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Office Development Plans Resurface in Austin

At 20.7%, Austin has one of the highest direct office vacancy rates in the nation, according to CB Richard Ellis (CBRE). Add the 1.4 million sq. ft. of available sublease space to the 6.8 million sq. ft. of direct space and the picture looks even bleaker for the Texas capital, bringing the overall vacancy rate to 24.9% in the first quarter.

A full recovery could take several years. Derek Silva, an office specialist at NAI/Commercial Industrial Properties Co. in Austin, estimates the market needs to absorb 720,000 sq. ft. annually for the next five years to reduce vacancy to 10%, widely considered to be the point of equilibrium between supply and demand.

So why have two developers rekindled development plans for Austin office buildings? The answer involves nuances of Austin's geography, political climate, and historic patterns of business development. Both of the planned projects are on the edge of the Texas Hill Country in Southwest Austin, one of the city's most scenic and environmentally sensitive areas.

Limited inventory due to strict development guidelines has combined with tenants' penchant for Hill Country addresses to backfill much of the submarket's office buildings. The direct vacancy rate in Southwest Austin is only 13.2%, according to CBRE.

Austin developer Hill Partners Inc. expects Southwest Austin's vacancy rate to fall below 10% in the two years it will take to acquire approvals and build its next 90,000 sq. ft. building in San Clemente at Davenport, a multi-use park that could eventually include 750,000 sq. ft. of offices. “We've got two years to have the market grow 5%, and I think it will actually do better than that,” says Sam Houston, a principal at Hill Partners.

Five miles to the southeast and in sight of downtown Austin, Dallas-based Prentiss Properties Inc. has obtained a building permit to launch The Park at Barton Creek, initially delayed by resistance from environmental protection groups when it moved through the city's development process in 2000.

Jerry Mays, regional vice president of construction for Prentiss, says the company won't build the two-building, 211,000 sq. ft. office project on a speculative basis but wants to be ready when leasing demand picks up. “We think the market's good,” Mays says. “Anything we do has the lag time of a year to a year and a half to get it built, and we want to be prepared to start on a minute's notice.”

With the exception of the 525,000 sq. ft. Frost Bank Tower that developer and owner Cousins Properties brought on line in the first quarter, Austin hasn't seen speculative development since early 2002. But overall vacancy hasn't changed since the end of 2002, either, and two consecutive quarters of positive absorption seem to indicate the market has bottomed and is poised to rebound.

In June, Dallas-based Trammell Crow Co. recognized sufficient potential to justify buying the partially completed Riata Gateway office building in Northwest Austin, where vacancy is 27.1%. The seller, McShane Corp., joined Trammell Crow in a single-purpose venture to buy the 148,000 sq. ft. building that was 30% complete when McShane mothballed the project in 2001. Lance Sallis, senior vice president at Trammell Crow in Austin, says the project will enable his company to provide new Class-A offices with a short lead time.

Longtime Austin observers believe the capital city will respond quickly to a national economic recovery because the educated workforce, small-town atmosphere, low cost of living and excellent quality of life that drew high-tech employers in the 1990s remain to fuel future job growth.

And with an office inventory of 34 million sq. ft., occupancy may firm up faster than competing markets like Houston that has roughly 42 million sq. ft. in the CBD alone. “If Austin can snag a few sizable transactions,” says Bob Boykin, regional vice president with Fort Worth-based Crescent Properties, “its health will be restored very quickly.”

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