Investors bullish on Austin office market

Austin American Statesman |

In a sign of Central Texas’ robust commercial market, sales of office buildings surged in the first half of the year, with twice as many buildings changing hands compared with mid-year of 2012, a new report shows. 

Local office brokers say they expect to see even more investment as the market continues to gain jobs and demand for office space outstrips supply. 

Thirteen sales took place from January through June involving 20 office buildings, compared with the sale of 10 buildings in the first half of 2012, according to Helen Jobes, regional director of marketing and investment sales for real estate and investment firm Kennedy Wilson. Jobes tracks Austin area office market sales of buildings of more than 30,000 square feet. Sales volume was $682.6 million through mid-year, up about 140 percent from $284 million by mid-year 2012. 

Local brokers say average office rents are near record highs, and the high occupancy rate of 87 percent effectively means the market is out of space. 

That and other market forces are fueling demand from investors “who see a huge opportunity to take advantage of rising rental rates as tenants compete for quality space,” said Cathy Nabours, a first vice president with real estate services firm CBRE.

With limited supply and the continued job growth, “investors feel confident that rental rates will continue to increase over the next several years,” said Sam Houston, office partner with Austin-based HPI Real Estate Services and Investments. 

Traditionally seen as a mid-tier market for office-building purchasers, the region’s strong economy is attracting greater investor interest, office brokers say. 

“A recent series of events including completion and success of the (Formula One) racetrack, high-tech and bio-tech tenant announcements, California company relocations, and the approval of the UT medical school with a teaching hospital have created the perfect storm and we are now attracting office investment groups from all over the world,” Nabours said. 

Jobes said that “for the first time, Austin is being viewed (by investors) as more of a main market” as opposed to a mid-market. 

Hale Umstattd, executive managing director for Central Texas with Transwestern, said the market is seeing “the entry of a broader range of investor categories which historically had not viewed Austin as a primary market.”

“International funds from Europe and Mexico have stepped up, along with institutional funds and new private equity groups. Therefore, the competition for quality assets is steep,” Umstattd said.

Just last week, New Jersey-based Real Estate Alert reported that two German-based investors made purchases in Austin. 

Union Investment of Frankfurt bought the Research Park Plaza III and IV buildings for about $103 million, while GLL Real Estate of Munich paid about $88 million for Las Cimas II and III. The local office market is also seeing strong interest from San Francisco-area investors, CBRE’s Nabours said. 

“Recent high-tech tenant announcements such as the Apple campus are attracting Silicon Valley based groups such as DivcoWest, Drawbridge Realty Trust and JMA Investments,” Nabours said. “These groups have all purchased office properties recently and are aggressively searching for additional purchasing opportunities in Austin.” 

Bryce Miller, a co-founder and managing principal of Endeavor Real Estate Group, said the recent sales activity is part of “the natural evolution of the office building investment cycle.” 

“Many of these investors likely made their investment during the last growth cycle, worked and struggled to preserve the asset through the recession, and now see a clear window of opportunity to sell at an attractive price,” Miller said. 

Rhonda Toming, a managing director in the Austin office of Holliday Fenoglio Fowler, the national investment sales and mortgage banking firm, said that “while demand for office outstrips supply in major coastal markets, investors will continue to compete aggressively for quality opportunities in Austin.”