Better Deals Abound, But Will Tenants Move?

Mike Killebrew, manager of Henry S. Miller Commercial's Austin office, says he had placed a number of tenants into less costly office spots in the industrial and retail sector when space had been a premier commodity in town. Now that the situation has changed, he doesn't expect many of those clients to buy into deals to fill the class-A space that is now on the market. Killebrew estimates that one-fourth of the 28 million sf of industrial space is actually leased to the office crowd.

The influx of office tenants to the industrial and retail markets had spanned a two-year period when class-A space was costly and unavailable around town. And, Killebrew says, those tenants are now "living out their leases" rather than jumping to available class-A space. "They are in one-story office buildings with roll-up doors in the back," he tells GlobeSt.com. "Nobody seems to recognize it may look like a warehouse, but it's legitimate office space."

The high number of traditional offices operating out of industrial and retail space is not being taken into account in the rash of market analyses, says Killebrew. One of his high-profile signings about two years ago came from a high-end jeweler who had relocated its entire operation from a class-A building in Los Angeles to a 30,000-sf flex spot at Simicon Business Park. And, the jeweler is staying put.

Killebrew believes that Austin's laid-back environment supports rather than discourages the one-time trend that has left a number of tenants comfortable with where they are. A prime example, he says, is Met Center where rates are 90 cents triple net and the bulk of the its tenants are using the industrial-designed space for offices rather than pay class-A rates. It's the image-conscious tenants who are the most likely candidates to jump to the available class-A space, he says.

Another of Austin's commercial real estate leaders, Mike Kennedy of Commercial Texas, disagrees with Killebrew's assessment that many of those quasi-office space holders will stay put in the cheaper office spots. "If you could buy a Mercedes for the same price that you could buy a VW, you'd buy the Mercedes," he says. "It's value at a lower cost, especially when there's a lot of supply." He expects a shift will occur with those firms that had taken spots in class-C properties Downtown and have grown fond of CBD life. The in crowd, at some point, will move up the ladder to class-A offices.