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Posted Mar 23, 2020, 9:18 PM
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Join Date: Sep 2015
Location: Austin, TX
Posts: 3,597
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The coronavirus' impact on commercial real estate in Austin: Many tenants hitting pause on office space searches
The economic fallout from the COVID-19 pandemic is already causing demand for office space to fall around the country. Austin’s strong market isn’t immune.
About 75% of the lease deals that Colliers International is working on in Austin are on hold, said Alex Durham, a senior associate at the firm who represents tenants.
“The immediate reaction is that people aren’t making real estate decisions unless they are forced to,” he said. “It’s bleak out there from a tenant on the ground [perspective].”
Austin employers affected by the cancellation of public events and the slowing of new construction projects are evaluating layoffs as employees are typically their largest expense, Durham said. Their second largest expense is usually office space so that’s also being reevaluated.
“If this thing drags into May, we will really see the impact of it,” he said.
By and large, the tenants that are signing leases right now are those with leases that are expiring in the next several months, and those working on deals involving new construction or a major renovation, real estate experts said.
Commercial real estate brokers interviewed by the Austin Business Journal, though, are optimistic that the Texas capital will be able to bounce back quickly from the economic recession the country is likely facing.
Austin has seen some of the fastest rent growth in the country, especially in the Central Business District. Over the last 13 years, Austin saw office rents downtown increase by 80%, CoStar Central Texas Economist Sam Tenenbaum said in February. In the past year, Austin’s metro saw 5.2% rent growth owing to low vacancies — office vacancy was 10.7% in the fourth quarter, according to CBRE Group Inc. — and an extremely low unemployment rate hovering around 2.6%.
Economic forecast
In a March 23 webinar, Cushman & Wakefield Chief Economist and Global Head of Research Kevin Thorpe said it is “pretty clear” U.S. and global economies are now in a recession amid the ongoing pandemic. But, it’s the National Bureau of Economic Research that will make the official determination.
As of right now, though, the true impact the pandemic will have on the economy and the commercial real estate market is unknown, he said. There is no precedent for how to model how this crisis will play out, but it is fast moving.
Just eight weeks ago, Oxford Economics was forecasting real gross domestic growth in the U.S. of 1.8% for 2020, Thorpe said. Two weeks ago, they were forecasting it to be 1.3%. Last week, on March 20, Oxford Economics forecasted that GDP would drop 0.2% in the year.
Most economists are predicting the recession “will be sharp and most of the economic pain happening in the first half of this year,” unlike the Great Recession of 2008, which lasted 18 months, he said. The second quarter will be “brutal,” and Oxford Economics is forecasting a 10.8% decline in U.S. GDP, Thorpe said.
A strong economic rebound in the second half of the year is possible, but it depends on the path of the virus, he said. Oxford Economics is forecasting GDP to grow by 14.5% in the fourth quarter of this year, Thorpe said.
“I almost fell out of my chair when I saw that,” he said.
Thorpe said the data point to watch is when the number of new coronavirus cases begins to drop dramatically. That could start to happen in April, he said.
The segment of the commercial real estate market that is getting hit hardest is the one that depends on daily human interaction including hotels and retail, Thorpe pointed out.
Thorpe said investors and occupiers of commercial real estate are in a “wait and see” mode. Investment sales could be down 30% to 40% during 2020, he said.
Demand for office space is down in most markets, but he didn’t make a forecast on leasing. “It’s too early to model that with any precision,” he said.
The good news, he said, is the commercial real estate market was in better shape entering the downturn than before previous recessions.
Austin leases
Matt Levin, managing principal of Austin-based Equitable Commercial Realty, said tenants and landlords are being more cautious right now, but deals are still happening. He said ECR has several leases that were signed just last week.
He said a lot of people are being very reactionary right now but he advises them to be patients as the downturn will likely be short lived.
While a slow-down is likely, Levin said Austin is one of the best markets in the country and will rebound quickly.
Durham said he had four deals put on hold last week. This week he went from having 15 active deals to three. He said those deals aren’t dead but tenants are hitting pause until they know how long the pandemic and its economic repercussions will last.
Casey Casper, senior associate at Stream Realty Partners, said he is also seeing lease transactions “both small and large come to a screeching halt as companies navigate what to do next during this unprecedented time.”
What to do now
Right now, tenants should be talking to their brokers and landlords. They should be looking at their force majeure clauses, Durham said. Courts may soon begin to rule if the pandemic and closures forced by the government will give tenants an out on their lease.
Tenants that are worried about cash flow now should work with their broker and landlord to see if they can get an amendment on their lease that would allow for a few months of free rent with the extension of a lease, he said.
“I think if this thing drags out that ought to be something that every tenant in Austin at least is considering with a broker,” Durham said.
He said most landlords are working with tenants because they don’t want to be faced with empty buildings in the months to come.
After years of Austin being a landlord’s market because of low vacancies, Casper said the pandemic could give tenants more negotiating power.
“Assuming this pandemic has a lasting effect on the overall economy, this will force landlords to be more flexible on providing concessions, with lease terms likely being the most desired by our tenant clients,” Casper said.
A trend that could also emerge is more tenants looking to save cash by leasing in class B office buildings and turnkey subleases, he said.
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https://www.bizjournals.com/austin/n...al-estate.html
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