HOW DO NEW OFFICE DEVELOPMENTS AFFECT SURROUNDING RENTAL RATES? Q2 2015 Special Report
AQUILA Q2 2015 SPECIAL REPORT
Due to the plethora of recent deliveries and projects under construction in Austin, AQUILA’s Market Research team delved deeper into the role these new properties play in their respective areas. More specifically, we analyzed how the rental rates of the surrounding properties fluctuate in response to new product, from well before ground breaks and construction starts, to several years into the buildings’ existence. According to our analysis (see below for methodology), you can segment the effect of a new development into four time periods:
A
$4
B
D
C
Price Above/Below Average Austin Avg-As-Is NNN ($/sf)
$3
$2
$1
$0
-30
-20
-10
0
10
20
30
-$1
-$2
-$3
-$4
-$5
-$6 Quarters Before/After New Construction Average of New Construction Rental Price Compared to Austin Market
A)
Trend Line
6.5 years to 15 months prior to new build: The starting average rental rate trend moves from about $4.00
below to about $1.25 above the average Austin rental rate. This rise in rates is likely due to the increasing demand in the area immediately surrounding a newly constructed building, which drives developers to build new product there.
B)
15 months prior to 9 months after new build: Rental rates level off to about $1.25 above the average
Austin market rate. This can be explained by the new supply catching up to the demand in the immediate area of the new construction during the lease up period, creating a temporary equilibrium. Preleasing generally begins during this time period coinciding with construction being far enough along to allow potential tenants to see the space, so the pent up demand starts to get addressed.
C)
9 months to 4.5 years after new build: Rates in the area surrounding the new development begin to fall
with respect to the overall market. Surrounding buildings are now competing for tenants with the new office space. The leases that were signed at the new building have alleviated the increased demand.
D)
4.5 years and beyond: The difference in rates compared to the overall Austin market bottoms out and the
cycle starts over. Leases are starting to expire from the new deals struck during the construction process, so demand is building again.
AQUILA Q2 2015 SPECIAL REPORT
WHAT DOES THIS MEAN FOR YOU? Tenants: If you are looking at space or renewing in a location close to a new project, the ideal window of opportunity to negotiate a renewal is either as far prior to a new building's delivery or a couple of years after the new development has delivered.
Landlords: If potential tenants are negotiating with you during the second or beginning of the third time period, it may behoove you to do what you can to secure as much term as possible. This may be in your best interest since your rental rates will likely have to drop by a dollar or more, relative to the rest of the market, the further away from the new construction you get.
METHODOLOGY Step 1:
Lease data was collected in the Austin suburban markets for buildings constructed near new developments from 2002 to 2013. This yielded 42 developments to analyze.
Step 2:
The developments were plotted on a map. For each new development, a fixed radius was drawn so that all existing buildings within this ring at the time of the development were identified for analysis.
Step 3:
Starting rental rates were tracked on a quarterly basis for each of the marked existing properties. Using the delivery of the new development as time “0,” the tracked starting rental rates were assigned a time relative to the delivery date (i.e. “-4” would represent the starting rental rate 4 quarters prior to delivery).
Step 4:
The tracked rental rates in Step 3 were compared to the average starting rental rates throughout Austin at the same relative time to each of the new building deliveries. The differences of these 2 geographies were the metric used in the study. For example, if the average starting rental rate at the time “-4” near the new development was $30/sf and the average starting rental rate in Austin was $28/sf at that time, then the rate above the average Austin rate was $2/sf. This methodology normalizes the data to account for economic forces that occur over time.
Step 5:
This process was repeated for all 42 tracked buildings, and the differences between the starting rates for the buildings close to new developments and the overall Austin market were averaged together for each time period. The results are displayed in the graph.
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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.