Vacancies high in commercial real estate

Vacancies high in commercial real estate

By Tiffany Young Friday, 27 February 2009

After a historical year of adding industrial space to Austin’s real estate market and a decrease in manufacturing at local technology businesses, commercial real estate vacancy rates are expected to rise.

“We’re looking at vacancy rates that are rising substantially, from about 12 percent vacancy in ’07 to 18 percent vacancy rate last year to maybe 22-23 percent vacancy rates or more,” said Angelos Angelou, principal executive officer of AngelouEconomics.

Throughout Austin, NAI Austin Commercial Real Estate Services’ brokers who track industrial properties saw a 7 percent increase in total capacity, going from 34.5 million sq. ft. of industrial space at the end of 2007 to 36.9 million sq. ft. at the end of 2008. There is still another 714,852 sq. ft. of construction underway and ready for occupancy in early 2009.

“Supply is extremely high right now in the northwest [area] and demand, with the national economy in a bit of a lull, is very slow as well. So absorption [amount of office space filled] is extremely low in the office markets,” said Ryan Kasten, associate vice president of tenant representation for Oxford Commercial.

According to NAI Austin’s 2008 year-end report, vacancies have been particularly high in northwest Austin, which houses 40 percent of the industrial real estate market. And another 450,015 sq. ft. of industrial real estate is still under construction, expected to be on the market within the first half of 2009.

Deals and steals

By most economic indicators, Austin is faring better than the national economy. However, local office vacancy rates began at a higher rate than the national market and also increased more quickly.

According to CoStar Realty, national office vacancy rates rose to 11.8 percent at 2008 year’s end from 11.1 percent at the end of 2007. In comparison, Austin’s vacancy rate increased to 18 percent in 2008, up from 13 percent the year before, according to Angelou’s economic forecast.

CoStar Realty reported suburban office markets being hit harder than central business districts nationally, particularly in class A office space, or spaces considered to be the highest quality in regard to location, access and building materials.

The same rings true for northwest Austin. The reason, Kasten said, is the majority of projects in the northwest area in 2008 were in class A office space, causing an oversaturated market.

Landlords will be competing heavily to attract tenants, giving options to businesses looking to lease. According to the Grubb & Ellis 2008 Fourth Quarter report, newly constructed properties will likely have asking prices lower than expected to sign tenants.

“We’re advising tenants, if they are in position, to take advantage of the rates going down and, if their company allows it, signing longer-term deals with termination options to take advantage of the lower rates right now,” Kasten said.

Transforming spaces

With prices dropping, some building owners may become innovative in leasing and selling industrial and office space. In some cases, it may make sense to divide large spaces into smaller office spaces in order to rent to smaller businesses.

“Some space is going to have to be converted into executive office suites because the availability of small entrepreneurs will always be there,” Angelou said. “Large blocks of space are going to be difficult to move. So you take a vacant building, turn it into executive suites and start leasing one room at a time.”

After the technology bubble in the early 2000s, similar conversions of commercial real estate from one market to another were made. The Domain property, originally planned to be a business park under the same name, was switched to retail when the market changed, making north Austin an attraction to shoppers.

Manufacturing

Besides more commercial properties being built, it is believed that a decrease in manufacturing is causing vacancies, as well.In his economic forecast report for Austin, Angelou said that reduced manufacturing growth from companies such as Dell, AMD and Freescale helped contribute to the contraction of the industrial market. According to the Greater Austin Chamber of Commerce, the Austin area lost 2,708 manufacturing jobs between 2007 and 2008.

However, Angelou does not see the decrease in manufacturing from technology businesses as being disastrous for the Central Texas economy.

“When 25 percent of your economy is the government, another 25 percent is professional services and another 20 percent is retail trade, 70 percent of Austin’s economy has nothing to do with technology and is fairly stable, with the exception of retail,” Angelou said.

Available data on how much commercial space is available and occupied does not include industrial spaces that are owner-occupied buildings, such as Freescale. However, as technology businesses continue to scale down, there is a possibility that companies will divide up campuses to lease some of the available space, adding even more real estate to Austin’s market.

Austin metro area office and industrial real estate vacancy

According to the Austin Chamber of Commerce, in the last two years Austin’s office market has had an increase in vacancies, with the last two quarters of 2008 having the largest increases, from 11.7 percent to 12.7 percent at third quarter’s end and up to 13.7 percent at year’s end. The industrial market stayed steady until the last quarter of 2008, when it jumped from 10 percent to 11.8 percent.

* There are several sources of office and industrial real estate statistics for the Austin market. This data comes from CoStar, but broker firm estimates for year end 2008 indicate office vacancy rates have been reported ranging from 12 percent to 18 percent.

Source: CoStar