Quarterly Market Report JANUARY 2019

Home , Frost Bank Tower, One American Center, San Jacinto Center

AUSTIN OFFICE | Q4 2018 Quarterly Market Report JANUARY 2019

Supply & Demand

Net Absorption Completions Vacancy

EXECUTIVE SUMMARY 3.0 16.0% Vacancy continues to tighten 2.5 14.5% Millions (SF) Austin’s overall vacancy rate dropped to 7.6% in Q4 2018, a decrease of 60 basis points quarter- 2.0 13.0% over-quarter, and down 40 basis points year- 1.5 11.5% over-year. Net absorption was positive 1,394,523 sq. ft., the second-highest quarterly absorption 1.0 10.0% amount recorded by NAI Partners going back to Q4 2000. The highest quarterly amount of 0.5 8.5% absorption occurred during the third quarter 0.0 7.0% of 2015 at 1,557,530 sq. ft. New construction delivered during the fourth quarter stood at 1 -0.5 5.5% million sq. ft., bringing the year-to-date total to -1.0 4.0% 2.9 million sq. ft. Full-service average asking Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 rents grew by $0.63 per sq. ft. quarter-over- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 quarter to $35.43 per sq. ft., and up $0.75 per sq. ft. compared to this time last year. Market Indicators Current Prior Quarter Year Ago Austin economic indicators Q4 2018 Q3 2018 Q4 2017

Austin’s unemployment rate remains low at Vacant Direct 6.8% 7.4% 7.3%

2.8%, well below the state and national rates, Vacant Total 7.6% 8.2% 8.0% both of which stood at 3.7% in November. The Available Direct 9.8% 10.9% 10.1% metro’s labor force has expanded an annualized 3.3% year to date, compared with the state’s Available Total 11.6% 12.8% 11.8% 2.2% growth. Recent performance by sector Net Absorption (SF) 1,394,523 736,740 758,088 was mixed. Growth was primarily led by health Leasing Activity (SF) 1,326,914 1,966,001 3,0 97,621 and education services, which accelerated at a Construction (SF) 3,974,852 4,533,189 4,159,194 soaring annualized rate of 18%, creating 5,200 Deliveries (SF) 1,001,011 538,832 421,986 positions. Professional and business services, and leisure and hospitality experienced small Avg Asking Rent (Gross) $35.43 $34.80 $34.68 reductions after growth earlier in the year, while Inventory (SF) 86,409,193 85,408,182 83,460,945 the financial activities sector continued to shed jobs. Home affordability in the Austin metro area increased. The percentage of homes sold that the median-income household could afford increased from 53.1% in the second quarter to 54.5% in the third quarter. As of November, the median home price in Austin was $308,153.

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MARKET OVERVIEW Vacancy tightens and net absorption soars Deliveries Vacant space in the Austin market contracted to Class A Class B 7.6% at the end of Q4, a decrease of 60 basis points 1.4 quarter-over-quarter and 40 basis points compared 1.2 to this time last year. Austin’s office market has Millions (SF) remained robust, with overall vacancy rates 1.0 remaining at or below 9.0% for the last nine quarters (Q4 2016). With so few vacant spaces, the best ones 0.8 are leasing quickly, as Austin’s economy has been changed from a state government and university- 0.6 driven town to a fast-growing, emerging job hub for tech and innovation. In 2018, Austin was ranked No. 0.4 1 among the 50 best places in America for starting 0.2 a business by Inc.’s Surge Cities Index. The report further describes Austin growing four times faster 0.0 than most of Silicon Valley—drawing talent from Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 all over the country resulting in thriving computer hardware, enterprise software, and, increasingly, consumer tech startups. Construction Construction boom continues Class A Class B As of Q4 2018 there was close to 4.0 million sq. ft. 5.0 of space under construction and another 1 million 4.5 sq. ft. delivered in the Austin office market, including 4.0 buildings that are primarily owner-occupied. In Millions (SF) 3.5 addition, Apple plans to build a $1 billion office campus in North Austin, not far from where it already 3.0 has a major corporate hub. The company announced 2.5 that the new 133-acre facility will be able to handle 2.0 about 5,000 employees when it opens and could 1.5 grow to house up to 15,000. Apple already employs 6,200 people in Austin, the largest group outside of 1.0 its headquarters in Cupertino, California. The new 0.5 hires will make Apple Austin’s largest employer. 0.0 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Local market experts say the selection by the tech 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 giant of Austin isn’t a shocking choice given the city’s impressive universities, robust lineup of tech companies, and the investment Apple has already made in the community. The project will be completed Net Absorption in phases totaling roughly 3 million sq. ft. Class A Class B Overall 2.0 Leasing activity remains steady 1.5

Leasing activity ended 2018 with a total of 6.8 million Millions (SF) sq. ft. of transactions in the Austin market—65% of which was fulfilled by Class A space and 34% 1.0 of Class B space—down from 10.8 million sq. ft. in 2017. The largest lease signings occurring in 0.5 2018 included the 320,095-sq.-ft. lease signed by Facebook at 3110 Esperanza Crossing in the North 0.0 submarket; the 307,771-sq-ft. deal inked by Indeed at 200 W 6th St in the CBD; and the 301,074-sq.-ft. -0.5 lease deal by Parsley Energy at 300 Colorado St, -1.0 also in the CBD. Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 www.naipartners.com/austin 2 AUSTIN OFFICE | Q4 2018 Quarterly Market Report

Investment sales activity Real Capital Analytics data reports year-to-date office sales volume for 2018 in the Austin area at Leasing Activity $1.5 billion. The fourth quarter sales volume was Class A Class B $359.7 million compared to fourth quarter 2017 at 3.5 $507.7 million, resulting in a year-over-year quarterly 3.0 volume change of -29.2%. The primary capital Millions (SF) composition for buyers in 2018 was made up of 2.5 62.3% institutional, and 19.7% private. For sellers, the majority was 49.1% institutional, and 35.5% private. 2.0 In December, Brandywine Realty Trust bought out its joint venture partner, New York-based DRA Advisors. 1.5 The Brandywine Partner Buyout TX Portfolio 2018 1.0 involved 12 office buildings totaling 1.5 million sq. ft. The portfolio included four buildings at Barton Skyway 0.5 (1501 S. MoPac Expwy.) in the Southwest submarket, 0.0 seven buildings at River Place (6500 Riverplace Blvd.) Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 in the Northwest submarket, and one building at 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Four Point Centre (11305 Four Points Drive) in the Far Northwest submarket. It has been reported that 5% of Brandywine’s income is from Austin, but that may Historical Investment Trends - Sales Volume jump to 18% by the end of 2019. Quarterly Volume 12/31/18: $359,742,681 Year-over-Year Change: -29.2 Source: Real Capital Analytics

Average asking rents at an all-time high Quarterly Volume Office asking rents in Austin are unsurpassed at 1,200 $35.43 per sq. ft., up $0.63 per sq. ft. quarter-over- quarter and $0.75 per sq. ft. year-over-year. Although Millions 1,000 concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a 800 market indicator, the price of Austin’s office space is climbing noticeably. The highest-quality space, 600 with the best location, and ease of accessibility will generate the highest rents. Asking rates for existing 400 Class A space in the CBD is at an average of $50.67 per sq. ft. The buildings with the most available Class 200 A office space in the CBD include 600 Congress Ave., One American Center (137,531 sq. ft.); 401 Congress 0 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Ave., Frost Bank Tower (121,761 sq. ft.); 111 Congress 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ave., One Eleven (106,456 sq. ft.); and 98 San Jacinto Blvd., San Jacinto Center (100,741 sq. ft.). There are two Class A buildings under construction in the Average Full-Service Asking Rent CBD with available space; 200 W. 6th St., Block 71 (365,000 sq. ft.); and 1400 Lavaca St., SXSW Center Class A Direct Class A Sublease Class B Direct Class B Sublease (100,524 sq. ft.). These four existing buildings, and $45 two under construction comprise 2.8 million sq. ft. $40 $40.05 with 932,470 sq. ft. (about 33%) of superior available space for lease. In the fourth quarter of this year, the $35 $33.77 average asking full-service gross rate for space in $31.81 these buildings was $53.87 per sq. ft. $30

$25 $23.71

$20

$15

$10 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 www.naipartners.com/austin 3 AUSTIN OFFICE | Q4 2018 Quarterly Market Report

MARKET OVERVIEW Submarket Stats

Overall Total Total Q4 2018 Net 2018 YTD Net Q4 2018 Q4 2018 Under Gross Avg Submarket Statistics Total Inventory Vacancy Availability Absorption Absorpiton Leasing Deliveries Construction Asking Rent (Total reflects Class A/B/C) (SF) (%) (%) (SF) (SF) Activity (SF) (SF) (SF) ($/PSF)

Austin Market Total 86,409,193 7.6 11.6 1,394,523 3,020,214 1,326,914 1,001,011 3,974,852 35.43

Class A 42,050,314 7.7 13.0 972,560 2,688,717 768,989 1,001,011 3,542,895 39.08

Class B 37,428,786 7.9 10.8 506,353 480,236 526,293 0 431,957 30.67

CBD Total 14,944,838 4.8 10.3 456,335 801,586 190,499 347,637 809,130 48.76

Class A 9,554,413 5.4 13.0 425,015 773,038 141,459 3 47,6 37 809,130 50.30

Class B 4,248,536 4.5 5.5 22,555 29,593 45,801 0 0 45.70

Central Total 6,136,874 8.2 10.4 -110,940 -37,940 87,981 0 276,391 32.36

Class A 1,592,872 7.0 8.5 12,361 9,150 18,689 0 250,000 43.03

Class B 3,271,767 10.7 13.4 -94,751 -17,0 92 61,351 0 26,391 30.27

Cedar Park/Georgetown/ Round Rock 6,017,486 5.5 7.6 103,207 151,501 45,429 22,906 96,160 30.90

Class A 3,079,760 6.5 8.8 115,965 113,264 39,497 22,906 59,510 32.26

Class B 2,619,172 4.9 7.0 -15,106 35,139 5,932 0 36,650 28.21

North/Domain Total 8,481,695 5.6 11.2 99,425 530,772 92,996 0 635,964 35.07

Class A 3,418,293 2.3 7.6 78,609 568,568 42,166 0 635,964 41.47

Class B 4,818,506 6.1 12.7 22,181 -25,205 50,830 0 0 28.37

Northeast Total 4,517,964 12.0 16.4 -89,489 -134,019 10,274 115,000 340,174 22.23

Class A 1,548,273 8.2 12.6 318 32,782 4,134 115,000 340,174 29.07

Class B 2,280,716 11.5 18.0 -17,0 87 -94,081 6,140 0 0 19.91

Northwest Total 20,849,070 7.8 11.5 -35,492 -78,932 272,548 0 444,329 33.87

Class A 11,540,753 8.3 12.9 -59,004 12,926 164,061 0 396,329 35.22

Class B 7,8 9 0,179 8.4 11.2 22,612 -88,256 108,487 0 48,000 31.06

South Total 3,528,932 5.8 11.3 36,699 84,108 58,407 76,741 208,389 32.85

Class A 951,765 8.0 17.9 15,174 114,232 26,706 76,741 208,389 35.30

Class B 1,765,480 2.7 6.5 16,293 4,681 13,309 0 0 32.68

East/Southeast Total 8,663,432 9.4 8.7 926,731 1,467,777 294,840 396,727 807,704 33.86

Class A 1,782,998 15.0 15.8 391,443 885,829 102,232 396,727 743,030 39.72

Class B 6,009,443 8.9 6.8 535,288 583,016 191,608 0 64,674 30.15

Southwest Total 13,268,902 10.4 16.6 8,047 235,361 273,940 42,000 356,611 38.01

Class A 8,581,187 10.4 16.8 -7,321 178,928 230,045 42,000 100,369 39.70

Class B 4,524,987 10.5 16.4 14,368 52,441 42,835 0 256,242 34.29

Suburban Total 71,464,355 8.2 11.9 938,188 2,218,628 1,136,415 653,374 3,165,722 33.75

Class A 32,495,901 8.4 13.0 547,545 1,915,679 627,53 0 653,374 2,733,765 37.27

Class B 33,180,250 8.3 11.5 483,798 450,643 480,492 0 431,957 29.57

www.naipartners.com/austin 4 AUSTIN OFFICE | Q4 2018 Quarterly Market Report

MARKET OVERVIEW Austin Office Submarkets 1. CBD 2. Central

195 95 3. Cedar Park/Georgetown/ 29 Round Rock 4. North/Domain

183 29 29 5. Northeast

281

130 6. Northwest

79 35 7. S o u th

71 45 8. Southeast 9. Southwest 620 183 1

290 290

183

71 360 130

290 71 35

95 21

183

45 21

130 304

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

AUSTIN OFFICE | Q4 2018 Quarterly Market Report JANUARY 2019

NAI Partners Austin Office 701 Brazos Street, Suite 320 Austin, Texas 78701 Leta Wauson Director of Research tel 512 580 6208 [email protected] www.naipartners.com/austin tel 713 275 9618