Definitions and Terms
Sublease space shrinks, real estate market grows healthy
Kate Harrington
Contributing writer
When Andrew Childers, a researcher with Colliers Oxford Commercial, talks about commercial real estate in Austin, his focus is on the new construction taking place in Central Texas.
With new office and industrial buildings springing up around the capital, Childers says he's seeing more companies forsake the sublease space they relied on during the days after the 2001 crash and move toward more customized space.
"We're going to see a lot of new buildings, and that's going to hurt sublease space," Childers says. "Especially with big availabilities because they're looking for 30,000 or 50,000 tenants to come in and lease space."
Childers isn't alone in his observation. According to real estate researchers in Central Texas, the area's sublease space has been on a downward spiral since 2001, and isn't likely to rebound in the near future.
The downturn in the sublease market signals the emergence of a healthy real estate market and the promise of a growing local economy, regional experts say.
Austin is seeing a resurgence in new construction and higher rental rates. Because tenants in office and industrial markets are expanding and hiring more employees, they're starting to look for more-permanent space.
During the dot-com period of prosperity, companies had fast employee turnover, and consequently needed less space. But with a more secure economy, companies are banking on long-term growth and need the space to accommodate it.
"When you talk to a tenant, a lot of times they say they have 10 employees but they're going to grow by the end of the year," Childers says. "Some groups that are growing even grow out of buildings."
Philip Bible, an industrial specialist with NAI Commercial Industrial Properties Co., says now sublease space is being leased or simply burning off. The sublease space that hasn't run out usually doesn't have enough time left on the market to be attractive to potential tenants.
To Bible, that means sublease space is probably going to fade away, as more construction and an upward trend in occupancy take over the market.
The trend toward shrinking sublease space also means tenants seeking subleases have fewer choices than they did, so they need to be more discerning. Rental rates will continue to rise as sublease space sees a discount.
Childers estimates there is a total of 939,627 square feet of sublease space in the office market in Austin now, down from the 3.3 million square feet he was tracking in 2002. That number dipped even lower a few months ago, he says, but a significant portion of sublease space hit the market when PPD Pharmaco recently gave up 180,000 square feet.
Volney Campbell, first vice president with CB Richard Ellis, says he's tracking 539,000 square feet in Austin's office and industrial sublease markets, compared to almost 3.5 million square feet of available sublease space in 2001.
Campbell says only 15.72 percent of the available market in Austin is made up of sublease space, but even that number will plummet by the end of the year, possibly falling into the single digits.
"Anytime you get into single digits on the vacancy factor, it's indicative of a healthy real estate market, trending towards a landlord's market," Campbell says. "That means prices are going to be going up."
Experts say sublease vacancies are tightest right now in Austin's Southwest area, with only about 70,000 square feet available there. The most vacancies are in the Northwest, with more starting to open up in the Central Business District.
Childers says Freescale Semiconductor Inc. has about 268,000 square feet of sublease space in the Northwest, and the Central Business District has around 140,000 square feet open.
Experts also say opportunities for subleases are shrinking in industrial and office sectors at an even rate. The tendency for Austin to focus on the semiconductor industry almost ensures that big blocks of sublease space in the industrial field won't be opening up, Bible says.
While the amount of available sublease space might continue to go down as the market strengthens, experts say bits and pieces will become available as companies vacate their space.
John Childers, a vice president of the Austin office of Staubach Co., says tenants seeking space will also tend to view favorably those sublease opportunities with longer terms. For groups concerned about spending money, subleases will continue to be attractive options.
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Austin Real Estate Market