Companies Play Waiting Game; Strategy Puts Sublease on Hold

AUSTIN-An Austin technology company is increasingly crowded in its class B space in the far northwest submarket, but it’s waiting for the market to stabilize before leasing more space. Another company scouted space for six months before settling into a class A sublease in north Austin.

As such companies play the waiting game, the terms of available sublease space shorten, cutting rates and shortening the time until they revert to the building owner. For now, landlords are getting rent from original tenants.

The amount of sublease space available has bedeviled the Austin commercial real estate market all year. Estimates of the open space range between 1.9 million sf and 2.4 million sf. The difference is whether the space is available now or being marketed now for occupancy later.

And, it’s not as if no one’s taking space. About 594,000 sf of sublease space has been absorbed so far this year, according to Justin Garrett, director of research for Chicago-based Transwestern Commercial Services’ Austin office.

“You’re seeing a lot of early-funded companies that are doing short-term subleases,” says Bart Matheny, director of leasing for New York City-based Insignia/ESG’s Austin office. “They’re taking advantage of some of these rates on short-term subleases.”

What’s it going to take to fill more of this space? For starters, prospective tenants need more confidence in the national and local economies; they want to see rental rates bottom out and nobody’s making them move. Still, incentives offered to get deals done before the end of the year might light their candles.

“I don’t think tenants feel the pressure to make a decision right now,” says Jamil Alam, principal of the brokerage services division at Dallas-based Trammell Crow Co. in Austin. “They’re not afraid to go into holdover in their existing leases because they’re not concerned about the landlord backfilling their space and kicking them.”

They also see that the market “is re-pricing itself and it’s going to continue to go lower before it stabilizes and they’re all trying to time the market the best they can,” Alam says. Once rates stabilize, leases will be signed, he says.

The market’s condition also makes it easier for them to sit tight. Building owners, with few if any new tenants waiting in the wings, are willing to let existing ones stay around month-to-month.

“If you’re a landlord and you’re given the option of having a tenant stick around on a month-to-month for three or four months and collecting rent,” Alam says, “as opposed to playing hardball with them and kicking them out without any prospects to back fill the space, I think you do the former versus the latter.”