Quarterly Market Report OCTOBER 2018

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Quarterly Market Report OCTOBER 2018 AUSTIN OFFICE | Q3 2018 Quarterly Market Report OCTOBER 2018 Supply & Demand EXECUTIVE SUMMARY Net Absorption Completions Vacancy 3.0 16.0% Vacancy down despite new deliveries to market 2.5 14.5% Austin’s overall vacancy rate dropped to 8.4% in Millions (SF) Q3 2018, a decrease of 20 basis points quarter- 2.0 13.0% over-quarter, and down 10 basis points year- over-year. Net absorption was positive 945,836 1.5 11.5% sq. ft. for the quarter, accelerating well beyond 1.0 10.0% last quarter’s -287,677 sq. ft. New construction delivered during the third quarter stood at 0.5 8.5% 808,832 sq. ft., bringing the year-to-date total to 2.4 million sq. ft. Full-service average asking 0.0 7.0% rents grew by $0.72 per sq. ft. quarter-over- -0.5 5.5% quarter to $34.87 per sq. ft., and up $0.62 per sq. ft. compared to this time last year at $34.25. -1.0 4.0% Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Austin economic indicators Austin’s unemployment rate increased slightly to 2.9% in August, though still below its post- Market Indicators recession average of 4.8% and a percentage Current Prior Quarter Year Ago Q3 2018 Q2 2018 Q3 2017 point below the state and national rates. Austin employment growth was modest over the three Vacant Direct 7.5% 7.8% 7.5% Vacant Total 8.4% 8.6% 8.5% months through August, with professional and business services making a significant rebound, Available Direct 11.3% 11.5% 10.9% with a 12.5% rise in administrative services. Available Total 13.3% 13.5% 12.4% Construction and mining also increased, adding Net Absorption (SF) 945,836 -287,677 270,452 1,800 jobs. Trade, hospitality and other services Leasing Activity (SF) categories rose at a healthy pace, while health 1,451,681 2,146,946 2,653,079 care and education services, finance and Construction (SF) 4,228,493 4,730,349 4,281,828 government all lost a significant number of jobs. Deliveries (SF) 808,832 270,294 209,208 Austin real GDP grew 6.9% in 2017, 2 percentage Avg Asking Rent (Gross) $34.87 $34.15 $34.25 points faster than the long-term average and Inventory (SF) 85,387,953 84,579,121 82,523,186 the fastest pace among U.S. metro areas with a population of more than 2 million. HOUSTON | AUSTIN | SAN ANTONIO www.naipartners.com/austin AUSTIN OFFICE | Q3 2018 Quarterly Market Report MARKET OVERVIEW Vacancy tightens and net absorption back in black Deliveries Vacant space in the Austin market contracted to 8.4% Class A Class B at the end of Q3, a decrease of 20 basis points quarter- 1.4 over-quarter and down 10 basis points compared to this time last year. Austin’s office market has 1.2 Millions (SF) remained robust, with overall vacancy rates remaining at or below 9.0% for the last eight quarters (Q1 2016). 1.0 Supply and demand have corresponded for some time now. Fundamentally, growing property demand 0.8 is supported by sustaining levels of new supply, which has been increasing in the Austin office market since 0.6 2014. In addition, the Austin office market ended the 0.4 third quarter of 2018 with close to 950,000 sq. ft. of positive net absorption, represented by positive 1.0 0.2 million sq. ft. of Class A space, and negative 10,296 sq. ft. of Class B space. 0.0 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Construction boom continues As of Q3 2018 there was 4.2 million sq. ft. of space under construction and another 800,000 sq. ft. Construction delivered in the Austin office market, including Class A Class B buildings that are primarily owner-occupied. Projects 5.0 in the development pipeline include Preserve at 4.5 620, a single-story 225,000-sq.-ft. office building Millions (SF) 4.0 located at 8201 North FM 620 in Northwest Austin. The property has 40,000 sq. ft. preleased to IAS 3.5 and the remaining 185,000 sq. ft. available with a 3.0 completion date scheduled for the end of 2018. In 2.5 addition, a 160,000-sq. ft. expansion of a Class A office building at 13620 RR 620 is underway in the 2.0 northwest submarket at Paloma Ridge. Delivery of 1.5 the entire complex is scheduled for late 2019 and will 1.0 total 371,000 sq. ft. in three buildings. Local experts estimate the rent around $25 to $29 per sq. ft., before 0.5 triple-net fees. Looking forward to late 2018 or early 0.0 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2019, The Employees Retirement System of Texas 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (ERS) will break ground on a new 200,000-sq.-ft. tower. ERS will occupy 10% of the 192,000 sq. ft. of office space, with an additional 15,000 sq. ft. of retail Net Absorption space located in the building. Class A Class B Overall 2.0 Leasing activity remains steady Millions (SF) 1.5 Leasing activity slowed during the third quarter with a total of 1.5 million sq. ft. of transactions in the Austin market—61% of which was fulfilled by Class A space 1.0 and 37% of Class B space—down from 2.1 million sq. ft. in Q2 2018. Recent significant lease signings 0.5 included social media giant Facebook, said to be the secret tenant behind the 320,000 sq. ft. lease 0.0 covering 17 floors at the Domain 12 office tower. TIER REIT is developing the building at 3110 Esperanza -0.5 Crossing that is scheduled for delivery in December 2019. Facebook currently leases over 100,000 sq. -1.0 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 ft. in the neighboring Domain 8 building. In addition, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 www.naipartners.com/austin 2 AUSTIN OFFICE | Q3 2018 Quarterly Market Report H-E-B has signed a long-term lease at 2416 E. 6th St. to develop a world-class tech facility. The recently converted industrial warehouse will become an office Leasing Activity loft/creative space building for employees of the H-E-B Class A Class B digital team and Favor’s corporate headquarters. 3.5 The two-story, 81,000-sq.-ft. facility is scheduled for completion in spring 2019. 3.0 Millions (SF) Office sales volume remains down 2.5 The rolling 12-month office sales volume as of 2.0 September 2018 has been down for 13 consecutive periods as investors continue to have a tough time 1.5 locating assets to acquire in Austin. Real Capital Analytics data reports year-to-date office sales volume 1.0 in the Austin area at $1.1 billion, resulting in a year- 0.5 over-year decrease of -13.5%. The buyer composition is made up of 40% private, 40% institutional, 9% 0.0 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 cross-border, 6% user/other, and 5% REIT/listed. A 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 positive sign for the Austin office sales market was the acquisition by Intercontinental Real Estate Corp. of the 388,000-sq.-ft. two-building office complex Austin Office Cumulative Monthly Sales Volume Year-to-date volume ($): 1141536958.979, Year-over-year chg: -13.5% Stonebridge Plaza I & II off N. MoPac Expressway in Source: Real Capital Analytics northwest Austin, for an undisclosed price, from KBS. 2018 2014 2015 2016 2017 3.0 Average asking rents continue to climb The market saw overall full-service average rates 2.5 increase $0.72 to $34.87 per sq. ft. from last quarter, Billions (SF) and $0.62 from a year ago. Although concessions 2.0 such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator, the price of Austin’s office space is climbing 1.5 noticeably. The highest-quality space, with the best location, and ease of accessibility will generate 1.0 the highest rents. Asking rates for Class A space in the CBD are at an average of $50.36 per sq. ft. 0.5 The buildings with the most available Class A office space in the CBD include 200 W. 6th St., Block 71; 0.0 111 Congress Ave., One Eleven; 600 Congress Ave., J F M A M J J A S O N D One American Center; 400 W. 15th St.; and 221 W. 6th St., Chase Tower. These four existing buildings, Average Full-Service Asking Rent and one under construction comprise 2.4 million sq. ft. with 32.7% or 776,000 sq. ft. of superior available Class A Direct Class A Sublease Class B Direct Class B Sublease space for lease. In the third quarter of this year, the $45 average asking full-service gross rate for space in $38.99 these buildings was $48.68 per sq. ft. $40 $34.56 $35 $30.30 $30 $25.37 $25 $20 $15 $10 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 www.naipartners.com/austin 3 AUSTIN OFFICE | Q3 2018 Quarterly Market Report MARKET OVERVIEW Submarket Stats Overall Total Total Q3 2018 Net 2018 YTD Net Q3 2018 Q3 2018 Under Gross Avg Submarket Statistics Total Inventory Vacancy Availability Absorption Absorpiton Leasing Deliveries Construction Asking Rent (Total reflects Class A/B/C) (SF) (%) (%) (SF) (SF) Activity (SF) (SF) (SF) ($/PSF) Austin Market Total 85,387,953 8.4 13.3 945,836 1,895,654 1,451,681 808,832 4,228,493 34.87 Class A 41,460,218 8.1 15.1 1,030,035 2,091,451 888,761 690,384 3,762,106 38.57 Class B 36,980,315 9.5 12.8 -10,296 -101,602 536,090 118,448 466,387 28.55 Overall Total Total Q3 2018 Net 2018 YTD Net Q3 2018 Q3 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) CBD Total 14,563,185 5.8 10.9 270,865 320,942 385,568 0 1,161,875 48.82 Class A 9,206,776 6.7 13.6 219,061 323,714 359,146 0 1,161,875 50.36 Class B 4,188,860 5.1 6.0 53,623 7,0 3 8 24,955 0 0 44.30 Central Total 6,116,610 6.4 10.0 5,956 73,000 101,754 20,001 26,391 31.27 Class A 1,592,872 7.7 8.7 21,932 -3,211
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