Eastside Special: Austin's Fourth Primary Submarket?

EASTSIDE SPECIAL: AUSTIN’S FOURTH PRIMARY SUBMARKET? 2Q 2016 Special Report

AQUILA 2Q 2016 SPECIAL REPORT

EASTSIDE SPECIAL: AUSTIN'S FOURTH PRIMARY SUBMARKET? Just

beyond

the

downtown

skyline lies Austin’s Eastside.

Less than a mile from the CBD sits one of Austin’s most authentic, eclectic and rapidly changing neighborhoods.

An area that has, for most of its recent history, been a working-class neighborhood is now one of the

HYDE PARK

UPPER EASTSIDE

city’s hippest hangouts. Named as one of the hippest neighborhoods in the country , coffee shops, bars, 1

breweries and taco stands can be found just steps from rows of quaint

MUELLER THE UNIVERSITY OF TEXAS

CHERRYWOOD

CENTRAL EASTSIDE

two-bedroom houses that have stood there since the days of the Great Depression.

DOWNTOWN AUSTIN

In 1990, out of the 21 census tracts

LOWER EASTSIDE

that make up the “Eastside,” 15 were eligible for gentrification2, but only one actually achieved gentrification status over the next ten years. In 2000, eighteen tracts were eligible for gentrification, and all but four of those have achieved it today – more than all other eligible tracts in Austin combined.3

EAST CESAR CHAVEZ

WINDSOR PARK

AQUILA 2Q 2016 SPECIAL REPORT

East Austin Household Income

Over the past decade, East Austin

100%

$75,000

has become a hotbed for house-

90%

$67,500

flippers, graduate students, young

80%

$60,000

professionals and new families. Multi-

70%

$52,500

family development has skyrocketed,

60%

$45,000

drawing a new demographic to live

50%

$37,500

in the neighborhood. Over the past

40%

$30,000

six years, more than 1,700 multi-

30%

$22,500

family units have delivered on the

20%

$15,000

Eastside. As of the second quarter

10%

$7,500

2015, there were another 1,900

0%

with almost one thousand more approved for development and ready

$0

2014

<$25k

$25k-50k

$50k-100k

$100k-200k

>$200k

Median household income

to break ground.

East Austin & Citywide Education

To see the appeal of the neighborhood is easy: its relative affordability within

90% 80%

the city, proximity to downtown and

70%

rich culture have made it a popular

60%

place to live and play. And now,

50%

the authenticity and sense of quirk

40%

that

30%

originally

2010

2000

multifamily units under construction,

drew

in

Austin’s

creative class is attracting new office prospects as well.

20% 10%

The Eastside is serving up to tenants what it is they are looking for: close

0%

East Austin

Austin Citywide

proximity to CBD, affordability, a

2000

plethora of nearby amenities, diverse transportation options and “creative”

East Austin

High school graduate or higher

Austin Citywide

Bachelor's degree or higher 2010

2014

Median Home Values $250,000.00

office space build-outs.

As rents in Austin’s primary three office

submarkets

steadily

climb,

demand has increased for welllocated,

amenity-rich

$200,000.00

$150,000.00

alternatives.

In the current real estate cycle, East

$100,000.00

Austin has emerged as a frontrunner to be Austin’s next established office

$50,000.00

market. $0.00

2000 Median Home Value East Austin

2010

2014

Median Home Value Austin Citywide

(Source: US Census and American Community Survey)

AQUILA 2Q 2016 SPECIAL REPORT

A DIFFERENT OFFICE PRODUCT While many of the Austin office buildings AQUILA

Much like the houses in the area, the office buildings

traditionally analyzes are large, class “A” multi-tenant

each have their own unique architecture. Eleven11,

properties with built-in amenities such as fitness

for example, features a rust-colored facade with a

facilities, delis, etc., the office projects rising on the

striking cantilevered terrace covering the sidewalk

east side are of quite a different ilk. You won’t find

below. Further east, you will find old warehouses

high rises or large, sprawling corporate campuses

converted into creative office suites alongside

here. Instead, offices on the Eastside range from

breweries and bistros. These aesthetics and amenities

converted warehouses to new mid-rise, mixed-use

tend to attract a millennial-minded tenant-base.

construction. These office projects often embody the eclectic vibe of the neighborhood, giving way to multiple “creative office” projects under development.

Given the unique positioning of East Austin within the overall office market, this budding area offers spaces to suit the needs of different types of tenants. Typical spaces offer open ceilings, stained concrete floors, and exposed brick and ductwork. Floorplates are also smaller than those in

Eleven11

the other primary submarkets, resulting in more open layouts.

This is largely due to the land-use and development

While established accounting or legal firms continue

restrictions that run through much of the Eastside.

to look for space in the Southwest, Northwest or

Some of the built-in amenities typically found in the other submarkets aren’t found in Eastside office projects. Rather than having an on-site deli or fitness area, offices capitalize on the abundance of pre-existing retail within walking distance. Some companies even offer credit to their employees to make use of nearby fitness studios.

CBD, Eastside office projects are competing instead to attract more creative tenants such as advertising, media, music and web-design companies, which are the fastest-growing segments of talent moving to Austin, and more specifically the Eastside.

AQUILA 2Q 2016 SPECIAL REPORT

DEFINING THE SUBMARKET In order to more clearly analyze the Eastside as an

professionals spending their weekends in the area,

office submarket, we limited the definition of the

whereas the thought of crossing I-35 on a Saturday

East Austin office submarket to the following area:

night was not even a consideration just five years

north of the Colorado river, between I-35 and US

ago. Now, locally-owned businesses thrive east of

183. This area can also be parsed into three smaller

downtown, bringing in customers who might live just

micromarkets: The Lower Eastside, Central Eastside

blocks away or across the country on vacation. What

and Upper Eastside. (See the map on page 7 for

was once a generally overlooked neighborhood full

reference.) These three areas each have their own

of worn-down houses is now being redeveloped into

unique culture and style, attracting a mixed pool of

a tourist destination live with contemporary homes

tenants and office product.

and nationally-renowned boutiques, bars and restaurants.

Lower Eastside

The increase in popularity can be partially attributed to the city designating East 6th as a core

The Lower Eastside is comprised of the area north

transportation corridor, allowing increased traffic

of the river, west of 183 and south of 12th Street.

flow to and from downtown. The added ease-of-

This micromarket is so close to the CBD—just across

access has given rise to thousands of Class A multi-

I-35—that it is almost an extension of downtown

family units being developed over the past decade,

itself. The city has instituted several measures to

with many more under construction and in the

help facilitate growth in the area, and the area has

planning stages.

responded favorably.

Developers are also taking advantage of the Lower

Here you will find the highest density of bars and

Eastside’s popularity with several mixed-use projects.

restaurants outside of downtown. The East 6th

One such project, Eastside Village, is currently under

Street entertainment district, for example, has

construction and offers both a new Class A

seen an explosion of college students and young

Patio at Burn Pizza + Bar on East 6th Street

AQUILA 2Q 2016 SPECIAL REPORT

office building (recently purchased by CIM Group

developer of the Domain in Northwest Austin first

in June) and 800 multi-family units atop ground

dipped their toes into Lower Eastside waters with a

floor retail. Tenants who have signed on at Eastside

little project at 2021 E. Fifth Street in 2013. Targeted

Village early to take advantage of the excitement of

towards the creative workers that reside in the area,

the area include C3 Presents, who relocated their

the project was quickly preleased by EnviroMedia,

headquarters from downtown, and Conde Nast,

one of Austin’s most notable marketing firms. The

who will be opening their new Digital Innovation

success of the development has since been followed

Center in the building.

by another, larger proposed office project, 901 E.

Blocks

away

6th, which is still in the

from

planning stages.

Eastside Village will be Endeavor Real Estate Group’s Plaza Saltillo, which will offer over 100,000 square feet of retail and office space, a public park, and 800 residential units. Plaza Saltillo is one of the city’s two designated

Some of the greatest potential on the Eastside lies in redeveloping existing owner-occupied offices into multi-tenant, Class A buildings.

Adjacent to Eastside Village and

Plaza

Saltillo

are

two more multi-use office developments: The Foundry

by Cielo and Fourth & by Capsa Ventures. Currently under construction, these two projects combined will feature over 100,000 sf

Transit

of office space and 115

Oriented Development

residential units. Although

(TOD) sites on the Eastside. The TOD presents an

smaller

exciting opportunity for tenants to capture a whole

developments, the rise of these live/work/play

new mix of commuters who will be brought to their

solutions attest to the growth of the Lower Eastside’s

area from as far away as Leander via MetroRail.

popularity, proving that just one or two developments

Endeavor’s involvement on the Eastside is a testament

are not enough to capture all of the demand in the

to the area’s high demand for office product. The

area.

Food truck park on East 6th Street

than

Transwestern’s

and

Endeavor’s

AQUILA 2Q 2016 SPECIAL REPORT

Starting Rental Rates - CBD vs Lower Eastside Source: AQUILA Market Research Lease Comparables

$45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 1/1/2010

1/1/2011

1/1/2012

12/31/2012

1/1/2014

1/1/2015

1/1/2016

Lower Eastside Starting Rent

CBD Starting Rent

Lower Eastside Starting Rent Trendline

CBD Starting Rent Trendline

1/1/2017

1/1/2018

While large ground-up mixed-use redevelopment

in redeveloping existing owner-occupied offices

projects like the Eastside Village and Plaza Saltillo

into multi-tenant, Class A buildings. Prime examples

are getting most of the hype on the Lower Eastside,

of such projects are the former Goodwill Career

there is a plethora of smaller projects that continue to

Academy building at East 6th and Chicon Streets

change the landscape. Central Austin Management

and the Capital Area Rural Transportation System

Group, for example, has two projects along

office less than a block down the street. These

Springdale Road – Canopy and Springdale General

projects—recently sold to office developers—will

– that will include over 200,000 sf of space across

add over 200,000 sf to the market. Riverside

more than 15 buildings. Also in planning stages

Resources has four total sites of this kind under

is 1719 East 2nd Street. Much like the recently

ownership on the Lower Eastside awaiting lead

delivered 2400 Webberville and 1711 Cesar

tenants to break ground on potentially 300,000+ sf

Chavez projects, this 10,000 sf project embodies

of space between the four of them.

the “creative” solution that small marketing and technology firms are looking for on the Eastside: white-box conditioned with custom finish-outs at a low rent.

Some of the greatest potential on the Eastside lies

As demand for limited downtown space increases, the rise of the Lower Eastside as an extension of downtown appears to be imminent. As shown in the graph above, starting rental rates are quickly approaching downtown levels

AQUILA 2Q 2016 SPECIAL REPORT

EAST AUSTIN

51

ST ST

11 AIR

RT B

LVD

38

TH

MANOR

5

BERKMAN DR

DEVELOPMENTS

18

12

PO

1/

2S T

7

RD

26

BLVD ING JR K R E H LUT MARTIN

2

29 1 1TH ST

RIN SP

NS T ICO

AVE Z

ST

T V ALLE Y RD

CH

CH

AR

24

D

CES

1 16

17

V RT BL

31 23 19 20 4

3

SAN

10 30

15

PLEA

25

9

AIRPO

AIL

ST

ROR

8 21 27 13 32 14 22

AL

MET

ST

VE OOD A ROSEW

33

CO M

6TH

GD AL

ER

D

28

6

AQUILA 2Q 2016 SPECIAL REPORT

OFFICE Project Name

Status

Completion Date

Office SF

Developer/Owner

Endeavor

1

2021 E. Fifth Street

Recently Delivered

2014

30,100

2

2921 E 17th St Bldgs B-D

Recently Delivered

2015

100,000

3

2400 Webberville

Recently Delivered

2015 Q2

8,000

4

1711 Cesar Chavez

Recently Delivered

2016 Q2

7,156

Emergence Commercial Realty

5

The Diamond Building at Mueller

Under Construction

2016 Q3

37,198

Catellus

6

atx Factory

Under Construction

2016 Q3

11,500

Vijay Mehra

7

The Station on Manor

Under Construction

2016 Q4

31,600

Lincoln Ventures

8

901 E 6th

Planned

2017 Q1

132,000

Endeavor

9

Springdale General

Planned

2018 Q1

165,000

Central Austin Management Group

10

The Lab on East Sixth (CARTS Site)

Planned

2018 Q4

115,000

Altair

11

Build to Suit Opportunities at Mueller

Planned

TBD

2,000,000

Catellus

12

The Park at Mueller

Planned

TBD

116,000

Catellus

13

6th & Onion

Planned

TBD

100,000

Riverside Resources

14

5th & Onion

Planned

TBD

82,000

Riverside Resources

15

1817 E 6th (Former Goodwill)

Planned

TBD

80,000

Riverside Resources

16

4th & Robert Martinez

Planned

TBD

43,000

Riverside Resources

17

Canopy

Planned

TBD

40,200

Central Austin Management Group

18

2015 Manor

Planned

TBD

23,000

Lincoln Ventures

19

Chavez Village

Planned

TBD

14,618

ECC Commercial

20

1719 East 2nd

Planned

TBD

10,000

Lonestar Syndicate

MIXED USE Project Name

Status

Completion Date

Office SF

Retail SF

Residential Units

Developer/Owner

16,000

256

Cypress

7,500

348

Transwestern

97

Capsa Ventures LLC

208

Trammel Crow Residential

18

Cielo Property Group

21

Corazon

Recently Delivered

2015 Q2

22

Eastside Village

Recently Delivered

2016 Q2

94,500

23

Fourth &

Under Construction

2017 Q2

42,000

24

Alexan on 6th

Under Construction

2017 Q2

25

The Foundry

Under Construction

2017 Q4

75,369

26

The CityLine at MLK Station

Planned

2017 Q3

134,000

11,000

22

CityLine Development

27

Plaza Saltillo

Planned

TBD

120,000

110,000

800

Endeavor

28

One Two East

Planned

TBD

472

Legend Communities

6,440

MULTI-FAMILY Project Name

Status

Residential Units

Completion Date

Developer/Owner

29

Eleven by Windsor

Recently Delivered

257

2013

Windsor

30

7East

Recently Delivered

186

2015

Stonelake

31

Eastside Station

Recently Delivered

330

2016 Q2

Flournoy

32

Spire

Planned

260

TBD

33

8th and Embassy

Planned

176

TBD

AQUILA 2Q 2016 SPECIAL REPORT

for new deals done on the Lower Eastside.

million square feet of office and retail use, and over

While rates have historically hovered around 60%

100 acres of public open space. The development

of those in the CBD, recent deliveries of Class A

is nearing its final stages of construction, with the

spaces within the past year have fetched rates on

majority of commercial space completed with the

par with those in older buildings downtown. With

exception of several build-to-suit opportunities.

over 800,000 sf of office product in its pipeline, the Lower Eastside is set to prove itself as a major player for centrally-located Austin office space.

The most notable tenants of the Mueller district include Seton Healthcare’s administrative campus and Texas Mutual Insurance Co., who announced

Furthermore, Reconnect Austin plans to physically

in April that it will be building its new corporate

remove the greatest barrier between downtown

headquarters next to Dell Children’s Medical

and the Lower Eastside: I-35. The Reconnect Austin

Center – one of largest office deals of the year at

plan proposes to bury I-35 underground and literally

270,000 sf. The close proximity to the new UT

bridge the gap between downtown and East Austin

medical school and Dell Children’s Medical Center

with surface-level walkways, mixed-use buildings

makes the area desirable to medical office users.

and open areas. While such plans will likely not be realized anytime soon, they point to the growth of

As the popularity of East Austin

East Austin as a primary urban area.

continues to grow, tenants and residents Central Eastside

alike will surely desire the next, hippest spots with affordability and

To the north of 12th Street from the Lower Eastside lies

proximity to downtown.

the Central Eastside. The Central Eastside extends up to 51st Street and East to Highway 183. If the Lower Eastside is considered an extension of downtown, then the Central Eastside would be considered an

The Central Eastside is also home Austin’s second

extension of the University of Texas. Just east of I-35,

transit oriented development east of I-35: MLK

UT has its baseball and softball fields, as well as

Station. Cityline Companies LLC is planning the

several administrative buildings. The university is still

Cityline at MLK Station development. Set to deliver

in the market to purchase and redevelop lots as it

in 2017, the CityLine Development will offer over

expands its footprint.

130,000 of office space, 11,000 sf of retail,

The Central Eastside is tamer than the Lower Eastside, as residents are typically graduate students or young families, often new to Central Texas. To that end, multi-national retailers are more apt to lay claim to this area, most notably in the Mueller Community.

After Austin’s first civilian airport, Robert Mueller Municipal Airport, was replaced by Austin Bergstrom International Airport in 1999, the 700-acre site was redeveloped into a Planned Unit Development (PUD)

by Catellus. The area is replete with single and multi-family housing for over 13,000 residents, 4

and 36,000 sf of residential townhomes, as well as a structured parking garage. Currently under construction across the street, the MLK Station Apartments will also offer 355 multi-family units as well as 11,000 sf of restaurant and retail space.

100,000 sf of office space already exists at MLK Station. Completed in 2015, 2921 East 17th Street Buildings B-D are fully leased and home to several Austin

nonprofits,

including

Sustainable

Food

Center, PeopleFund, Creative Action and Interfaith Action of Central Texas.

AQUILA 2Q 2016 SPECIAL REPORT

Eastside Village

Thoroughfares such as Airport Boulevard, Manor Road and Martin Luther King Jr. Boulevard are examples of core transit corridors connecting the Central Eastside to the rest of Austin, and many retailers are capitalizing on the added traffic generated by the increased accessibility. Manor Road, for example, has several of the hippest new bars outside of the downtown and East 6th areas, as well as Salty Sow, one of Austin’s must-eat restaurants, as evidenced

by Michelle Obama’s recent patronage during this year’s SXSW conference. Lincoln Ventures is one of the first office developers to capitalize on the Manor Road frenzy with two creative office buildings under construction at The Station on Manor – just blocks away from the MLK Station TOD – and another mixed-use development set to break ground later this year: 2015 Manor, which has already signed Texas Mutual Insurance Company for approximately 270,000 sf.

Upper Eastside The Upper Eastside, defined by the area north of 51st Street, south of Highway 290 and west of Highway 183, is the least developed office market.

Here you will find mainly older, Class B and C office buildings along the highways and mid-to-late-century homes in between. The area is not to be dismissed; however, as just north of Highway 290 lie several industrial complexes, and many would argue that the Lower and Central Eastside looked much like this area does now just a few decades ago. As the popularity of East Austin continues to grow, tenants and residents alike will surely desire the next, hippest spots with affordability and proximity to downtown.

Furthermore, with Round Rock just to the north and quickly expanding down I-35 as plans are set in place to ease the traffic flow, the two growing areas will have to meet somewhere in between.

1711 Cesar Chavez

WHAT DOES THIS MEAN FOR YOU? Landlords: The Eastside presents an exciting

Tenants: If you’re looking for an opportunity to re-

opportunity to invest in one of Austin’s fastest grow-

locate within Austin, the Eastside is in high demand

ing submarkets. With so much support from the

and can be a great fit for modern tenants. With

City of Austin to develop the area, and with more

a burgeoning bar and restaurant scene, employees

gracious land-use regulations, the neighborhood

will be enlivened to office within walking distance

has certainly not hit its full potential yet. As long as

of some of Austin’s coolest amenities. Chances are

Austin continues to grow, people are going to flock

some of your employees are already living there.

to the Eastside since it embodies so much that Aus-

Time is of the essence though, as rents are growing

tin stands for: quirky, creative, authentic, unique.

at a faster pace than in other submarkets. One of

This makes the Eastside more of a competitor to

AQUILA’s own clients, for example, signed a lease

capture the media-type and technology firms that

on the Eastside for $12 per sf in 2012. Just three

may have historically looked for space in the other

years later they signed another lease on the Eastside

primary submarkets. An example of such a compa-

for double that amount. With most new build-outs,

ny is Conde Nast. Just five years ago it would have

asking rents are in the low-to-mid-twenties, compara-

been unimaginable to see a multinational media

ble to those in the Northwest submarket.

publishing company sign a lease for space east of I-35. Now, however, the company will feel right at home.

1

http://www.forbes.com/sites/morganbrennan/2012/09/20/americas-hippest-hipster-neighborhoods/#30546b41ccaa

To be eligible to gentrify, a tract's median household income and median home value needed to fall within the bottom 40th percentile of all tracts within a metro area at the beginning of the decade. Tracts considered to have gentrified recorded increases in the top third percentile for both inflation-adjusted median home values and percentage of adults with bachelors’ degrees.

2

3

http://www.governing.com/gov-data/austin-gentrification-maps-demographic-data.html

4

Reconnectaustin.com

View more special reports at:

aquilacommercial.com/reports

The information contained herein has been obtained from sources believed reliable. AQUILA Commercial, LLC makes no guaranties or warranties as to the accuracy thereof. The presentation of the property is submitted subject to the possibility of errors, omissions, change of price, rental or other conditions, prior sale, lease or financing, or withdrawal without notice. Included projections, opinions, assumptions or estimates, are for example only, and may not represent current or future performance of the property. Information is for guidance only and does not constitute all or any part of a contract.