Offices Space Market Report Austin | Q4 2020

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Office space market report |Q4 2020

Austin office space is feeling the effects of COVID-19. Interestingly enough, lease rates are not correcting as expected.  During the last quarter of 2020, Austin vacancies rose 2%.  Current vacancy is now close to 17%.

Sublease market for office space

Subleases are increasing into 2021. This has been caused by COVID-19 effects pushing businesses out of business and further consolidations due to working at home. Full Service lease rates are remaining flat.  Pre-leasing is moving down significantly above 30% for the Austin office space market. You can cross compare with previous market news updates on our website.

Normalization predictions?

We predict some normalization potential into the summer of 2021. This is all predicated on Geo-political movements and the COVID vaccine distribution.Austin office properties for lease

Vacancy overview for the market

You can view office lease rates with our tracking chart for sub-markets. As stated earlier, average vacancy is near 17%. The NE and South sub-market has the highest vacancy rates at 40% and  32% for Class A office space. As a tenant , we would guide you towards those sub-markets for the best lease rates.

Shire Commercial has helped clients find suitable office solutions since 2004. We also provide recommendations for space planners, although most of the time the landlord’s team has planners they like to use. For your next Law office, contact Shire Commercial!

Commercial Real Estate Construction

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Commercial Real Estate Construction

A commercial real estate construction project is just like other projects. You will have a start date, benchmarks to hit, and an end date. The end date is the property being complete and a certificate of occupancy is issued. Commercial Real Estate Construction loans differ from other loans.  A draw schedule is set up to disburse funds which translates to the loan being funded. These loans are also called interim construction, temp construction to permanent  loans.

Draw Schedule 

Draw schedule defines as the dates funds distribute.  Let’s review a few key points on construction lending. Construction Loans do not fund at closing.  This way the lender can oversee the process while minimizing the amount if interest paid by the borrower.  To be more accurate, the construction loan is pre-fund an interest reserve account. Money from this account makes monthly interest payments. Funds deposited are figured by the lender using loan amount, interest rate and time of estimated construction.  The benchmarks that exist are the catalysts so money disburses. Larger deals have more benchmarks and are more complicated. This also allows the lender to monitor progress of the commercial real estate construction loan. An inspector will come and inspect the work making sure the borrower is using the funds for the construction specified. 

 

Budget Office Expenses

A lender will set up a budget that the borrower sends the lender for construction. These are limits set to each line item the borrower submits in a budget. When the inspection is complete, a report is submitted to the lender. The report is in review with a construction loan administration department. If approved, a draw request is processes.  Draw funds deduct from each line item which releases to the borrower. This way the budget will update in the computer systems to reflect a current balance of each line item.  This process will take 2-10 days. It is always important for borrowers to know when they need to pay the contractors.  You should submit a draw request ahead of the time.

 

Construction Schedule Changes

Typically a construction of commercial real estate does not occur on plan. Delays from municipalities, weather etc always effect construction completion.  A Loan’s interest rate is pre-determined on the estimated time to completion.  When delays happen, the builder will may their own interest payment.  Or, they can ask the lender to move funds from one line item to another.  A lender can deny a change request. Usually, denying a change request is not in the best interest of the lender.  A project must be complete before a borrower can covert to a permanent loan.

Business Valuation

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Valuation of a Business

What is your business worth? How do you value  a business , in this bog we will discuss valuation. If you are selling your business, you need to be able to accurately forecast revenue. This blog deals with a percentage ownership in your business. If you want to sell it 100% , you can figure the math based on a total sell out.

Revenues and valuation 

Typically if you want to sell a portion of your business, an entrepreneur will ask for a dollar amount based on percentage of ownership. Let’s say you want $100,000 dollars for a 10% ownership stake in your company.  This means you would need to provide accurate documentation that your business is worth $1M.  The math works like this: 10%  $100,000/ .10 = $1M n revenue. You will provide the last years sales. If your sales were $250,000, it theoretically would take you 4 years to get to $1M. Revenues and valuations are based on past revenues or current deals you have working. 

Earnings and Profit Office Expenses

If your company has $100,000 in profit then your earnings multiple would be 10.  We get 10 by dividing $1M/100,000.  Then what will happen is the earnings multiple of a like business can be applied to your business.  This is done as a comparison to see if this is a good investment and to understand the valuation.  Let’s say the earnings multiple for a widget manufacturer is 12. Using the Multiple of 12 X $100,000 the valuation comes in at $1.2M.  In this example the valuation is higher than your number at $1M. This makes sense for a sounder investment. 

See Cap rates for commercial properties.

 

Tesla Plant Austin

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Tesla Plant in Austin

Tesla announced they made the decision to open their Cyber truck factory near ABIA (Austin Bergstrom International Airport). The decision was made on July 27th during their earnings call. Here is an overview of the deal and the tax incentives provided to Tesla.  

Construction of Tesla Plant 

Forecasts for construction starts are for the third quarter of 2020. Start up forecasts are currently for the end of 2021. With that being said, many factors play into construction so we would predict the real opening may have a few months added onto the open date. Tesla’s venture started early in 2020 for its gigafactory.  The site is 2100 acres in Southeastern Austin.  There is criticism around no oversight on this development from an independent authority.  “Judge and county commissioners are allowing Tesla to write its own ticket and exempt themselves from county policy” according to Jeremy Hendricks (regional director for Laborers).

Tax Breaks

Overall the tax break for Tesla in Austin is $13.9 Million dollars. The tax rebates are incremental and they are as follows:

  • 70% Tax rebate for the first 1.1 Billion in investments 
  • 75% Tax rebate for the second Billion in investments
  • 80% Tax rebate for the third Billion in investments 

Tax revenue for Travis County will see approx $8.8M for the first 10 years of Tesla’s existence in the Austin area. Tesla promises to pledge 10% of its pre-incentive tax revenues to local nonprofits, education and transportation causes.  The deal is performance based, Tesla could lose on its tax breaks if it does not hold up their part of the deal. The company is also required to hire at least 50% of its workforce from residents in Travis county.  Minimum wage is the base line requirement at $15 per hour.  

Summary

  • 5,000 new jobs
  • SF 4-5 Million 
  • $8.8 Million in tax revenue over 10 years
  • $776,000 in school revenues
  • $13.9 Million in Tax breaks over 10 years

Retail Tenants and Landlord Bankruptcy

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Retail Tenants and Landlord Bankruptcy

Summary taken from NREI

We are starting to see quite a bit of fallout regarding retail tenants and landlord bankruptcy. As  retail tenants experience more difficulties from COVID 19 such as government shutdowns and shelter in place orders business is greatly affected. Even though there is some lifting of restrictions, the damage being done will be long. As a result, there is a rise of bankruptcy filings by commercial landlords.  What should retail tenants do to protect their rights during a landlord bankruptcy?

Landlord files for bankruptcy

When a landlord files for bankruptcy, they can keep in place or reject it’s unexpired tenant’s leases.  Within the Bankruptcy code there are provisions regarding this that do not change the terms of a lease. If you are a tenant and are not familiar with bankruptcy law (most are not) a tenant can run the risk of losing lease rights.  The unprepared tenant could lose potential opportunities within bankruptcy to improve the position of its lease. The position would be via other tenants and creditors of the landlord. 

Assuming and Retaining a lease

To assume and retain a lease , the landlord must cure all breaches. All monetary breaches are done at 100 cents on the dollar.  Retaining income from tenants is of the upmost importance to a landlord in commercial real estate. This is especially important for leases signed before the pandemic. Before the pandemic, leases garnered higher lease rates in Austin. For you as the retail tenant, retaining above market lease rates is not that appealing.  However, the bankruptcy code requires landlords to cure all existing defaults prior to lease assumption. Some lease defaults such as janitorial services for tenants are not required to cure. Tenants are compensated for damages due to non payment of tenant improvements. Also damages can be claimed for not maintaining the property. Landlords can only assume a lease after adequate assurance of future performance is complete.

Renegotiation

Landlords must by law cure breaches. This presents a good opportunity for a retail tenant to renegotiate their existing lease for more favorable terms. The tenant may accomplish by carefully analyzing its existing lease. They should provide a detailed and documented list of the landlord’s past and ongoing breaches. The lease analysis should include “measurable money loss” from defaults and also important non-monetary breaches that negatively affect the value of the leasehold.

For more information regarding bankruptcy and commercial real estate, a retail tenant should contact a CRE attorney.

 

Office Rent Reduction

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Office Rent Reduction

During the COVID-19 dilemma , let’s chat a bit about some options for you as a tenant for office rent reduction. I was having a conversation with a colleague yesterday (5/28/2020) about this. They told me they have had 1000 requests for rent reductions.  Needless to say, this is alot of requests! During the government shutdowns whether it be federal or local, you still have a business to run. So, what happens when you can’t make your rent? How long can you stay closed?  What are your options?

Requests for rent reduction

Depending on the length of time you have been “forced to close” will depend on a request for a rent reduction. As you are well aware , other options exist such as PPP and CARES from the government.  Keep in mind a portion of these solutions are loans and you will have to pay it back with interest at 3.75%.  If you are in a retail based business, you can first go to the landlord. Ask them for rent relief. How much should you ask for?  You ask for a percentage reduction or a dollar amount.  The option of the two is up to you.  There is a catch, you may have to pay the difference at the end. Here is an example:

Your rent is $1000 per month. You ask for a $200 rent reduction for 3 months.  The landlord agrees , so you pay $800 for the next 3 months. What about the $600 that is not paid? In this example, if your rent is static (unlikely) you pay $1600.00 for your last month’s rent. If you are in a location with multiple tenants having issues, you may have more leverage. The same example works for office and industrial.

COVID-19 Lease provisions?

There will be discussions that will happen due to this recent scenario. Should there be a provision in leases from now on regarding business interruptions caused by a government entity? We have not seen any provisions drafted as of today. To understand if there is a lease provision available to you , your Broker can recommend a CRE attorney.  Brokers and agents are not allowed to draft provisions into a lease, only deal points that have been agreed to. The business interruption may include recourse you have in case your business is shut down when it is not caused by your business.  You may also have a conversation with your insurance company to see if they will underwrite a business interruption policy based on government shutdowns.