CBRE TECH SERIES AUSTIN - Texas A&M University · PDF file · 2017-08-16Figure 2: Tech’s Share of ... receiving 4 months of gross free rent. AVERAGE ANNUAL GROSS ASKING RENTS

Summer 2017

AUSTINREAL ESTATE TRENDS

CBRE TECH SERIES

WELCOME

Tech and Austin go hand in hand, so we are pleased to release the Summer 2017 Austin edition in CBRE’s Tech Series. This new real estate trends report provides thoughtful and succinct analysis on Austin office activity and the implications for tech firms today and in the future. Additionally, we cover the evolution of workplace strategy.

CBRE continues to invest significantly in its research in terms of people, technology and resources to provide our clients with world-class insight into commercial real estate markets around the globe. This report leverages these research investments and places powerful information at your fingertips.

While this report touches on the technology sector in Austin, CBRE offers insight and expertise in a variety of industries locally and around the globe. We invite you to reach out to our professionals at the local level to help you turn real estate into real advantage.

Thank you.

Scott SeneseSenior Managing DirectorCBRE Austin

Photo source: iStock.

Scott SeneseSr. Managing Director

27 44.3%

1,000+ 56 263 19

4,000+ 34%colleges and universities attained bachelor’s degree

or greater

mobile food vendors craft breweries live music venues music-related festivals in Austin, including SXSW

more than 4,000 patents were awarded to Austin area

investors in 2016

population growth rate projected into 2020

CBRE Research © 2017 CBRE, Inc. | 3

TECH SERIES AUSTIN Q2 2017


Q2 2017

CBRE Research

Austin has remained a beehive for innovation and cultural activities, which has continued to attract top talent in tech

Why Austin?

Ssource: iStock.

All Other Industries

66%

Tech Companies34%

Source: CBRE Research, Q2 2017.

Figure 5: Tech's Share of the Office Market by Sq. Ft. Occupied



CBRE Research © 2017 CBRE, Inc. | 4CBRE Research

Investors and users in the office market demonstrate calm optimism despite softening market fundamentals

The Austin office market ended the first half of 2017 with high occupier demand marking the 26th consecutive quarter of positive net absorption and tech tenants occupying 35% of the total office market. Although a slight uptick occurred during the first half of 2017, direct vacancy continued to hover under 10% for the fourth straight quarter, while a tightening supply of office space has driven up asking rates market-wide. As of Q2 2017, gross asking rates held steady at the historic high of $34.83 per square foot set in late 2016.

ASKING RATES UP MARKET-WIDE

Austin Market Overview

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DirectVacancy (%) Asking Rate ($/SF/Yr)

Gross Asking Rate (L) Direct Vacancy (R) Source: CBRE Research, Q2 2017.

Figure 1: Direct Vacancy / Gross Weighted Asking Rate

Figure 2: Tech’s Share of the Office Market by Sq. Ft. Occupied



Fresh Ideas Happen HereAustin accounted for 30.8% of all patents granted to Texas inventors in 2016, up from 28.7% in 20151

CHIP DESIGN STILL A MAINSTAY OF AUSTIN’S TECH STRENGTH

With more than 36,000 utility patents for inventions awarded since 2000, Austin shines as an innovation hub. The majority of Austin’s patent activity stems from advanced manufacturing and electronic chip design. IBM, which opened an engineering plant in Austin in 1967 and Dell, founded in Austin in 1984, continue to produce the largest individual shares of patent production. AMD, which opened its first Austin production facility in 1979, tapered off their production of patents reflective of their decreased market presence. Patents from individuals increased 19% from 2014 to 2015.

IBM Dell AMD Freescale AT&T Individuals Total Patents

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

500

1,000

1,500

2,000

2,500

3,000

Paten

ts Aw

arded

Figure 3: Austin MSA Patents for Inventions

Source: U.S. Patent and Trademark Office, July 2017.

1 Austin Chamber of Commerce, Q1 2017.Photo source: iStock.


Figure ...: Committed Pre-Lease by Tenant Industry (Class A, U/C)

Other 4%

Technology 76%

Retail 10%

Business Services

4%

Financial Services 5%




Asking rates, saturation in multiple submarkets may drive new development projects to east micro market

During the first half of 2017, developers delivered approximately 1.3 million square feet to the market, with an additional 1.9 million square feet under construction. Tech firms account for approximately 67% of all pre-leased space in Class A office buildings currently under construction primarily in Austin’s hottest three office submarkets. As the CBD, Southwest, and Northwest office submarkets are saturated with occupier demand and asking rates continue their monumental climb, Austin’s near east micromarket is poised to see the brunt of new development, with 19 proposed projects totalling 2.3 million square feet waiting to be kickstarted.

THE CHANGING FACE OF AUSTIN

Demand Fuels Flight to Quality


Figure 4: New Construction Deliveries and Currently Under Construction

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Under Construction Delivered Construction

MSFFigure 4: New Construction Deliveries and Currently Under Construction

Figure 5: Committed Pre-Lease by Tenant Industry (Class A, U/C)



On average, landlords are asking $37.47/sq. ft./yr. for existing Class A office product compared to $42.88/sq. ft./yr. for Class A office product currently under construction as of Q1 2017. On average, tech occupiers are paying $25/sq. ft./yr. for existing Class A space on a 5+ year deal.

For 5-10 year deals, landlords are willing to contribute $20 (existing) to $60 (new construction) per sq. ft. on tenant improvement allowances for tech firms to build out office space. This is in excess of negotiated base building work.

For 5-10 year deals, tech companies are typically receiving 4 months of gross free rent.

AVERAGE ANNUAL GROSS ASKING RENTS

TENANT IMPROVEMENT ALLOWANCES

RENT ABATEMENT

OPERATING EXPENSES

Austin Tech Transactions

Class AClass B U/C Class A

$29.32 per sq. ft.

$37.47 per sq. ft.

$42.88 per sq. ft.

$20-60 per sq. ft.

4 months

For 5-10 year deals, tech companies are typically paying $12.89/sq. ft./yr. for operating expenses.




Austin a Co-Working Leader

Co-working space or shared working space emerged from the Great Recession as a choice office alternative among entrepreneurs, small businesses, and freelancers seeking to maintain a flexible work-life balance free of the financial obligations of traditional office leases. Regus remains supreme; however, modern co-working providers are gaining steam with multiple expansions in the books. With the expansive growth of 70 co-working providers in recent years, the 700,000 sq. ft. of shared space on the market is available to the local startup economy which has attracted $8.1 billion since Q1 2005.

Figure XX Largest Co-Working Providers by Square Footage Occupied Market-Wide

Source: CBRE Research, Q2 2017

264,955 sq. ft. 16 locations

27,000 sq. ft.1 location


22,740 sq. ft.2 locations

19,000 sq. ft., 1 location 1,663

sq. ft

., 1 lo

catio

n


165,382 sq. ft. 3 locations

Downtown Austin was the pioneer market in Texas to welcome national co-working space operators

CO-WORKING OPPORTUNITIES CONTINUE TO EXPAND IN THE MARKET

Figure 8: Largest Co-working Providers by Square Footage Occupied Market-Wide





Tech opportunities continue to drive venture capital momentum in Austin

VC INVESTMENTS HAVE ECLIPSED $8 BILLION

Austin’s incubator climate

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Investment ($M)

Figure X: Historical VC Funding for the Austin MSA

Source: PwC MoneyTree Report, Q4 2016.

Figure 9: Historical Venture Capital Funding for the Austin MSA

Austin has developed a reputation for startup activity due to its warm business climate and stout talent attraction. Co-working space has contributed to the growth of Austin’s startup activity by allowing small operations space to grow their businesses free from the financial obligations of traditional office leases.

Photo source: CBRE.





WHO MAKES UP THE CREATIVE CLASS?

STACKING UP WELL AGAINST THE NATION

A City of Problem-Solvers

Pivotal to Austin’s success has been its attraction of “creative” human capital. The source of much attention over the last decade, the creative class engages in innovative problem-solving, creating meaningful new solutions that are often transferable on a larger scale. As such, these creative professionals are employed in knowledge-rich industries requiring a high degree of formal education, from software engineers to writers and physicians to musicians.

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Sales M

gmt.

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ibrary

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a Leg

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Employees (#)

Figure …: Austin's Creative Class | Techies, Artists, Sales Professionals, Scientists, etc.

Source: Bureau of Labor Statistics and ESRI, Q1 2017.

0 10 20 30 40 50 60 70 80 90

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ncisco

Seattle

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ton, D.

C. Atla

nta

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Raleig

h-Durh

am

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Dallas/

Ft. Worth

Score

Figure …: CBRE Tech Talent Ranking

Source: CBRE Research, Scoring Tech Talent, Q2 2017

Figure 10: Austin’s Creative Class | Techies, Artists, Sales Professionals, Scientists, etc.

Figure 11: Tech Talent Ranking





Tech Labor HotspotsThe top 100 tech companies in Austin employ a labor pool of 90,616 employees, which is 8% of the total employed workforce.

2,635Employees

14,512Employees

8,950Employees

15,149Employees

8,391Employees

17,766Employees

FAR NORTHWEST

ROUND ROCK

NORTHWEST

10,646Employees

NORTHCENTRAL

CBDSOUTHWEST

SOUTH

12,567Employees

EAST

Source: Austin Business Journal, 2017.

Figure 12: Top 100 Tech Companies by Number Employed | Austin Submarket Breakdown





“It’s not just about shiny office commodities anymore. Employees are being siphoned away by the competi-tion due to involvement in valuable projects, access to amenities, and convenient concierge services making life easier.”

—— CBRE—Senior—Vice—President,—Advisory—&—Transaction—Services—|—Occupier

WHAT IS MOST IMPORTANT TO YOUR LABOR FORCE?

WHAT ARE THE MAIN DRIVERS OF AN ORGANIZATION’S WORKPLACE STRATEGY APPROACH?

Changing the Way Tech Works

64% 47% 45% 41% 37% 25% 9%Amenities Flex

WorkspaceFlex

WorkingPublic

transportationIndoor

environment quality

Connectivity Sustainability

According to CBRE’s 2017 Americas Occupier Survey Report, 67% of the companies surveyed said they measured the success of their workplace strategy program by employee satisfaction. Today’s successful tech occupiers prioritize workplace strategies that foster community and drive employee value, while catering to a diversifying workforce.

55% 53% 40%TALENT ATTRACTION

AND RETENTIONPROMOTE

COLLABORATIONOPERATING EXPENSE

SAVINGS

The workplace can be a benefit to employees that differentiates you from the competition.

The workplace can act as a catalyst for drawing people back into the office voluntarily.

The workplace can achieve real estate savings to be reinvested into enhanced technology and offerings.

Photo source: CBRE.

Source: CBRE Americas Occupier Survey Report, 2017.

Source: CBRE Americas Occupier Survey Report, 2017.


FUTURE TRENDS IN THE TECH WORKPLACE

• Refocus from amenity one-upmanship to amenity access

• Cater to the young family life-stage by providing convenience services making the office the best place to get work done

• Drive employee loyalty through event-based branding and the commercialization of products

• Adaptable space catering to occupational preferences—creating hackable workspaces that enhance visibility while

preserving focused workstations for traditional work styles

• Centralizing a heart center to promote collaboration and integrate social space

• Create a sense of belonging

• Work and client events held in highest visible space

• Investing in the right amount of space

• Taking back the best real estate for communal spaces

The needs of the current tech workforce are changing as many are buying homes and building young families. The following are potential trends developing in the recruiting landscape for workspaces to retain top talent:

“Service is the new amenity.”—— CBRE—First—Vice—President,—Advisory—&—

Transaction—Services—|—Occupier

Photo source: CBRE.

5%

10%

15%Prov

ided b

y Em

ploye

rs

Over-Provided Amenities

Current vs. Desired Amenities in the Workplace

Under-Provided Amenities

Wanted by Millennials

20%

25%

30%

35%

40%

45%

5%0% 10% 15% 20%

Dry Cleaning

25% 30% 35% 40% 45%

Bike Racks

Deliveries

CafeteriaCoffee Bar

Showers Green Space

Rest AreasWellness Facilities

Day Care

On-Site Convenience StoreGame Room

Source: CBRE Live-Work-Play Survey, 2017.

Figure 13: Current vs. Desired Amenities In The Workplace

Source: CBRE Live-Work-Play Survey, 2017.

Southwest441,108 SF available

48 spaces

South

Northwest442,404 SF available

57 spaces

North Central68,816 SF available

8 spaces

Far Northwest116,506 SF available

13 spaces

East44,036 SF available

5 spaces

CBD225,776 SF available

40 spaces


Figure ...: Total Available Sublease Space by Tenant Industry

Legal 3%

Energy 3%

Technology 44%

HealthCare14%

FinancialServices

9%

All Other

Industries10%

CreativeIndustries

7%

Business Services6%

Retail5%



CBRE Research


Available sublease space in Austin totaled nearly 1.3 million sq. ft. market-wide, up approximately 400,000 sq. ft. from Q3 2016. Tech firms account for approximately 556,000 sq. ft. of available sublease space currently on the market. Larger subleases compete with one another offering reduced rates and funded tenant improvement allowances, while smaller subleases are seeing less frequent viewing activity.

TECH TENANTS RETURNING THE MOST SQUARE FOOTAGE

Sublease Space Rising

Figure 6: Sublease Space by Submarket

Figure 7: Total Available Sublease Space by Tenant Industry



Build Out Costs

CURRENT AVERAGE TECH FIRM PROJECT COSTS IN AUSTIN

With 1.9 million sq. ft. under construction and delivered construction hitting a three-year high in 2017, firms will need finish-out assistance

Construction$78.00-

$129.00/RSF

Median cost: $89.00/RSF

FurnitureWorkstation

Product: $25.00/RSF

Ancillary Furniture: additional

$10.00/RSF

Design/EngineeringArchitecture

Median: $3.50/RSF

Engineering Median:

$1.25/RSF

Moving/ContingencyWith move

coordinator: $3.65/RSF

Without: $3.00/RSF

Consulting$2.00/RSF –$6.00/RSF

Median: $4.00/RSF

Photo source: CBRE.


ABOVE THE CEILING:• Fire Protection• Plumbing

Communications• Security• Occupancy Sensors• HVAC • Electrical• WIFI• Distributed Antenna

System

VERTICAL SPACE:• Millwork• Hardware• Acoustic Tile• Glass & Glazing• Audio Visual• Painting and

Wallcoverings• Partitions• Kitchen Equipment• Washroom Accessories • Elevators• Drywall• Signage

HORIZONTAL SPACE:• Concrete Latexing• Terrazzo Ceramic Tile• Stone• Carpet • Wood Flooring • Access Flooring

PERCENTAGE OF PROJECT COSTS IMPACTING TECH FIRMS

Photo source: CBRE.

50%FIRST GENERATION SPACE

REMODEL45%


REMODEL


REMODEL45%

10%

Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

CBRE and the CBRE logo are service marks of CBRE, Inc. and/or its affiliated or related companies in the United States and other countries. All other marks displayed on this document are the property of their respective owners.

FOR MORE INFORMATION, PLEASE CONTACT:

Robert—C.—KrampDirector of Research & Analysis Texas-Oklahoma Division+1 713 577 [email protected] Robert on Twitter: @RobertKramp

Erin—MoralesSenior Vice PresidentTech Media Practice Group+1 512 499 [email protected]

John—GumpSenior Vice President+1 512 482 [email protected]

Kelly—WoodruffSenior Associate+1 512 499 [email protected]

Luke—GoebelResearch Coordinator+1 512 499 [email protected]

Alan—HalterResearch Data Analyst+1 512 482 [email protected]

Cover Photo Source: CBRE. Back Page Photo Source: SkyCam Photography.

https://twitter.com/RobertKramp

Documents

CBRE TECH SERIES AUSTIN - Texas A&M University · PDF file · 2017-08-16Figure 2: Tech’s Share of ... receiving 4 months of gross free rent. AVERAGE ANNUAL GROSS ASKING RENTS