Austin's Flux Shifts Silicon Cities Comparison

The constant comparison of the high-tech hotspots by economists, brokers and elected officials precipitated the study, says Shawn Martin, research director in the Central Texas office in San Antonio. He and broker George Harcourt say the situation has changed since they wrote the report. Still, Harcourt tells GlobeSt.com that their projections are now being validated in the Austin market, particularly their call that sublease rates would take a turn south. Instead of coming months down the road, it came not long after the ink dried on their report.

Austin sublease holders altered the scenario with discounts much akin to elsewhere in the nation. "There are starting to be real incremental drops now," Harcourt reports. Specifics can be elusive, but Harcourt has heard of knockoffs that took class A space from $30 per sf to $18 per sf and in some cases down to $15 per sf on the sublease circuit. So far, the cuts haven't translated into deep rate reductions for direct space, but they will, Harcourt predicts. "There isn't a direct bidding war (between sublease and direct space in Austin), but they have made some adjustments," he says.

Sublease tenants looking in Austin's northwest market, which accounts for 48% of the open space, can latch onto TIs, a windfall in any sublease scenario. Harcourt says the bonuses result from TI allowances that were never expended by a tenant now willing to pass the perk to a taker just to depressurize its fiscal state. Before the report was written such concessions were rare, he said.

In the beginning, Martin and Harcourt simply set out to compare the two markets and discover why San Jose building owners were dramatically discounting space whereas Austin's rent was holding fairly firm. On the like side of the equation, San Jose shouldered 17.5% vacancy and sublease space of 3.9 million sf and Austin, 20.9% and 3.5 million sf, respectively.

Martin and George Harcourt concluded San Jose building owners made the difference because they controlled the space, including a sizable chunk of the sublease market. Austin's sublease space clearly was being held hostage--at the time--by the tenants who were continuing to pay and not slashing their asking prices, reported the Grubb & Ellis team. San Jose's class A, full-service rent was running $41.02 per sf, down from $71.76 per sf annually whereas Austin moved laterally with a 1% decrease of 35 cents per sf annually. And at the time, the researchers said Austin building owners shouldered about 35% of the city's new vacancy burden in comparison to 55% in San Jose. While that still may be true, Austin's tenants now are willing to bargain with the hunters more so than ever before.