported positive absorption for the first time in several quarters, raising hopes that growth is returning to the Austin Market. But, that was more than balanced by news from the financial sector about significantly rising defaults on bank and CMBS loans.  So what does this mean for tenants in the coming months and where is the market heading?

Think of it this way, real estate is much like a hypothetical math equation in which building owners solve for value of the project by calculating the impact of rents, vacancy, absorption, and the time required to reach pro forma. If a market has a low vacancy, then absorption of space and time has a lower impact on rents; but as vacancy increases, the variables of time and absorption become critical. Time equals money in the real estate business because buildings must be carried financially by investors until they are leased. Unfortunately for building owners, we currently have a vacancy above 20% citywide, little absorption for the year, and these two variables will increase the time to reach pro forma. So, building owners are lowering rents to attract tenants and to lower their vacancy, but the problem is that there are not enough tenants in the time required to reach pro forma. Currently, we have over a three-year supply to reach a stabilized vacancy even with historically strong absorption, and that level of absorption may be unreachable in the short term. If rents stay low and vacancies stay high due to low absorption and long lease up times, many buildings will fail to reach their pro forma and will likely be foreclosed on.

All of these events will ultimately mean opportunity for tenants in the next 12 to 18 months.

The math is simple then, too much space currently, combined with slow job growth and absorption, means that rents and values will be lower for at least the next eighteen to twenty-four months.