Investing in Our Future

A Message from Mark Doran

Mark Doran Chief Operating Officer

return to table of contents
return to top of page

The resurgence of the U.S. economy during the past few years has driven strong performance in the housing and retail markets, but the office market has been slower to find its footing. As of August, vacancy rates remain high in many markets while other indicators remain mixed. During the first half of 2015, the trends have been mostly positive in the largest metro areas in the nation. With the national economy poised for continued growth through the next two to three years, the office market should continue to gain momentum in most metro areas.

The following information presents a snapshot of market conditions in 14 major U.S. metros.

Net absorption was modest in most major metros during the first half of 2015. Dallas was the strongest performer, with 2.8 million square feet of positive net absorption. Other areas with more than 2 million square feet of positive net absorption during the first half of the year were Boston and Philadelphia. Net absorption was below 500,000 square feet in Chicago, Miami, San Francisco and Washington, D.C. for 2014 and in the first quarter of 2015. The public sector has now added jobs for 10 consecutive months after shedding jobs during the previous 44; nearly all of this growth was at the state and local government level.

Office vacancy remains elevated in several major markets, particularly Philadelphia (18.3 percent), Atlanta (17.2 percent), Chicago (15.6 percent) and Los Angeles (15.5 percent). San Francisco (7.4 percent), New York (7.6 percent) and Denver (9.9 percent) maintain the lowest vacancy rates, but vacancy in all other major markets remains above 10 percent.

Direct average marketing rents in New York and San Francisco are far above those in any other major metro area – both have average rents above $55 per square foot, while no other area has an average rent above $37 per square foot. The lowest average rents are in Atlanta, Baltimore, Dallas and Philadelphia, all of which are below $23 per square foot.

Boston and Seattle each experienced slight rent declines during second quarter 2015. Three major metros experienced average rent increases in excess of 2.5 percent during the quarter: Atlanta, Dallas and Los Angeles. Others with strong rent increases were Denver, Miami, New York and Washington, D.C.

With 11.3 million square feet of space under construction as of June, Houston and New York have the most activity. Boston, Dallas and Washington, D.C., have at least 5 million square feet under construction. There is very little active construction in Atlanta, Baltimore or Miami.

Houston and San Francisco lead the way in terms of space under construction as a percentage of the existing inventory. In Houston, the space under construction represents 4.8 percent of the existing inventory, and San Francisco’s figure is 4.4 percent. Boston at 3.6 percent and Seattle at 2.9 percent also have significant amounts of space under construction relative to their current supplies. Atlanta and Philadelphia have the smallest shares, with less than 1.0 percent of the existing inventory under construction.

Based on the previously mentioned data, Delta Associates tracks the market position of the major U.S. metros. The scale is based on eight different positions in the market cycle, as follows:

1. Absorption flat to slightly positive; vacancy beginning to decrease; rents relatively stable; speculative construction not justified
2. Absorption increasing; vacancy declining; rents rising; positioning for speculative construction
3. Absorption strong; vacancy declining; rents rising; speculative construction
4. Absorption strong; vacancy low and nearing bottom; rents up strong; speculative construction
5. Absorption light; vacancy stable or rising; rents up only slightly if not flat; minimal new speculative construction
6. Absorption flat/negative; vacancy rising; rents flat to declining; no or minimal new speculative construction
7. Absorption negative; vacancy rising; rents dropping; no new speculative construction
8. Absorption relatively flat; vacancy and rents stabilizing; no new speculative construction

Most of the major metro areas in the U.S. are in the early stages of market expansion at this time, either at position two or three. Among this group, Boston, Los Angeles and Seattle are further along and poised for stronger growth in the short-term. Dallas and San Francisco are both experiencing healthy market expansions. In Dallas, strong absorption and rising rents are overcoming the high vacancy rate. In San Francisco, very low vacancy and strong rent growth both persist.

The two outliers among major metros are Houston and Philadelphia. Houston has a very large supply of office space set to come online, but a weakened economy is likely to limit absorption of this new space. Philadelphia has experienced weak rent growth and no pressure for new construction.

The sluggish economic growth of the first quarter of 2015 notwithstanding, the national economy remains on track for significant improvement through at least 2018. Employment and gross domestic product growth are expected to gain strength over for the next several years. Although this economic growth will drive continued improvement in the U.S. office market, not all major metros are likely to share in the good fortune. Areas that are able to increase their job bases in the professional, scientific and technical services sectors will experience stronger office markets. Conversely, those with job growth in education/health services, leisure/hospitality and other industries that do not generate Class A office demand will struggle.

David Weisel
David.Weisel@DeltaAssociates.com
202.778.3119

Forward-thinking office tenants are beginning to take a broader view on the role real estate plays in business. Both corporate occupiers and building owners should become knowledgeable about this shift because it is impacting the site selection process. Traditionally, decision makers focused on location, size and price. More recently, it has become just as common to hear office space described as a tool for employee recruitment, retention and productivity. However, the most progressive companies are recognizing that their organization’s physical space plays a unique role in establishing and communicating the firm’s brand.

In a recent survey of Transwestern’s top tenant advisors, 45 percent said that in more than half of their upcoming transactions, the company’s image is a significant factor in its location decision, and 18 percent said image is a significant factor in all of their upcoming transactions. Furthermore, 60 percent of brokers surveyed for the “Quantifying The Cool Factor in Real Estate” report said they believe an organization’s real estate is equally important to or more important than marketing and advertising when it comes to communicating a company’s brand. This represents a new way of thinking on both sides of the real estate transaction – tenants have another tool in their marketing arsenal and building owners should be aware their space could be a component of their tenants’ branding campaign.

By utilizing innovative strategies to guide workspace decisions, the process of considering a new lease and location can become the optimal tool to refresh a company − organizationally and culturally – and ensure all parties are on the same page when it comes to brand messaging. The process is so impactful that for many clients, Transwestern will not embark on a tenant advisory project without first conducting a visioning session with the client’s leadership team. Decision makers from the C-suite, real estate department and human resources are increasingly taking the opportunity to ask themselves questions such as: “What is our company?”, “How are we perceived in the marketplace?” and “What do we want our company to be?”

As a result, companies are beginning to rely on the location of a property as well as the potential office space to communicate the essence of their brand. For instance, is it more edgy and rebellious, or does it skew toward stable and conservative? Building owners that are capable of describing how their property will convey the personality of a potential tenant will gain an additional advantage over the competition. And by working alongside tenants, the real estate can be transformed into a powerful message about the company that expresses the brand in a nuanced and sophisticated way.

In some cases, owners may take a proactive approach to upgrade properties to appeal to tenants that are looking for a particular style of office space. For example, Nordblom wanted to attract tech tenants to its 135,000-square-foot office and life sciences building in North Suburban Boston, so the owner conducted a full renovation of the asset. As part of the capital improvements to 201 Burlington Road, Nordblom added a fitness center, bike storage and showers, collaborative work area and grab-n-go café – all features that appeal to a younger work demographic.

Of course, achieving optimum workspace is not a formulaic process. The takeaway should be that tenants will find it worthwhile to dedicate time to solidifying their brand and envisioning how it could translate to physical space. With brand and culture as flip sides of the same coin, making sure to pass along the right message to employees as well as customers and the community at large can impact the bottom line. As occupiers recognize the value in communicating brand and culture via their space and put the concept into practice, they will drive greater value from their real estate.

Similarly, forward-thinking owners will have a strategic advantage in the marketplace as more occupiers implement plans to communicate brand and culture via their space. Whether or not an additional investment is ultimately made in a building, by engaging in a dialogue about tenant branding, owners can market their assets from a position of strength.

Amber Strang
Amber.Strang@transwestern.com
972.774.2548

Brian McKenzie
Brian.McKenzie@transwestern.com
617.439.7813

Marc Allen
Marc.Allen@transwestern.com
214.446.4572

The continuing popularity of transit-oriented developments is clearly evident by the pre-delivery success of Transwestern Development Co.’s newest mixed-used project in Austin, Texas. The Arnold multifamily/retail building and office building at 1645 E. 6th have been so well received that the office and retail portions are substantially pre-leased. The 4.2-acre development is currently under construction adjacent to the MetroRail in trendy East Austin – a culturally rich area that has garnered national acclaim for its entertainment and dining establishments. Near the Central Business District and University of Texas, the dynamic neighborhood is popular with both college students and creative companies.

With multifamily units slated for delivery from March through mid-2016, The Arnold consists of 346 residences in four stories above ground-level retail. While a plethora of destinations are within walking distance – such as restaurants, bars, a planned grocery store and MetroRail’s Plaza Saltillo station − The Arnold’s amenities package will give residents plenty of reasons to stay home. The rooftop terrace with views of downtown Austin will be equipped with a fire pit, grilling kitchen and media center. Two courtyards will feature a resort-style pool, bocce ball court, outdoor fire pit, grilling areas and dining areas. And the pet-friendly project will have a wellness center with complimentary fitness classes, an indoor lounge with a gourmet demonstration kitchen offering cooking classes and the Aqua Lounge, including vintage video games, televisions, catering kitchen and keg refrigerator.

The Arnold
Austin, TX

The Arnold features 20 floorplans ranging from 393-square-foot efficiencies to 1,738-square-foot two-bedroom/two-bathroom residences. Interiors include gourmet kitchens with islands, quartz countertops and stainless steel appliances. Wood plank-style flooring, USB charging outlets and walk-in closets come in all residences, and select units have private balconies and custom built-ins.

Named after its address, the 1645 E. 6th office building consists of 95,210 square feet of Class A space. The building’s exterior Chicago brick will be accented throughout the interior lobby along with a focal wall of reclaimed wood. An undisclosed entertainment-related tenant has pre-leased 64,530 square feet, while a recruitment firm is taking 22,072 square feet. Less than 9,000 square feet remain available in the building, whose tenants will have access to The Arnold’s wellness center and rooftop amenities. A 700-space garage will provide parking for the project’s office, multifamily and retail components.

Transwestern Development Co. carefully selected local retailers for the 9,600 square feet of street-level space to provide highly desirable amenities for residents and office tenants, as well as reflect the home-grown vibe of the East Austin area. Specialty retail tenants include Blenders and Bowls; Royal Blue Grocery; Gato Nero, an Italian restaurant; and a yet-to-be-named bakery/deli from the owners of Gato Nero.

Transwestern Development Co. secured top-quality partners for the transit-oriented development, with financing provided by Amegy Bank of Texas and Comerica Inc. The office building was designed by Kirksey Architecture, while Wilder Belshaw Architects designed The Arnold. Harvey Cleary is general contractor for the office building, and Andres Construction is general contractor for The Arnold. KBGE is handling civil engineering for both buildings.

The creative energy that drew Transwestern Development Co. to East Austin is also attracting musicians, tech companies and advertising agencies to the hip neighborhood. By designing each property detail with this vibrant community in mind, The Arnold and 1645 E. 6th are certain to become landmark destinations for people who live, work and play in the transitioning area, as well as visitors from throughout Greater Austin.

Josh Delk
Josh.Delk@transwestern.com
512.314.3557

Ashley Taylor
Ashley.Taylor@transwestern.com
512.314.3556