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AUSTINOFFICE MARKET

RESEARCH 2Q 2018

© NEWMARK KNIGHT FRANK | 2018 RESEARCH | 1

AUSTIN MARKET A MIXED MESSAGE

of 2018. The office metrics reflected this slow down, as market conditions remain mostly favorable to landlords yet tenant-favorable areas are beginning to emerge. Rental rates fell 2.1% to $34.01/SF for all building classes in the market. Class A rates fell from $39.70/Sf in the first quarter and currently sit at $38.30/SF. Although vacancy continues to exceed 10.0%, overall it remains within the current cycle

trend of negative absorption, as an additional 336,932 square feet of space came back to the market in the past 90 days.

Leasing activity for the quarter reached its lowest point since the fourth quarter of 2009, another sign of a slowing market. The average transaction size of 5,262 square feet, was an increase of nearly 1,000 square feet from the prior quarter. Consequently, several submarkets saw average-per-square foot leasing that was larger than anticipated.

in terms of leasing activity and rental rates. For example, both the Central Business District and Southwest Austin submarkets have

$47.71/SF asking rent being a market high. When Class A rental rates are examined, the strength of a premier building address is further

commanding in excess of $40.00/SF on a direct basis. As a result, tenants looking to capitalize on both space needs and rental value have begun to expand their search to the outlying areas and nearby cities

Although the year to date has seen just one office delivery, construction remains active within the Austin market. When current under-office market could see a nearly 5.0% percent spike in overall inventory within the next 24 to 36 months. As a result, the market has seen a cooling in terms of transactional dollars and volume on the investment front. However, out-of-state and foreign investors remained active in the Austin market, which as a whole offers value compared with other gateway markets. Investors continue to focus on a strongly leased core building within the major Austin submarket and have begun to view these investments as longer term holds for their balance sheets.

CURRENT CONDITIONS

Rental rates have fallen over the past 3 quarters to $34.01/SF; Class A rents have fallen to $38.30/SF

Two consecutive quarters of negative absorption breaks string of 19 consecutive quarters of positive absorption

Availability rate up 101 bps from Q1, and 40 bps year over year

MARKET ANALYSIS

Asking Rent and Availability

Net Absorption (SF, Millions)

MARKET SUMMARYCurrent Quarter

PriorQuarter

Year AgoPeriod

12 MonthForecast

Total Inventory 60.8 MSF 59.9 MSF 60.6 MSF

Availability Rate 10.5% 9.4% 10.1%

Quarterly Net Absorption -336,932 -237,169 412,492

Average Asking Rent $34.01 $34.61 $33.86

Under Construction 911,454 933,165 617,369

Deliveries 1 0 3

8%

10%

12%

14%

16%

18%

$22

$25

$28

$31

$34

$37

2Q13 2Q14 2Q15 2Q16 2Q17 2Q18

Average Asking Rent (Price/SF) Vacancy (%)

-1.00

-0.50

0.00

0.50

1.00

1.50

2Q13 2Q14 2Q15 2Q16 2Q17 2Q18


2Q 2018 AUSTIN OFFICE MARKET

combination of economic vitality, high wage-earning population, low cost of living and competitive business environment continue to draw

number of number of tech companies.

SPEC AND BTS CONSTRUCTION UPDATESlowing to balance demand

the board, including traditional users of office space such as law firms, and more tech trendy development firms, are putting more people in less space. In certain instances, firms are focusing on an 8 to 12 person per 1000 square foot metric for space planning. Users are quickly shifting to this metric in order to make more efficient use of their space. Yet, many office developers are still lagging in designing buildings that can accommodate these higher density tenants, even though doing so could raise their potential to achieve premium rental rates as well as higher lease-up percentages.

In terms of developments currently under construction, Austin is still seeing strong development from both a single-tenant and multi-tenant perspective. The Northwest and Southeast submarkets are home to the Charles Schwab and Oracle campus developments respectively, which remain scheduled to deliver at or near the end of the 2nd quarter of 2018. These new developments represent nearly 1.0 million square feet of single-tenant Class A office development. There are 15 other multi-tenant and/or spec developments underway in the Austin market, highlighted by the Domain Tower and Domain 11 office buildings in the Northwest, Third+Shoal in the CBD and multiple other developments in the East and South submarkets that are slated to deliver by late 2019.

Perhaps the most intriguing of all the new developments remains the 1400 Lavaca space in the CBD where the world-famous South-by-Southwest music festival headquarters are slated for in early 2019. An additional nearly 8 million square feet of proposed office developments remain in the planning stages and are awaiting either a strong pre-leasing commitment or continued existing tenant demand. Developers remain wary of a potential overbuilding situation similar to other formerly robust Texas office markets.

AMAZON HQ2Austin on the short list

When Amazon issued its shortlist of 20 metro areas for the companies HQ2, Austin not surprisingly made the list, along with the DFW area for potential Texas sites. However, the location of the potential HQ2 site within the Austin market remains a challenging proposition. Amazon has said it needs up to 500,000 sq. ft. of space by 2019, and ultimately requiring as much as 8 million sq. ft. Rumored to be on a short list of sites that could accommodate both the immediate and long term needs of Amazon include a the 66-acre Broadmoor campus, which is next to

-plus acre campus in East Austin; the 19-acre American-Statesman property along Lady Bird Lake as well

savvy employment base, business friendly environment and other -end

campus announcement. Should Austin be chosen, it will be worth

accommodate the rumored 1000 plus six-figure jobs that the campus will create as well as other economic and real estate impacts that the city will see.

AVERAGE ASKING RENT BY SUBMARKET

Average Asking Rent ($/SF)

Current Quarter 2Q17

12 MonthChange

CBD $47.71/ SF $47.38/SF

Southwest $36.79/SF $30.31/SF

North $32.20/SF $29.13/SF

Suburban $31.54/SF $30.89/SF

Northwest $31.37/SF $32.13/SF

East/ Northeast 23.6% 9.1%

South/Southeast 12.2% 10.2%

Southwest 11.5% 9.3%

Suburban 11.0% 10.6%

Northwest 9.7% 10.6%

AVAILABILITY BY SUBMARKET

Availability Rate (%)

Current Quarter 2Q17

12 MonthChange


LEASING AND SALES Slowing demand on both fronts cause for concern

Austin, though an in demand market for a multitude of both tenants and investors, has begun to show signs of a slow down over the past 12 months on both fronts.

the second quarter a large 206,410 square foot bit of positive news, when looked at in more depth, it reinforces the idea of a continued slowing of leasing activity. Overall, less than 1.0 million square feet of leasing activity took place during the second quarter, and just 10 leases out of 208 total being greater than 20,000 square feet in nature. This reaffirms the slowing trend that was first seen in the prior quarter, when WeWorksquare feet respectively in the South and CBD submarkets represented market high points in terms of single tenant lease transactions. The combined first and second quarter leasing activity barely reached 2.0

transaction square footage.

Likewise, building sales activity was down significantly from past quarters. However, this can be viewed as both a positive and a negative, as transactional volume is low as owners are not yet looking to sell well-capitalized and strong properties. Overall sales volume

seeing a smattering of transactions taking place. The buyer composition of the transactions continues to echo the first quarter, with nearly 2 in every three transactions occurring involving private buyers, with the remaining being institutional investors.

During the second quarter, two transactions of note involved properties trading at or above $400/SF. TIER REIT purchased Domain 8 from Shorenestein Properties in early April for $475/SF. The 291,000 square foot Class A office building was built in 2017 and is fully leased to tech giants Amazon and Facebook, representing a solid investment into

Azrieli purchased 3700 San Clemente from HPI in the Southwest submarket for $391/SF. Again, this building is a newly-constructed Class A asset that is fully leased to such long-term tenants as Spiceworks, Inc, Merrill Lynch and others.

LEASE/USER TRANSACTIONS

Tenant Building Submarket Type Square Feet

IRS 1821 Directors Blvd Southeast Renewal 206,410

E Health Inc Paloma Ridge Bldg A Northwest New 26,878

City of Austin Barton Oaks V Southwest Renewal 25,137

MHNet Stonebridge Plaza I Northwest Renewal 22,327

Social Solutions Braker Pointe II North New 13,766

SELECT SALE TRANSACTIONS

Buyer/Seller Building Submarket Sale Price $/SF

TiER REIT/Shorenstein Domain 8 North $137,700,000 $475

Azrieli/HPI 3700 San Clemente Southwest $100,000,000 $391

Boyd Watterson/Honeck Property 1821 Directors Blvd Southeast $65,100,000 $316



SUBMARKET STATISTICSTotal

Inventory (SF)

Under Construction

(SF)

TotalVacancy

Rate

QtrAbsorption

(SF)

YTDAbsorption

(SF)

DirectAsking Rent(Price/SF)

SubletAsking Rent(Price/SF)

AverageAsking Rent(Price/SF)

CBD Total

Class A

Class B

11,358,980

7,955,812

2,831,188

0

0

0

8.5%

9%

8.0%

-7,892

-27,648

33,329

96,331

122,279

-13,870

$48.09

$49.60

$44.06

$46.24

$48.48

$38.93

$47.71

$49.37

$43.16

Cedar Park/Georgetown/ Round Rock Total

Class A

Class B

1,863,667

768,475

896,061

155,000

155,000

0

7.6%

9.2%

8.1%

15,739

3,565

10,174

6,197

2,317

1,880

$29.88

$31.04

$26.32

$31.15

$31.98

$30.83

$30.01

$31.05

$27.00

Central/West Central

Total

Class A

Class B

4,071,669

1,064,738

2,030,799

0

0

0

6.7%

8.2%

8.1%

23,626

6,578

18,687

-63,552

-38,184

-19,957

$29.69

$41.98

$27.30

$26.42

$37.81

$24.51

$29.27

$41.54

$26.82

East/Northeast Total

Class A

Class B

4,440,519

896,445

3,093,474

338,767

338,767

0

23.6%

11.6%

27.8%

-110,462

-95,522

-17,630

-192,040

-54,416

-137,624

$26.23

$27.92

$26.96

$25.15

$30.21

$19.68

$25.85

$29.75

$25.08

North Total

Class A

Class B

5,874,229

2,302,420

3,407,630

0

0

0

7.6%

6.0%

6.9%

-60,069

-71,752

4,001

-47,371

-69,788

14,735

$32.97

$38.77

$27.95

$25.88

$32.50

$22.15

$32.20

$38.20

$27.16

Northwest Total

Class A

Class B

17,649,809

9,632,040

6,623,687

226,329

226,329

0

9.7%

11.1%

9.6%

-114,136

-66,171

-47,965

-206,100

-105,400

-96,198

$32.39

$33.98

$28.44

$26.66

$27.99

$24.03

$31.37

$33.08

$27.40

South/Southeast Total

Class A

Class B

5,369,170

1,021,432

3,349,125

90,500

90,500

0

12.2%

25.3%

10.4%

-145,190

-55,180

-108,435

-189,387

-75,012

-108,435

$28.45

$32.43

$25.46

$32.20

$28.69

$37.57

$28.53

$32.31

$25.67

Southwest Total

Class A

Class B

10,219,518

7,240,160

2,773,960

100,858

20,858

80,000

11.5%

12.9%

8.2%

40,160

34,655

5,505

2,469

-6,006

8,475

$38.09

$40.53

$30.16

$32.86

$32.97

$31.88

$36.79

$38.17

$23.47

Austin Suburban Total

Class A

Class B

49,488,581

22,925,710

22,174,736

911,454

831,454

80,000

11%

11.6%

11.5%

-350,332

-236,145-135,663

-689,784

-338,807

-339,921

$32.23

$35.67

$27.89

$28.11

$30.41

$23.34

$31.54

$34.69

$27.16

Austin Total

Class A

Class B

60,847,561

30,881,522

25,005,924

911,454

831,454

80,000

10.5%

10.9%

11.1

-336,932

-263,793

-102,334

-572,161

-216,528

-353,791

$34.59

$38.30

$29.34

$31.07

$33.65

$24.87

$34.01

$37.46

$28.62



UNEMPLOYMENT RATE

Not Seasonally Adjusted

PAYROLL EMPLOYMENT- SELECT TEXAS MARKETS

All Items, 12-Month % Change, Not Seasonally Adjusted,

EMPLOYMENT BY INDUSTRY

Austin, February 2018

PAYROLL EMPLOYMENT

Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change

EMPLOYMENT GROWTH BY INDUSTRY

Austin, Feb. 2018, 12-Month % Change, Not Seasonally Adj.


5.9%

5.5%

17.3%

2.9%

5.8%

17.4%11.6%

12.0%

4.4%

17.1%

Mining, Logging andConstructionManufacturing

Trade, Transportation andUtilitiesInformation

Financial Activities

Professional and BusinessServicesEducation and HealthServicesLeisure and Hospitality

Other Services

GovernmentSource: U.S. Bureau of Labor Statistics

0%

2%

4%

6%

8%

10%

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

United States Austin

Source: U.S. Bureau of Labor Statistics

2%

4%

6%

8%

10%

12%



Source: U.S. Bureau of Labor Statistics,

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Austin Dallas Houston


Total NonfarmMining, Logging and Construction

ManufacturingTrade, Transportation and Utilities

InformationFinancial Activities

Professional and Business ServicesEducation and Health Services

Leisure and HospitalityOther Services

Government

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0%


RSFRank Submarket

1 Far North Dallas 43.8 M

2 Houston CBD 38.9 M

3 DFW Las Colinas 32.2 M

4 Dallas CBD 28.5 M

5 DFW Richardson/Plano 24.5 M

6 HOU Galleria/Uptown 23.7 M

7 DFW LBJ Freeway 19.7 M

8 HOU Energy Corridor 19.3 M

9 Northwest Austin 17.6 M

10 DFW Mid-Cities 16.2 M

SELECT TEXAS MARKETS- LARGEST SUBMARKETS

Houston, June 2018


Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank (NKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professiondecision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

Graham HildebrandDirector Texas [email protected]

CJ MgbeahuruAnalyst Texas [email protected]


Kirsten KempfTransactions [email protected]

Jake StrasserIntern Texas [email protected]

Market Summary

Current Conditions

Market Analysis

-1.00

-0.50

0.00

0.50

1.00

1.50

1Q13 1Q14 1Q15 1Q16 1Q17 1Q18

Net Absorption

Square Feet, Millions

8%

10%

12%

14%

16%

18%

$22

$25

$28

$31

$34

$37

1Q13 1Q14 1Q15 1Q16 1Q17 1Q18


Asking Rent and Vacancy

AUSTIN1Q18 OFFICE MARKET

AUSTIN METRICS MAINTAIN STRONG MARKET

overall market strength remained evident during the first quarter of

leasing activity and rental rates. As a result, tenants looking to capitalize on

both space needs and rental value have begun to expand their search to the

outlying areas and nearby cities.

The office metrics for the first quarter reflect an overall market that remains

favorable to landlords. Rental rates saw a 4.4% gain to $34.70/SF for all

building classes in the market. Class A rates saw a nearly 6.1% gain over the

prior quarter and currently sit at $39.70/SF. While vacancy exceed 10.0% for

the first time since 2015, it remains on par with the four-year cycle average.

Likewise, while the first quarter saw more than 522,000 square feet of space

returning to the market, market conditions indicate that 2018 will see positive

absorption overall.

Leasing activity for the quarter was down relative to the fourth quarter of 2017,

as a little over 850,000 square feet of transactions took place. The average

trend of utilizing more efficient space to limit leasing costs and exposure in the

longer term. Consequently, only six transactions during the quarter involved

Although no buildings delivered at the start of 2018, eight buildings totaling

933,165 square feet remain under construction. Upon completion, these

buildings will add nearly 2.0% of new stock to the overall market. However,

strong pre-

overall vacancy metrics. For example, the Parmer 3.3 building comprising

204,000 square feet of Class A space in the East/Northeast is slated to deliver

in early 2019 and is 100% pre-leased to 3M. Additionally, it bears repeating that

Indeed signed a nearly 310,000-square-foot lease at the Domain Tower in the

North submarket in late 2017.

While the end of 2017 saw a cooling market in terms of transactional volume

and 2018 has continued that trend, out-of-state and foreign investors remained

active in the Austin market, which as a whole offers value compared to other

gateway markets. A prime example of this demand for well-positioned, well-

Point I and II from Crow Holdings. The 240,000 square foot Class A office

traded hands for $308/SF.

LOOKING AHEADOverall, the Austin market remains favorable to landlords thanks to a combination of tightening availability, limited new construction, and high tenant demand. Additionally, any tenants looking for space in the Central Business District or the Domain areas of town need to be in the market and flexible well in advance of their lease expirations. However, there are some signs that the market strength is beginning to wane. Office-using employment has trended downward over the past 180 days and bears watching as the months play out.

RESEARCH

Rental rates rose during the first quarter by 4.4% from the previous quarter, landing at $34.70 per square foot.

933,165 square feet underway representing a modest 1.6% expansion of the existing inventory base once completed.

Overall vacancy is 10.2%, an increase of 50 basis points year-over-year.

Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast

Total Inventory (SF) 59.9 M 59.9 M 59.4 M

Vacancy Rate 10.2% 9.4% 9.7%

Net Absorption (SF) -522,325 398,523 260,491

Average Asking Rent $34.70 $34.57 $33.24 =

Under Construction 933,165 912,307 982,448 =

Deliveries 0 0 378,819

2

www.ngkf.com

RESEARCH

CBD Total 11,286,516 0 9.5% -47,817 -47,817 $49.43 $43.56 $48.82

Class A 7,823,348 0 10.0% 13,456 13,456 $51.37 $45.19 $50.81

Class B 2,831,188 0 9.3% -50,353 -50,353 $43.72 $39.91 $43.25

Cedar Park/Georgetown/Round Rock 2,106,998 95,000 10.6% -14,000 -14,000 $29.06 $22.74 $28.63

Class A 979,085 95,000 13.8% 736 736 $30.31 $31.98 $30.34

Class B 928,782 0 9.4% -14,736 -14,736 $25.50 $20.95 $24.63

Central/West Central 4,152,974 0 7.7% -95,931 -95,931 $31.08 $28.76 $30.80

Class A 1,110,738 0 8.5% -44,762 -44,762 $43.46 $37.81 $43.10

Class B 2,066,104 0 9.7% -45,462 -45,462 $26.52 $27.22 $26.65

East/Northeast 4,358,293 420,478 21.3% -156,410 -156,410 $25.56 $21.11 $24.58

Class A 896,445 338,767 5.0% 4,795 4,795 $29.14 - $29.14

Class B 3,011,248 81,711 26.6% -158,515 -158,515 $26.09 $21.29 $24.82

North 5,874,229 0 7.9% 101,804 101,804 $32.47 $25.64 $31.80

Class A 2,302,420 0 5.2% -50,509 -50,509 $38.6 $39.39 $38.82

Class B 3,407,630 0 7.9% 152,313 152,313 $27.87 $22.24 $27.10

Northwest 17,493,476 226,329 9.2% -218,293 -218,293 $32.64 $26.92 $32.12

Class A 9,429,923 226,329 10.7% -139,578 -139,578 $34.48 $27.20 $33.52

Class B 6,669,471 0 8.8% -68,863 -68,863 $28.65 $25.73 $28.77

South/Southeast 4,751,993 90,500 7.2% -32,819 -32,819 $29.27 $28.70 $29.26

Class A 691,432 90,500 7.0% -2,158 -2,158 $38.79 $32.58 $38.72

Class B 3,113,148 0 7.3% -9,093 -9,093 $25.16 $27.09 $25.18

Southwest 9,943,366 100,858 11.8% -58,859 -58,859 $38.34 $33.11 $37.20

Class A 6,996,705 20,858 13.2% -45,603 -45,603 $40.70 $34.03 $38.93

Class B 2,741,263 80,000 8.8% -13,256 -13,256 $30.73 $23.29 $30.06

Austin Suburban Total 48,681,329 933,165 10.4% -474,508 -474,508 $32.64 $28.30 $32.12

Class A 22,406,748 771,454 10.6% -277,079 -277,079 $36.73 $31.04 $35.92

Class B 21,937,646 161,711 11.0% -157,612 -157,612 $27.61 $23.31 $27.13

Austin Total 59,967,845 933,165 10.2% -522,325 -522,325 $35.27 $30.48 $34.70

Class A 30,230,096 771,454 10.5% -263,623 -263,623 $39.70 $33.33 $38.81

Class B 24,768,834 161,711 10.8% -207,965 -207,965 $29.05 $24.85 $28.59

Total Under Total Qtr YTD Direct Sublet TotalTotal reflects Class A/B/C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent

(SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)

Submarket Statistics


3

Payroll Employment Select Texas Markets Employment Growth by Industry

Unemployment Rate Payroll Employment

Employment By Industry

RESEARCH


0%

2%

4%

6%

8%

10%





ECONOMIC AND SUBMARKET SIZE ANALYSIS


ManufacturingTrade, Transportation and Utilities




Government

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

Austin, December 2017, 12-Month % Change, Not Seasonally Adjusted


2%

4%

6%

8%

10%

12%





5.9%

5.5%

17.3%

2.9%

5.8%

17.4%11.6%

12.0%

4.4%

17.1%

Mining, Logging andConstructionManufacturing

Trade, Transportation andUtilitiesInformation



Other Services

Government

Austin, January 2018


Texas Vacancy Report

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%





Select Texas Markets Largest Submarkets

Top 10 Submarkets by Rentable Square Feet

Source: Newmark Knight Frank

RSFRank Submarket




4 Dallas CBD 28.7 M





9 Northwest Austin 17.5 M10 DFW Mid-Cities 16.2 M

All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank (NKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in

of that decision, including its legal, financial, and tax aspects and implications.

Any recipient of this publication may not, without the prior written approval of NKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents.

Newmark Knight Frank Research Reports are also available at www.ngkf.com/research

Austin Office Submarkets

Graham HildebrandDirector of Research & Marketing - [email protected]

Morgan SturgeonResearch [email protected]

Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

RESEARCH

Market Summary

Current Conditions

Market Analysis


long

unemployment figure dropped below 3.0% during the quarter, which puts

the city in the top 5 in the United States.

The third quarter office metrics, while slowing, continue to show an overall

strong office market that benefit from the overall strength of the city. While a

slight compression in overall rental rates is seen by comparing the third quarter

have ticked slightly upwards over the same time period and currently register

$37.00/SF. Likewise, while the third quarter saw a slowing in terms of

absorption, the year-to-date number remains nearly 450,000 square feet of

positive absorption. Overall, leasing activity has remained constant on a

quarter-over-quarter basis, with greater than 1.0 million square feet of new

leases signed each quarter in 2017.

Several large-scale leases were executed in the third quarter, chief amongst

complex and SailPoint Technologies' nearly 170,000-square-foot lease. When

combined with announcement in late June that they are

occupying the entirety of Domain 11 for their global HQ and plan to take

occupancy of the space within the next 24 months, it is clear that the Austin

area continues to draw a variety of large users to its office sector, with an

especially large focus continuing to be technology based tenants.

While deliveries paused in the third quarter 2017, four non-owner-occupied

properties remain under construction, totaling 366,746 square feet. Once

completed, the properties will expand the existing inventory base by 0.6%.

Texas Capital Complex, which comprises t1801 Congress Avenue and 1601

Congress Avenue, is set to break ground in the latter part of the third quarter.

1801 Congress Avenue will have a 603,000-square-foot, 14-story office building

that will serve as the new headquarters for the Texas Lottery Commission and

other state offices. 1601 Congress Avenue will be connected by a five-level

parking garage and will a 12-story tower encompassing roughly 416,000 square

feet and will house additional state offices and state-of-the-art childcare

facilities. The project is anticipated to complete in 2022.

What to Expect Through the End of 2017Despite the slight upward float in vacancy, the Austin office market remains

on an accelerated trajectory and highly landlord favorable. Will this cause

tenants in the market to widen their search path to surrounding markets like

Buda, Fredericksburg, etc.?

The technology sector continues to dominate much of the discussion for the

office sector. Could Austin be the Texas representative with the best

Will a continuing tightening in the Class A office market in Austin draw users

to the Class B and C space available in core and surrounding submarkets?

Vacancy rates within the B and C space are poised to remain at or below

11.0% market wide throughout 2017.

The overall average asking rent dipped slightly from the previous quarter, landing at $33.65/SF and representing a 0.5% year-over-year decrease.

Construction activity remains sparse with 366,745 square feet underway representing a modest 0.62% expansion of the existing inventory base once completed.

Overall vacancy is 10.6%, up 20 basis points quarter-over-quarter but still under the third quarter 2016 rate of 10.7%

0.00

0.25

0.50

0.75

1.00

1.25

3Q12 3Q13 3Q14 3Q15 3Q16 3Q17

Net Absorption


8%

10%

12%

14%

16%

18%

$20

$23

$26

$29

$32

$35

3Q12 3Q13 3Q14 3Q15 3Q16 3Q17



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.6% 10.4% 10.7%


Average Asking Rent $33.65 $33.81 $33.81 =

Under Construction 366,745 366,746 1,080,578

Deliveries 0 870,590 258,985

2

www.ngkf.com

CBD Total 11,256,817 0 10.1% -125,977 98,816 $47.90 $44.62 $47.60

Class A 7,820,504 0 11.7% -132,982 8,058 $50.40 $48.38 $50.06

Class B 2,723,333 0 6.7% 22,211 13,474 $39.51 $32.06 $39.59

Cedar Park/Georgetown/Round Rock 1,891,739 0 9.7% 24,551 17,882 $28.60 $29.99 $28.65

Class A 734,841 0 13.4% -8,609 -779 $29.14 $34.98 $29.37

Class B 978,247 0 9.3% 27,460 12,961 $27.65 $22.00 $27.52

Central/West Central 4,320,879 0 5.4% 13,062 22,485 $30.20 $28.32 $30.07

Class A 1,110,738 0 3.9% 8,072 10,647 $43.30 $36.22 $42.92

Class B 2,105,434 0 7.0% 27,045 44,251 $26.10 $26.92 $26.20

East/Northeast 4,713,354 216,078 17.1% -23,982 28,677 $26.04 $18.58 $25.94

Class A 896,445 134,367 9.9% -14,340 17,741 $26.34 - $26.34

Class B*** 3,310,731 81,711 18.5% -9,642 -45,054 $27.33* $18.58* $27.08*

North 5,801,687 0 10.0% -26,281 307,573 $29.25 $22.01 $28.48

Class A 2,292,471 0 5.4% 71,524 429,591 $30.25 $33.24 $30.34

Class B 3,345,037 0 11.3% -21,004 -45,217 $28.29 $21.24 $27.02

Northwest 16,500,814 0 10.4% 57,769 -29,490 $32.52 $28.40 $32.16

Class A 9,650,245 0 10.5% 40,138 27,418 $34.58 $29.18 $34.93

Class B 5,515,275 0 12.3% 22,397 -52,138 $28.73 $26.07 $28.65

South/Southeast 4,708,885 90,500 10.3% -33,124 -79,988 $28.61 $32.10 $28.69

Class A 692,200 90,500 8.6% 3,245 -6,951 $33.44 $33.09 $33.42

Class B 3,054,690 0 11.3% 4,738 -46,292 $25.08 $28.16 $25.05

Southwest 10,176,061 60,168 11.7% -32,383 147,776 $35.59 $31.09 $34.71

Class A 7,226,377 60,168 12.6% -31,169 172,986 $37.29 $30.94 $35.90

Class B 2,744,286 0 9.7% -1,214 -28,676 $30.83 $32.01 $31.00

Austin Suburban Total 48,113,419 366,746 10.8% -20,388 414,915 $31.37 $28.85 $31.14

Class A 22,603,317 285,035 10.4% 68,861 650,653 $34.29 $30.31 $33.83

Class B 21,053,700 81,711 12.0% 48,831 -161,114 $27.91 $25.48 $27.73

Austin Total 59,370,236 366,746 10.6% -127,749 434,797 $33.76 $31.97 $33.65

Class A 30,423,821 285,035 10.7% -64,121 658,711 $37.34 $34.08 $36.99

Class B 23,777,033 81,711 11.4% 71,042 -147,640 $28.85 $26.29 $28.67





3





0%

2%

4%

6%

8%

10%

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17




Mining, Logging & ConstructionLeisure and Hospitality

Education and Health ServicesManufacturing

Other ServicesTotal Nonfarm

GovernmentTrade, Transportation & Utilities

Financial ActivitiesProfessional & Business Services

Information

-3.5% -1.5% 0.5% 2.5% 4.5% 6.5%

Austin, April 2017, 12-Month % Change, Not Seasonally Adjusted


1%

2%

3%

4%

5%

6%

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17




6.3%

5.8%

17.1%

2.7%

5.6%

16.7%11.9%

12.7%

4.5%

16.8%

Mining, Logging, andConstructionManufacturing

Trade, Transportation, andUtilitiesInformation



Other Services

Government

Austin, September 2017



-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17







RSFRank Submarket



3 DFW CBD 37.0 M






9 DFW Mid-Cities 16.6 M10 Northwest Austin 16.5 M






Austin Office Submarkets


Morgan SturgeonResearch [email protected]

Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

Market Summary

Current Conditions

Market Analysis


Demand for office space in the Austin market has continued to thrive in the

second quarter of 2017, producing noteworthy increases in net absorption and

rent prices since the first quarter. The ,

innovation, and entrepreneurship, has remained a draw to prospective tenants

looking to relocate. Moreover, the value of real estate and the cost of living

have become increasingly attractive among millennials and corporations,

ranging from start-ups to Fortune 500s. Although overall vacancy rates grew by

0.02% from the previous quarter, it remains historically low for the capital city.

The overall asking rent stood at $33.58/SF, which was up 1.3% quarter-over-

quarter and 4.3% year-over-year. Class A rates of $37.38/SF represented a

10.0% premium by comparison.

The largest lease of note for second-quarter 2017 took place at 500 West 2nd

Street with Google taking 65,206 square feet of space. Additionally, activity was

strong with two undisclosed tenants taking the 56,466-square-foot sublease at

7300 Ranch Road 2222 in Northwest submarket and the 42,369-

square-foot sublease at 5707 Southwest Parkway.

While 870,590 square feet delivered in second-quarter 2017, two non-owner-

occupied properties remain under construction, totaling 150,668 square feet.

Once completed, the properties will expand the existing inventory base by

1.0%. The largest property under construction is at 801 Barton Springs Road,

located in the South submarket of Austin. The nine-story, 90,500 square foot

office building featuring restaurant space on the ground floor will deliver in

December 2017. The second project underway is The Overlook at Barton

Creek, located at 317 Grace Lane. The four-story, 60,168 square foot property

is currently available for lease and will deliver in August 2017.

Net Absorption MultipliesThe second quarter marked a turnaround in the acquisition of Austin office

space, as net absorption rose from negative 23,793 square feet in the first-

quarter to positive 666,964

as a growing technology hub, and push for sustainability are attracting tenants

from all over the nation. The largest move-ins were by from Amazon and

Facebook, where 273,168 square feet of space was absorbed at Domain 8,

located at 11601 Alterra Parkway. Additionally, Google absorbed 239,558

square feet of space at 500 West 2nd

Business District.

What to ExpectDespite the slight upward float in vacancy, the Austin office market exhibits

strong signs of growth with escalating rent prices, accrued absorption and

increasing amounts of square footage being delivered.

With prominent technology-based tenants such as Facebook and Amazon

acquiring new space in Austin, expect other large corporations to follow.

Job growth is projected to soar, as the high tech scene in Austin continues

to attract talent.

The overall average asking rent stood of $33.58/SF representing a 4.3% year-over-year increase.

Construction activity remains sparse with 150,668 square feet underway representing a modest 0.25% expansion of the existing inventory base once completed.

Overall vacancy is 10.3%, down 40 basis points year-over-year.

-1.00

-0.50

0.00

0.50

1.00

1.50

2Q12 2Q13 2Q14 2Q15 2Q16 2Q17

Net Absorption


8%

10%

12%

14%

16%

18%

$20

$23

$26

$29

$32

$35

2Q12 2Q13 2Q14 2Q15 2Q16 2Q17



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.3% 10.1% 10.7%

Net Absorption (SF) 666,964 -23,793 124,032


Under Construction 150,668 1,021,258 1,205,358

Deliveries 870,590 87,761 211,515

2

www.ngkf.com

CBD Total 11,310,560 0 9.1% 286,479 137,360 $47.90 $44.79 $47.44

Class A 7,836,906 0 10.1% 222,742 130,669 $49.65 $46.94 $49.20

Class B 2,760,674 0 7.4% 67,801 14,847 $40.84 $35.55 $40.05


Class A 846,779 0 12.4% 69,400 74,947 $24.74 - $24.74

Class B 945,747 0 11.4% 114 -13,413 $28.22 $24.16 $28.13

Central/West Central 4,398,431 0 7.5% -48,679 -55,374 $28.92 $26.02 $28.64

Class A 1,110,738 0 5.7% 2,145 -9,368 $42.28 $35.09 $41.87

Class B 2,148,186 0 9.0% 8,865 16,327 $25.81 $25.02 $25.71

East/Northeast 4,660,242 0 17.1% -18,105 37,921 $23.80 $18.54 $23.73

Class A 896,445 0 8.3% -2,145 32,081 $26.75 $23.00 $26.73

Class B 3,257,619 0 18.0% -15,960 -19,430 $22.73 $17.44 $22.59

North 5,723,521 0 9.3% 268,035 326,690 $29.58 $24.90 $29.04

Class A 2,292,471 0 9.1% 269,309 344,901 $31.43 $31.63 $32.00

Class B 3,345,037 0 9.8% -1,274 -18,211 $27.50 $22.95 $26.90

Northwest 16,211,687 0 10.6% -152,242 -161,621 $32.33 $29.80 $32.04

Class A 9,541,971 0 11.0% -131,100 -87,652 $34.67 $32.10 $34.42

Class B 5,334,422 0 12.3% -18,742 -73,965 $28.22 $23.81 $27.59

South/Southeast 4,708,885 90,500 9.9% 1,956 -61,661 $28.37 $31.28 $28.46

Class A 692,200 90,500 9.0% -6,673 -10,196 $33.05 $32.67 $33.03

Class B 3,054,690 0 11.8% 4,563 -60,494 $25.14 $27.75 $25.19

Southwest 10,231,277 60,168 10.2% 260,006 358,322 $35.02 $29.99 $33.95

Class A 7,226,377 60,168 10.4% 229,672 331,113 $36.91 $30.39 $35.30

Class B 2,799,502 0 9.6% 30,334 23,743 $30.31 $26.89 $29.89

Austin Suburban Total 48,051,471 150,668 10.6% 390,485 514,911 $30.74 $29.28 $30.62

Class A 22,641,981 150,668 10.2% 430,608 675,826 $33.98 $31.34 $33.78

Class B 20,974,454 0 12.0% 17,900 -135,443 $27.07 $24.23 $26.78

Austin Total 59,215,780 150,668 10.3% 666,964 643,171 $33.65 $32.16 $33.58

Class A 30,478,887 150,668 10.2% 653,350 806,495 $37.56 $34.58 $37.38

Class B 23,645,877 0 11.4% 75,701 -130,596 $28.22 $25.62 $27.92





Amount of available sublease space could increase. Although sublet

space is down from last quarter, it has nearly doubled in size over the

past five years. Fortunately, gross rent sublet prices show the current

demand for sublet space is strong, as prices rose from $30.47/SF in

first-quarter 2017 to $32.16/SF in second-quarter 2017.

3





0%

2%

4%

6%

8%

10%

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17




Mining/Logging/ConstructionOther Services

Leisure/HospitalityEducation/Health Services

Total NonfarmGovernment

Trade/Transportation/UtilitiesFinancial Activities

Professional/Business ServicesManufacturing

Information

0.0% 1.5% 3.0% 4.5% 6.0% 7.5%



1%

2%

3%

4%

5%

6%





2.7%4.4%

5.6%

5.6%

5.9%

12.0%

12.3%16.8%

16.7%

17.9%

Information

Other Services

Manufacturing


Mining/Logging/Construction

Education/Health Services

Leisure/Hospitality

Professional/Business Services

Trade/Transportation/Utilities

Government

Austin, April 2017



-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%








RSFRank Submarket



3 Dallas CBD 37.0 M












Newmark Knight Frank United States Office Locations


Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

Market Summary

Current Conditions

Market Analysis


The Austin office market has been on such a tear in recent years, with four of

the past five years recording over 1.0 million square feet in net absorption, that

some leveling out should come as no surprise. Sure enough, absorption turned

negative in the first quarter of 2017, pushing overall vacancy to 10.2%, up from

9.8% at the end of 2016. However, vacancy remains low by historical

standards well below its five-year average of 11.8% and 10-year average of

14.1%, for example. Furthermore, asking rents continued to move higher, even

though the pace of growth is clearly slowing. The overall asking rent stood at

$33.28/SF, which was up 0.8% quarter-over-quarter and 4.0% year-over-year.

The largest move-outs of first-quarter 2017 were at 7300 Ranch Road 2222,

which Samsung SARC vacated as part of a larger expansion plan to relocate to

3900 North Capital of Texas Highway. Other contractions were seen at 108

Wild Basin Road, as Texas Instruments vacated nearly 45,000 rentable square

feet (RSF); 5000 Plaza on the Lake Capital Tower, as My Fit Foods abruptly left

the Texas market and along with an unknown tenant vacated nearly 20,000

RSF; and 800 Brazos Street, as Capitol Services, Inc. vacated more than

17,000 RSF. On the flip side, strong leasing took place at 13011 McAllen Pass

Drive, as Home Depot moved into 184,500 RSF. Another large expansion took

place at 12301 Research Boulevard, as Cadence and Malauzai combined to

take down more than 87,000 RSF.

Turning to supply, currently there are five non-owner-occupied properties

underway representing 1.0 million RSF. Once completed, that will expand the

existing inventory base by 1.7%. The largest property under construction is 500

West Second Street. Located in downtown Austin, the building is 75% pre-

leased by Google, King & Spalding, CBRE and Austin Fraser. Coming in a

distant second is Domain 8, located at 11601 Alterra Parkway. The 12-story,

291,058 RSF property is 95% pre-leased due to large leases signed by

Facebook and Amazon. The remaining properties in the construction pipeline

are below 100,000 RSF.

Investment SalesIn a relatively quiet quarter, the most notable office transaction took place in the

CBD submarket, as Lincoln Property Company and Goldman Sachs completed

their purchase of Chase Tower from Spire Realty Group. While the purchase

price was not disclosed, Bank of America agreed to lend $100.5 million, and the

389,503-square-foot property is currently assessed at $166 million by the Travis

Central Appraisal District. The building was 99% leased at the time of sale.

Moving ForwardRobust employment growth expectations and a healthy pipeline of future office-

using demand points to another positive year in 2017. This story has also

played out in the sublease market. As discussed in our research publication

The Texas Office Market: Through the Eyes of the Sublease Market

amount of available sublease space is a helpful forward-looking indicator of the

health of the market. By that measure, Austin is well positioned given the

longevity of the current cycle.

The overall average asking rent stood at $33.28/SF at the end of first-quarter 2017 which represents a 4.0% year-over-year increase.

Construction activity was limited with 1,009,693 square feet underway which represents a modest 1.7% expansion of the existing inventory base once completed.

Vacancy stood at 10.2% which was up quarter-over-quarter, but down 30 basis points year-over-year.

-1.00

-0.50

0.00

0.50

1.00

1.50

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Net Absorption


8%

10%

12%

14%

16%

18%

$20

$23

$26

$29

$32

$35

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.2% 9.8% 10.5%



Under Construction 1,009,693 1,067,454 1,287,974

Deliveries 57,761 25,409 297,432

2

www.ngkf.com

CBD Total 10,879,606 500,512 7.4% -147,414 -147,414 $47.29 $42.02 $47.12

Class A 7,331,906 500,512 7.0% -92,718 -92,718 $49.71 $44.01 $49.56

Class B 2,834,720 0 9.6% -51,925 -51,925 $38.10 $33.65 $37.75


Class A 931,217 0 24.5% 34,581 34,581 $26.88 - $26.88

Class B 798,593 0 5.7% -2,435 -2,435 $26.04 $27.52 $26.25


Class A 1,058,318 0 6.2% -11,513 -11,513 $42.22 $35.29 $41.85

Class B 2,127,616 0 8.5% 27,686 27,686 $26.14 $23.77 $25.91

East/Northeast 4,690,925 0 16.3% 67,638 67,638 $23.30 $19.37 $23.17

Class A 897,128 0 6.8% 45,346 45,346 $26.82 $19.50 $26.78

Class B 3,287,619 0 17.3% -2,978 -2,978 $21.95 $19.36 $21.79

North 5,432,463 291,058 10.8% -16,118 -16,118 $30.56 $28.24 $30.45

Class A 2,001,413 291,058 13.1% 819 819 $33.61 $34.96 $35.36

Class B 3,345,037 0 9.7% -16,937 -16,937 $28.01 $25.49 $27.78

Northwest 16,031,145 0 9.5% -85,721 -85,721 $32.93 $27.72 $31.81

Class A 9,489,217 0 9.6% -50,514 -50,514 $35.62 $29.42 $34.09

Class B 5,297,534 0 12.2% -69,131 -69,131 $29.17 $24.04 $28.28

South/Southeast 4,641,526 90,500 10.5% -81,525 -81,525 $28.10 $29.67 $28.09

Class A 692,200 90,500 9.4% -12,427 -12,427 $32.85 $30.00 $32.96

Class B 3,054,690 0 12.2% -72,896 -72,896 $25.01 $29.46 $25.09

Southwest 10,156,744 127,623 12.2% 79,196 79,196 $35.39 $30.62 $34.25

Class A 7,151,845 127,623 12.9% 86,262 86,262 $37.48 $30.65 $35.55

Class B 2,799,501 0 10.7% -7,435 -7,435 $30.29 $30.36 $30.30


Class A 22,221,338 509,181 11.3% 92,554 92,554 $34.62 $30.17 $33.94

Class B 20,710,590 0 11.8% -144,126 -144,126 $27.27 $24.91 $27.02

Austin Total 58,066,071 1,009,693 10.2% -138,269 -138,269 $33.69 $30.43 $33.28

Class A 29,553,244 1,009,693 10.2% -164 -164 $38.17 $32.27 $37.38

Class B 23,545,310 0 11.6% -195,091 -195,091 $28.05 $25.56 $27.79





3





0%

2%

4%

6%

8%

10%





Mining/Logging/ConstructionOther Services

Leisure/HospitalityEducation/Health Services

Total NonfarmGovernment

Trade/Transportation/UtilitiesFinancial Activities

Professional/Business ServicesManufacturing

Information

0.0% 1.5% 3.0% 4.5% 6.0% 7.5%

Austin, February 2017, 12-Month % Change, Not Seasonally Adjusted


1%

2%

3%

4%

5%

6%

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17




2.8%4.3%

5.6%

5.6%

6.0%

11.8%

12.2%16.7%

16.9%

18.1%

Information

Other Services

Manufacturing




Leisure/Hospitality

Professional/Business Services

Trade/Transportation/Utilities

Government

Austin, February 2017



-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17






Source: Newmark Grubb Knight Frank

RSFRank Submarket




4 Dallas CBD 28.3 M






All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Grubb Knight Frank (NGKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NGKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient

to all aspects of that decision, including its legal, financial, and tax aspects and implications.

Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents.

Newmark Grubb Knight Frank Research Reports are also available at www.ngkf.com/research

Newmark Grubb Knight Frank United States Office Locations

David Wegman, CFADirector of Research - [email protected]

Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

Market Summary

Current Conditions

Market Analysis

AUSTIN 4Q16 OFFICE MARKET

The Austin office market has been on a tear. Net absorption totaled 1,071,573

rentable square feet in 2016, marking the fourth time out of the previous five

years that absorption has exceeded the 1.0 million-square-foot threshold. As a

result, overall vacancy declined to 9.8% compared with 10.4% a year ago.

Furthermore, this is the first time that overall vacancy has fallen to single digits

since the first quarter of 2001. By property classification, Class C buildings, the

smallest segment of the market, maintained the lowest vacancy relative to the

more expensive Class A and Class B product. Overall, while demand in 2016

was healthy, it was less robust than in 2015, suggesting the technology leasing

cycle is tapping the brakes.

Turning to supply, there are six properties underway representing 1.3 million

rentable square feet of non-owner-occupied office space, which is slightly lower

than the five-year average of 1.4 million rentable square feet. Once completed,

the current construction pipeline will expand the existing inventory base by

2.3%. During the previous eight quarters, there has been a steady trickle of new

supply coming online. However, only one property, representing 25,409

rentable square feet, delivered in fourth-quarter 2016. The recent completion

pushed the annual tally of new supply to 818,058 rentable square feet,

significantly below the 2.7 million rentable square feet that was delivered in

2015.

In response to healthy fundamentals, asking rents moved higher. Overall,

asking rents in Austin increased by 4.3%, driven by a 9.3% jump in the Class B

segment relative to a more moderate 3.1% pick-up in the Class A segment.

With rents near all-time highs, sticker shock is leading tenants at the high end

of the market to search for less expensive options. Following the dramatic rise

of Class B rents, the spread between Class A and Class B asking rents

narrowed from the more than $10.00/SF seen during the past several years to

$9.19/SF at the end of 2016. By comparison, the typical spread between Class

A and Class B buildings was $8.98/SF during the previous 10 years, although

spreads narrowed to as low as $5.00/SF to $7.00/SF during streaks of

widespread demand. This suggests the pace of rent growth for Class B

buildings will continue to outperform in coming quarters, but as the spread

begins to normalize, the degree of outperformance will moderate.

By submarket, three areas outperformed the metro norm for rent growth in

2016: Central Business District (11.9%), East/Northeast Austin (11.7%) and

Cedar Park/Georgetown/Round Rock (4.5%). Expect higher rents to continue

in 2017, a trend driven by the underlying strength in the CBD and the Class B

segment, particularly in the Northern and Eastern submarkets, which are in the

.

The DomainAfter nine years of steady expansion, The Domain is not only referred to as

state of Texas. Located in Northwest Austin, the high-density, multi-phased,

mixed-use development features more than 100 retail stores and restaurants,

The overall average asking rent pulled back from an all-time high achieved last quarter and stood at $33.03/SF at the end of 2016.

Construction activity was limited with 1,341,693 square feet underway, which represents a modest 2.3% expansion of the existing inventory base once completed.

Fourth-quarter 2016 marks the 17th consecutive quarter of positive absorption.

-1.00

-0.50

0.00

0.50

1.00

1.50

4Q11 4Q12 4Q13 4Q14 4Q15 4Q16

Net Absorption


8%

10%

12%

14%

16%

18%

$20

$23

$26

$29

$32

$35

4Q11 4Q12 4Q13 4Q14 4Q15 4Q16



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 9.8% 10.7% 10.4%

Net Absorption (SF) 507,210 186,487 785,933


Under Construction 1,341,693 870,070 1,609,628

Deliveries 25,409 259,480 817,370

2

Lease/User Transactions

Select Sales Transactions


Building Submarket Sale Price Price/SF Square Feet

2,700 apartment units, 1.5 million rentable square feet of office space and

775 hotel rooms. Recently, Endeavor Real Estate Group and Tier REIT

announced plans to build two more office buildings, Domain 11 and Domain

12. However, with Domain 8 and Domain Tower currently underway, the

exact start date to begin construction has not been set. Combined, Domain 8,

Domain 11, Domain 12 and Domain Tower will add more than 1.2 million

rentable square feet of office space, nearly doubling the office footprint.

Investment Sales As Austin has transformed from a hip and trendy college town to an

established major metro, the investor base has shifted from primarily local

owners to now include institutional players. This evolution, combined with the

success enjoyed across the metro, has translated into a dramatic rise in

transaction volume. Year-to-date through October, investment sales volume

has totaled more than $1.7 billion, according to Real Capital Analytics. That

exceeded the sales volume of the much larger Houston metro ($1.1 billion)

and was 21.2% higher than at the same time period a year ago.

By far, the biggest news to hit the Austin office scene was the completion of

Cousins Properties' acquisition of Parkway Properties. Along with Buckhead

in Atlanta and Uptown in Charlotte, the merger is a long-term bet on the

fundamentals of downtown Austin. At the end of 2016, the downtown Austin

office market had both the lowest vacancy rate and highest rental rates

across the state of Texas, and that trend will likely continue moving forward.

Following the merger, the combined company will own 816 Congress Avenue,

Colorado Tower, 98 San Jacinto Boulevard, 111 Congress and control 24%

of the institutional-quality Class A office product in downtown Austin. All told,

this adds up to critical mass and pricing power. Any time a landlord controls

submarket is there, translating into the ability to hold rents longer in a down

market and push rents more aggressively in an up market.

In another notable transaction, World Class Capital Group purchased the

Offices at Braker, a 13-building office portfolio for $84.8 million, or $155/SF.

The properties were originally built as light industrial buildings, but are now

primarily used as office space. The complex was 93.0% leased at the time of

the transaction. In the CBD, New York-based Brickman Associates purchased

823 Congress for $63 million, or $347/SF. The 16-story, 181,381-square-foot

building was 97.0% leased at the time of the sale. 2017 Outlook Moving forward, 2017 is on track to become another good year for the Austin

office market. Expect real estate fundamentals to remain healthy and U.S.-

based investor interest to remain strong. In fact, Austin was ranked as the

number one market to watch in Emerging Trends in Real Estate 2017,

published recently by the Urban Land Institute and PricewaterhouseCoopers.

The report points out favorable attributes, including a diverse economy,

growing population base, educated workforce and a millennial-friendly culture.


Amazon 11601 Alterra Pky, Floors 5-8 North Domain Direct/New 136,584

Facebook 11601 Alterra Pky, Floor 10-12 North Domain Direct/New 102,438

Capital Factory 701 Brazos CBD Direct/Renewal 56,702

Trusource Labs Parmer 3.2 Northeast Direct/New 32,565

American Teleconferencing Services 612 W 4th St. CBD Direct/Sublease 15,200

Offices at Braker CBD $84,750,000 $155 546,965

823 Congress CBD $63,000,000 $347 181,381

Exchange Park Central $29,200,000 $192 151,917

Pecan Park I Northwest $35,500,000 $260 136,444

Aspen Lake Two Northwest $40,000,000 $310 128,990

3

www.ngkf.com

CBD Total 10,864,534 500,512 6.1% 61,247 190,106 $48.60 $41.24 $48.31

Class A 7,302,104 500,512 5.8% 82,844 293,819 $51.15 $44.29 $51.06

Class B 2,849,450 0 7.9% -39,899 -125,508 $40.25 $33.93 $39.48

Cedar Park/Georgetown/ Round Rock 1,909,091 112,500 16.4% 25,619 155,712 $26.33 $23.00 $26.31

Class A 931,217 112,500 28.2% 17,432 37,028 $26.34 - $26.34

Class B 799,223 0 6.2% 8,187 118,684 $26.29 $23.00 $26.12

Central/West Central 4,325,201 0 6.4% -12,164 232,632 $27.30 $31.01 $27.90

Class A 1,058,318 0 5.1% -411 214,289 $40.03 $37.71 $40.49

Class B 2,127,616 0 10.0% -13,922 803 $25.89 $25.88 $26.00

East/Northeast 4,601,674 0 16.9% 68,288 133,156 $22.55 $19.36 $22.45

Class A 839,367 0 5.8% 83,989 97,179 $25.60 - $25.60

Class B 3,256,129 0 17.5% -31,481 82,496 $22.07 $19.36 $21.87

North 5,493,307 601,058 9.9% 203,548 29,122 $32.69 $27.75 $32.45

Class A 2,001,413 601,058 13.1% 152,645 61,521 $35.80 $31.69 $35.92

Class B 3,405,881 0 8.2% 50,903 -32,399 $27.94 $26.44 $27.78

Northwest 16,058,666 0 8.7% -120,583 232,742 $31.80 $27.39 $30.77

Class A 9,465,905 0 8.6% -79,914 342,688 $34.28 $29.46 $32.93

Class B 5,313,367 0 10.9% -41,186 -110,412 $28.38 $21.21 $27.24

South/Southeast 4,645,139 0 8.7% 218,897 113,250 $25.17 $30.75 $25.46

Class A 692,200 0 7.2% 1,779 -31,124 $32.94 $33.04 $32.96

Class B 3,058,303 0 9.8% 219,693 178,101 $24.20 - $24.20

Southwest 10,163,569 127,623 12.9% 62,358 -15,147 $35.17 $31.38 $34.22

Class A 7,158,670 127,623 13.8% 77,087 148,281 $37.31 $31.52 $35.63

Class B 2,799,501 0 10.7% -15,260 -144,554 $29.55 $30.51 $29.72


Class A 22,147,090 841,181 11.2% 252,607 869,842 $34.13 $30.66 $33.48

Class B 20,760,020 0 11.0% 176,934 92,719 $26.85 $24.13 $26.58

Austin Total 58,061,181 1,341,693 9.8% 507,210 1,071,573 $33.52 $30.09 $33.03

Class A 29,449,194 1,341,693 9.9% 335,451 1,163,661 $37.86 $31.84 $36.84

Class B 23,609,470 0 10.7% 137,035 -32,789 $27.98 $24.96 $27.65

Total Under Total Qtr YTD Direct Sublet Total Total reflects Class A/B/C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)



4





0%

2%

4%

6%

8%

10%

Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16




Total NonfarmMining/Logging/Construction

ManufacturingTrade/Transportation/Utilities


Professional/Business ServicesEducation/Health Services

Leisure/HospitalityOther Services

Government

-8.0% -4.0% 0.0% 4.0% 8.0% 12.0%

Austin, November 2016, 12-Month % Change, Not Seasonally Adjusted


1%

2%

3%

4%

5%

6%





2.8% 4.3%

5.4%

5.7%

6.1%

11.7%

12.0% 16.9%

17.5%

17.7%

Information

Other Services

Manufacturing




Leisure/Hospitality

Professional/BusinessServicesTrade/Transportation/Utilities

Government

Austin, November 2016



0%

1%

2%

3%

4%

5%

6%





Texas Top Submarkets

Top 10 Submarkets by 2016 Net Absorption


RSF Rank Submarket

1 DFW Las Colinas 899,836

2 Far North Dallas 617,905

3 DFW Uptown/Turtle Creek 520,295

4 DFW Richardson/Plano 513,984

5 DFW LBJ Freeway 445,009

6 DFW Central Expressway 438,746

7 HOU Greenway Plaza 257,686

8 Northwest Austin 232,742

9 Central/West Central Austin 232,632 10 DFW Lewisville/Denton 227,219


to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Grubb Knight Frank Research Reports are also available at www.ngkf.com/research


David Wegman, CFA Director of Research - Texas 713.599.5151 [email protected] Leta Wauson Research Manager - Texas 713.599.5108 [email protected]

Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

Market Summary

Current Conditions

Market Analysis


Following an upward revision to second-quarter 2016 results, third-quarter

2016 marks the 16th consecutive quarter of positive absorption for the

Austin office market. Net absorption during the third quarter totaled

129,702 square feet. However, vacancy remained unchanged at 10.7%

quarter-over-quarter, as four properties came online. Even though vacancy

held constant, rent hikes are becoming more aggressive across the metro

in light of limited new supply. The average asking rent increased to

$34.05/SF at the end of third-quarter 2016, which represents an 8.6% hike

year-over-year. With the local economy remaining healthy and the labor

market tight, expect office market conditions to remain in a steady and

upward trend in the coming quarters. (See the recent report

)

At the submarket level, the urban core shined as the Central Business

District (CBD) and Central/West Central submarkets recorded the lowest

vacancy rate in the metro at 6.6%. This was closely followed by the

technology-centric Northwest submarket, where vacancy stood at 8.6%.

Meanwhile, the more affordable area of Austin located in the

East/Northeast submarket posted a metro-high level for vacancy at 20.3%.

However, redevelopment opportunities and cost-sensitive users represent

untapped demand growth for this area. Expect vacancies in East/Northeast

Austin to gradually come down.

By property classification, both Class A and Class B properties ended third-

quarter 2016 in good shape. Class A vacancy stood at 10.8%, in line with

the metro norm, whereas Class B vacancy was slightly higher at 11.8%. To

put this into perspective, the blended average rate for Class A and Class B

properties stood at 11.2% at the end of the third quarter, significantly below

the 15-year average of 16.9%.

Turning to construction, there are currently four properties underway,

representing 870,070 rentable square feet. Once completed, this will

expand the existing inventory by a modest 1.5%. The most active

submarket is the CBD with 500,512 square feet underway. This is followed

by the North submarket, a distant second with 291,058 square feet that has

broken ground. With 31.0% of the new supply pre-leased, the construction

pipeline will have a minor impact to overall fundamentals.

Rents Reach an All-Time High One

increasing in response to increasing demand for office space. (See the

recent report ) This is certainly true in Austin,

where the average Class A asking rent increased by 24.0% from 2010 to

2015, compared with 18.0% in Houston, 17.0% in Dallas/Fort Worth and

10.0% in San Antonio. Fast-forward to today and the average Class A

asking rent in Austin is $38.20/SF, the highest on record.

Rents reach an all-time high with an average asking rent of $34.05/SF.

Construction activity was limited with 870,070 square feet underway, which represents a modest 1.5% expansion of the existing inventory base once completed.

Third-quarter 2016 marks the 16th consecutive quarter of positive net absorption.

-1.00

-0.50

0.00

0.50

1.00

1.50

3Q11 3Q12 3Q13 3Q14 3Q15 3Q16

Net Absorption


8%

10%

12%

14%

16%

18%

$20

$23

$26

$29

$32

$35

3Q11 3Q12 3Q13 3Q14 3Q15 3Q16



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.7% 10.7% 10.5%

Net Absorption (SF) 129,702 73,797 1,033,244


Under Construction 870,070 1,172,991 2,093,427

Deliveries 259,480 114,204 658,098

2



Samsung (SARC) 3900 N Capital of Texas Hwy Southwest Direct/New 112,000

TrueCar 3297 Ranch Road 620 S Southwest Direct/New 37,757

Amherst Holdings LLC 5001 Plaza on the Lake Dr Southwest Direct/Renewal 32,625

Bankers Toolbox 12331-B Riata Trace Pkwy Northwest Direct/Renewal 31,715

Aristocrat Technologies 11801 Domain Dr Domain 1 North/Domain Direct/New 24,412


Austin Centre CBD $130,000,000 $378 343,664

Austin Research Park I & II * Northwest N/A 271,882

Champion Office Park ** Northwest $88,240,000 $400 220,600

Stonebridge Plaza II Northwest $64,028,885 $335 191,131

Stonebridge Plaza I Northwest $63,650,000 $335 190,000

* Partial Sale

** Estimate


Similarly, Class A asking rents in the CBD breached $50.00/SF for the first time, making Downtown Austin the most expensive submarket in Texas. Employment Growth Slows With the labor market operating above full employment, employment

growth will naturally begin to slow. The local economy added 37,800 jobs

in the year ending July 2016, which represents a 3.9% increase,

compared with a 4.8% jump one year ago. While the pace of growth has

on a percentage basis ranked third-highest among the top 50 metros,

behind only Fort Lauderdale and Orlando. Driving these gains were

healthy additions in the trade/transportation/utilities,

professional/business services and mining/logging/construction

segments. Households are benefitting from the tight labor market: The

median household income jumped 5.7% from $63,603 in 2014 to

$67,195 in 2015. Furthermore, the unemployment rate remained low at

3.6% at the end of July 2016, which suggests that incomes should

continue their upward trend in 2016. Expect employment growth to

continue at a slower pace.

Investment Sales In a relatively quiet quarter for investment sales transactions, KBS made

a splash with the purchase of Stonebridge Plaza I and II, located in

Northwest Austin. The two properties, which are located at 9600 and

9606 North MoPac Expressway, were 96.0% leased at the time of sale

with Qualcomm, Google and Oracle serving as the anchor tenants. The

combined purchase price was $127.7 million, or $335/SF. The

transaction represented a 5.8% cap rate and closed in August 2016.

Overall, $768.6 million of office transactions has taken place in Austin

during the first seven months of 2016. That result is down 34.8%,

compared to the same time period in 2015, according to data from Real

Capital Analytics. Cap rates have trended down, with most institutional-

quality deals trading between a 5.8% and 6.2% cap rate.


3

www.ngkf.com

CBD Total 10,788,322 500,512 6.6% 163,824 137,442 $49.01 $38.95 $48.10

Class A 7,298,856 500,512 6.9% 162,668 206,970 $50.80 $41.30 $50.21

Class B 2,802,679 0 6.2% -291 -73,021 $39.95 $34.51 $38.91

Cedar Park/Georgetown/ Round Rock 1,866,578 25,409 17.3% 102,651 120,222 $26.62 $26.44 $26.68

Class A 888,704 25,409 29.1% 5,373 15,748 $26.30 $27.51 $26.42

Class B 799,223 0 8.0% 97,278 104,474 $27.86 $23.00 $27.66


Class A 1,158,043 0 7.0% 66,374 187,019 $38.78 $38.06 $39.31

Class B 2,140,267 0 9.3% -13,072 13,815 $25.37 $25.88 $25.52

East/Northeast 4,229,153 0 20.3% -6,744 -3,988 $21.51 $14.12 $21.31

Class A 839,367 0 16.2% -19,464 10,250 $25.57 - $25.57

Class B 2,945,907 0 20.6% 12,720 -14,238 $21.66 $18.67 $21.41

North 5,490,852 291,058 12.4% -10,348 -106,146 $33.77 $28.28 $33.32

Class A 2,001,413 291,058 16.9% 2,974 -13,716 $37.99 $31.92 $37.63

Class B 3,403,426 0 10.0% -13,322 -92,430 $27.86 $25.78 $27.63

Northwest 16,080,682 0 8.6% 29,047 305,399 $31.82 $28.06 $31.29

Class A 9,457,434 0 8.5% 115,186 397,072 $34.60 $29.43 $33.52

Class B 5,370,854 0 10.5% -85,622 -95,942 $28.12 $22.98 $27.73

South/Southeast 4,645,139 0 13.3% -65,749 -98,439 $25.87 $31.23 $26.20

Class A 692,200 0 7.5% -17,517 -32,903 $33.96 $35.77 $35.45

Class B 3,058,303 0 16.8% -28,199 -35,295 $24.82 - $24.82

Southwest 10,160,731 53,091 13.0% -137,811 -28,717 $35.86 $32.82 $35.37

Class A 7,156,001 53,091 14.2% -76,918 118,864 $37.59 $33.08 $36.53

Class B 2,799,332 0 10.1% -60,803 -128,176 $29.70 $30.87 $30.33

Austin Suburban Total 46,910,712 369,558 11.7% -34,122 404,336 $31.33 $29.56 $31.23

Class A 22,193,162 369,558 12.1% 76,008 682,334 $35.39 $31.46 $34.78

Class B 20,517,312 0 12.5% -91,020 -247,792 $26.98 $25.02 $26.90

Austin Total 57,699,034 870,070 10.7% 129,702 541,778 $34.43 $30.54 $34.05

Class A 29,492,018 870,070 10.8% 238,676 889,304 $39.20 $32.29 $38.20

Class B 23,319,991 0 11.8% -91,311 -320,813 $27.85 $26.25 $27.79

Total Under Total Qtr YTD Direct Sublet Total Total reflects Class A/B/C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)



4





0%

2%

4%

6%

8%

10%






ManufacturingTrade, Transportation, and Utilities




Government

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Austin, July 2016, 12-Month % Change, Not Seasonally Adjusted


1%

2%

3%

4%

5%

6%





2.8% 4.3%

5.6%

5.6%

6.3%

11.7%

12.3% 16.9%

17.1%

17.4%

Information

Other Services


Manufacturing



Leisure/Hospitality


Government

Austin, July 2016



-2%

0%

2%

4%

6%

8%





Texas Most Expensive Submarkets

Asking Rent P/SF Rank Submarket

1 Austin CBD $48.10

2 Houston CBD $40.80

3 DFW Uptown/Turtle Creek $37.42

4 Southwest Austin $35.37

5 DFW Preston Center $35.25

5 HOU Galleria/Uptown $35.08

7 HOU Greenway Plaza $34.41

8 North Austin $33.32

9 HOU Allen Pkwy/Montrose $31.48 10 HOU The Woodlands $31.35

Top 10 Submarkets by Average Asking Rent







Austin

515 Congress Ave.

Suite 1620

Austin, TX 78701

512.329.2782

Market Summary

Current Conditions

Market Analysis


Demand for office space in technology-centric markets is robust,

vacancies are low and rents are rapidly climbing. The computer,

semiconductor and electrical component industries may be tied to

-positioned to benefit from the rapid

technological evolution of the present day. This dynamic city offers an

enterprise-friendly environment, entrepreneurial focus and a unique

culture that welcomes innovation and creative possibility. Over time, this

blend has transformed a local economy once dominated by government

and education into a diversified, $115 billion economy with strong ties to

the technology sector. Today, technology represents approximately 17%

of the economy and 13% of the jobs in Austin. The impending launch of

the Dell Medical School at The University of Texas at Austin will

biotech innovation.

Silicon Hills is Rapidly Becoming the Location of Choice As real estate and human capital become increasingly expensive in top-

tier technology markets like Silicon Valley, New York and Boston,

companies are searching new markets for expansion opportunities. With

a deep talent pool, access to venture capital and leading-edge ideas

driving innovation, Austin has risen to the top as a viable option. Nearly

75% of corporate relocations and expansions in 2015 and 2016 (to date)

involved technology companies. The venture capital flows into Austin-

area companies suggest the current technology cycle has yet to slow

down.

Austin is Operating above Full Employment The people of Austin benefit from low unemployment and robust

employment growth. Austin added 38,300 new jobs in the year ending

April 2016, which represents a 4.0% expansion of the employment base.

As a result, the local unemployment rate dipped below 3.0% for the first

time since 2000, and the average hourly earnings for private-sector

employees increased 2.5% year-over-year, according to data from the

U.S. Bureau of Labor Statistics. By industry, trade/transportation/utilities

added 9,100 new jobs, closely followed by professional/business

services (7,300) and leisure/hospitality (6,900).

Office Fundamentals Turning to the office market, despite the long-term structural story of

healthy demand and limited construction, the Austin office market

suffered a disappointing second quarter of 2016, which saw the end to a

streak of 14 consecutive quarters of positive absorption. Net move-outs

during second-quarter 2016 resulted in negative overall absorption of

314,021 square feet and an uptick in vacancy. Impacting the quarterly

performance was softness in the North submarket, but this softness can

be described as constrained and limited to one-time events. Specifically,

IBM moved out of its Broadmoor campus located at 11501 Burnet Road,

Construction activity was limited with 1.2 million square feet underway, representing a modest 2.0% expansion of the existing inventory base once completed.

Net absorption turned negative in second quarter. This snapped a streak of 14 consecutive quarters of positive absorption.

The overall vacancy rate stood at 10.7%, the lowest among the three major Texas metros.

-1.00

-0.50

0.00

0.50

1.00

1.50

2Q11 2Q12 2Q13 2Q14 2Q15 2Q16

Net Absorption


8%

10%

12%

14%

16%

18%

$24

$26

$28

$30

$32

$34

2Q11 2Q12 2Q13 2Q14 2Q15 2Q16



Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.7% 10.0% 11.2%




Deliveries 114,204 321,024 581,634

2



Trend Micro 11305 Alterra Parkway North/Domain Direct/New 74,804

State of Texas 7701 Metropolis Southeast Direct/New 24,000

Telogis Braker Pointe III North/Domain Direct/New 29,220

Deloitte 1101 S Capital of Texas Hwy Southwest Direct/New 13,607

Deloitte 7700 W Parmer Land Far Northwest Direct/New 13,153


Plaza on the Lake I & II* Southwest $37.6M $158.94 236,561

Lakewood On The Park B&C* Northwest $32.1M $177.78 180,558

900 Congress* CBD $18.4M $326.29 56,391

8500 Shoal Creek Blvd. Central $305K $6.44 47,335

2512 South Interstate 35* Northwest $2.8M $108.25 25,866


resulting in 144,818 square feet of negative absorption. Brandywine -building

campus in 2015 and is moving forward with a mixed-use master plan to develop 66 acres of land. In another significant move, Houghton Mifflin Harcourt moved out of roughly 200,000 square feet of office space at 10801 North MoPac Expressway, as the company downsized into its new office space in Round Rock. In the end, for the city that tops quarter does not constitute a trend, and the Austin office market is expected to pick up steam in the second half of 2016, as the multiyear growth cycle continues. Vacancy Decline Hits the Pause Button After hovering around 10% for three consecutive quarters, vacancy at the

end of the second quarter stood at 10.7%, 30 basis points higher than in

first-quarter 2016 but lower than the 11.2% vacancy recorded at this time

last year. The longer-term downward trend appears intact, as the metro

enjoys a multiyear growth cycle with limited new supply. Two submarkets

recorded vacancy below 8%: the Central Business District (6.2%) and

Central/West Central (7.1%). Moving forward, NGKF expects vacancy

will dip below 9.0% in the next two years.

Rent Growth Flatlines for at Least One Quarter Asking rents, which had been on a tear in Austin, took a breather in

second-quarter 2016. However, it is important to note, the slowdown is

not expected to last long. The average asking rent stood at $32.13/SF at

the end of the second quarter. That tally was flat quarter-over-quarter,

but up 4.0% from one year ago. By comparison, rents increased 9.7% in

2015 and 4.1% in 2014.

By submarket, the CBD remains the most expensive area of town, as

average rents shot up to $43.79/SF, a 6.5% increase from the same time

last year. Meanwhile, the suburban areas offer some reprieve, with rents

at $30.26/SF, although the gap could soon shrink. For example, the

North submarket saw the average asking rent climb 18.4% to $32.53/SF,

and Southeast Austin recorded an above-average gain of 7.3% to

$29.80/SF. By property classification, a $10.14/SF spread exists between

Class A and Class B rents, which is higher than the historical $8.00/SF

norm. This would suggest that tenants demand prime space as a method

to attract and retain the best talent.

Moving forward, asking rents will continue to climb, based on healthy

fundamentals and continued strength within the technology sector.

Expect asking rents to increase by 7.1%, 5.7% and 4.5% in 2016, 2017

and 2018, respectively.


* Loan amount, Real Capital Analytics

3

www.ngkf.com

CBD Total 10,608,476 680,358 6.2% -9,444 20,567 $44.33 $39.08 $43.79

Class A 7,119,010 680,358 6.3% 20,792 84,005 $45.83 $40.02 $45.38

Class B 2,802,679 0 5.9% -28,225 -63,896 $37.15 $37.45 $37.20

Cedar Park/Georgetown/ Round Rock 1,765,157 155,575 17.7% -2,586 -1,224 $26.34 $25.38 $26.34

Class A 888,704 24,000 31.7% -2,480 -6,897 $26.40 $25.87 $26.44

Class B 697,802 131,575 4.4% -106 5,673 $26.11 $22.00 $25.95

Central/West Central 4,391,577 46,000 7.1% 80,693 151,832 $26.71 $30.28 $27.21

Class A 1,112,043 46,000 8.9% 74,233 123,333 $34.73 $41.98 $36.81

Class B 2,140,267 0 8.9% 9,742 22,875 $26.34 $22.10 $25.82

East/Northeast 4,201,753 0 19.5% 26,467 31,425 $19.70 $16.81 $19.64

Class A 839,367 0 13.9% 31,981 29,714 $23.78 - $23.78

Class B 2,918,507 0 20.2% -5,514 2,711 $19.38 $19.27 $19.37

North 5,495,506 291,058 15.6% -350,494 -285,415 $32.87 $28.49 $32.53

Class A 2,005,498 291,058 26.4% -226,334 -205,738 $35.77 $33.44 $35.67

Class B 3,403,995 0 9.6% -124,160 -79,677 $26.72 $25.80 $26.58

Northwest 16,115,824 0 9.2% 38,781 209,548 $31. 35 $27.95 $30.84

Class A 9,479,642 0 10.0% 48,846 253,400 $34.34 $29.20 $33.05

Class B 5,383,788 0 9.9% -12,056 -50,243 $27.45 $21.15 $27.10

South/Southeast 4,593,633 0 12.0% -35,569 -38,769 $29.75 $30.22 $29.80

Class A 669,450 0 4.7% -21,366 -12,588 $36.70 $35.84 $36.55

Class B 3,029,547 0 16.1% -13,017 -19,317 $29.03 $31.59 $29.19

Southwest 10,519,837 0 11.2% -61,869 -114,636 $34.84 $32.40 $34.54

Class A 7,545,410 0 12.6% -22,451 -37,221 $36.04 $32.54 $35.41

Class B 2,769,029 0 7.7% -24,034 -57,938 $29.64 $28.22 $29.93

Austin Suburban Total 47,083,287 492,633 11.7% -304,577 -47,239 $30.49 $28.36 $30.26

Class A 22,540,114 361,058 13.1% -117,571 144,003 $34.42 $30.30 $33.76

Class B 20,342,935 131,575 11.7% -169,145 -175,916 $26.54 $24.30 $26.43

Austin Total 57,691,763 1,172,991 10.7% -314,021 -25,672 $32.36 $29.84 $32.13

Class A 29,659,124 1,041,416 11.5% -96,779 228,008 $36.90 $31.83 $36.17

Class B 23,145,614 131,575 11.0% -197,370 -239,812 $26.08 $24.79 $26.03

Total Under Total Qtr YTD Direct Sublet TotalTotal reflects Class A/B/C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)



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Government

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Information

Other Services


Manufacturing



Leisure/Hospitality


Government

Austin, April 2016



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Top 10 Submarkets by Lowest Vacancy Rate


Total Vacancy Rate Rank Submarket

1 Austin CBD 6.2%

2 Austin Central/West Central 7.1%

3 Houston Bellaire/Medical Center 8.7%

4 Houston Sugar Land/E. Ft. Bend 9.0%

5 DFW South Ft. Worth 9.2%

5 Austin Northwest 9.2%

7 DFW Lewisville/Denton 10.1%

8 DFW North Ft. Worth 10.6%

9 DFW Preston Center 10.7% 10 DFW Uptown/Turtle Creek 10.9%






Austin

901 S MoPac Expy

Suite 300

Austin, TX 78746

512.329.2782

Market Summary

Current Conditions

Market Analysis


The Austin office market recognized its 14th consecutive quarter of positive net absorption in the first quarter of 2016, as its vacancy rate fell to 10.6%, significantly lower than that of Dallas or Houston. Following consecutive years of strong demand, supply has steadily increased, and in each of the previous six quarters, the market has added an average of 600,000 square feet of new product. However, as new product has been delivered, the construction pipeline has not been replenished. Construction activity at the end of first-quarter 2016 stood at 1.3 million square feet, which, once completed, will represent a modest 2.3% inventory expansion. All told, going into 2016, Austin ranked number one out of the 55 markets in the NGKF Momentum Index, an index based on demographics, employment trends and real estate market fundamentals.

Economic OverviewBoosting past performance and future expectations of the office market has been strong employment growth. Austin added 43,400 new jobs in the year ending January 2016, which represents a staggering 4.7% expansion of the employment base. By industry, nearly all major segments contributed to positive employment growth, led by leisure/hospitality and professional/business services, which added 9,800 and 9,100 jobs, respectively. On the flip side, manufacturing was the only sector that recorded a decline, but the loss was modest at 700 jobs. As a result, the local unemployment rate dropped to 3.2%, 170 basis points below the U.S. average, as of January 2016.

Vacancies Rise, but Remain on a Downward TrendSince hitting a peak in second-quarter 2009, total vacancy has declined from 18.6% to 10.6% in first-quarter 2016. During this same time period, Class A vacancy tightened from 22.2% to 11.9%, while Class B vacancy improved from 17.1% to 10.3%. More recently, tenants have flocked to Class A product. In first-quarter 2016, positive absorption totaled 240,163 square feet. Contributing to this figure was Q2 Holdings, which moved into 13785 Research Boulevard, and Natera, which moved into 13011 McCallen Pass Drive. Combined, these transactions represented 161,000 square feet of absorption. At the same time, Class B inventory absorbed negative 77,000 square feet.

Construction Activity is Limited Despite very low vacancies, construction activity was fairly limited at the end of the first quarter. As previously mentioned, work was underway on nine properties representing 1.3 million square feet. The largest concentration of activity is taking place in the Central Business District,

lowest rate for a given submarket across Austin, Dallas and Houston. The largest project currently underway is 500 West Second Street, a joint venture between Trammell Crow Company and Principal Real Estate. The property, which is part of a larger master-planned project at the former Thomas Green Water Treatment Plant, will feature roughly 490,000 square feet of Class A office space and 11,000 square feet of ground-floor retail. 500 West Second Street is expected to complete in first-quarter 2017, with Google as the anchor tenant. All told, the construction pipeline is nearly 30% pre-leased, and, once completed, will expand the existing inventory base by 2.3%.

Construction activity was limited with 1.3 million square feet underway, representing a modest 2.3% expansion of the existing inventory base once completed.

Positive net absorption reached 167,724 square feet in first quarter 2016. This marked the 14th consecutive quarter of positive absorption.

The overall vacancy rate stood at 10.4%, the lowest among the three major Texas metros.

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Net Absorption


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Current Quarter

Prior Quarter

Year Ago Period

12 Month Forecast


Vacancy Rate 10.4% 10.2% 11.0%

Net Absorption (SF) 167,724 935,698 679,678



Deliveries 321,024 805,604 695,391

2



Yeti Coolers Inc. 7601 Southwest Parkway Southwest New 175,000

Undisclosed Lamar Central West Central New 69,868

Oracle USA Stonebridge Plaza II Northwest Direct 44,712

Navitus Health Solutions Research Park Plaza Bldg V Northwest New 25,937

CalAtlantic Homes Paloma Ridge Building B Northwest New 22,285


301 Congress 1 CBD $234,700.000 $561 418,338

University Park 2 Central $60,100,000 $294 204,297

Encino Trace 3 Southwest $45,650,000 $286 319,743

North Austin Office Pair 4 North/Northwest $14,700,000 $118 124,310

Donley Plaza 5 North $8,693,300 $125 69,547


Asking Rents Move Significantly Higher Turning to pricing, as market conditions have tightened, landlords have become more aggressive in their pricing strategies. Average asking rents ended the first quarter at $32.12/SF, which was up 1.0% quarter-over-quarter and 6.1% year-over-year. Class A office buildings have seen average asking rent increase by 6.3% year-over-year, to $36.17/SF. Similarly, Class B rents shot up 9.0%, to $25.82/SF. By submarket, year-over-year pricing gains occurred across the board, including double-digit gains in three submarkets: North Austin (18.5%), South/Southeast Austin (10.7%) and East/Northeast Austin (10.4%). We expect asking rents will continue to rise through 2016 and 2017, as a result of the robust local economy and constrained supply.

Investors Are Hot for AustinIn 2015, more than $2.1 billion of office transactions closed in Austin. While this figure is down slightly from 2014, it represents 21.0% of total deals that took place across the four major metros in Texas (Austin,

-third the size of the existing stock in Dallas and Houston. One of the largest deals of the year took place at 301 Congress Avenue in the CBD, which sold for $234.7 million to Prudential Real Estate Investors. Overall, demand for properties remains strong. As a result, pricing has moved higher. In 2015, the average price for institutional quality office product hit roughly $300/SF. Furthermore, the average cap rate compressed from 6.3% in 2014 to 6.1% in 2015, based on data from Real Capital Analytics.

Submarket Spotlight East Austin East Austin, historically known as a hipster hangout, is currently undergoing a redevelopment push. Former garage repair shops, manufacturing distribution centers, restaurants and vacant grocery stores are being assembled for repositioning. The trend is a result of

-growing creative tenant mix searching for the next Meatpacking District. Overall vacancy remained elevated at the end of first-quarter 2016, at 21.0%, but is set to come down dramatically due to pent-up demand for large-block users. Currently, there are at least a dozen 100,000-square-foot-plus users looking for product in Austin.

Several development deals are in the works that seek to capitalize on this repositioning trend. For example, Plaza Saltillo has been approved for a 10.0-acre transit-oriented development near the MetroRail at Fifth and Comal streets. This private-public partnership urban infill project is slated to deliver office, retail, affordable housing and plenty of public open space. Another project is the redevelopment of the 109.0-acre former Freescale Semiconductor campus located at 3443 Ed Bluestein Boulevard. Newly dubbed MOS 8, the campus sat vacant for almost 10 years, but is currently being reimagined with 250,000 square feet of data center product, 450,000 square feet of revamped office, flex and industrial product, 500,000 square feet of developable office product and two restaurant pads.


1 Dec. 2015 sale2 Estimated price, Real Capital Analytics3 Dec. 2015 sale, purchase price represents 50% ownership stake4 Estimated financing5 Asking price

3

www.ngkf.com

CBD Total 10,608,476 680,358 5.9% 50,350 50,350 $43.52 $40.01 $43.13

Class A 7,119,010 680,358 6.5% 73,276 73,276 $44.98 $41.00 $44.58

Class B 2,802,679 0 4.5% -25,429 -25,429 $37.17 $36.91 $37.12

Cedar Park/Georgetown/Round Rock 1,770,785 155,575 20.8% -51,568 -51,568 $25.67 $24.36 $25.62

Class A 894,332 24,000 37.7% -57,347 -57,347 $26.26 $24.76 $26.19

Class B 697,802 131,575 4.4% 5,779 5,779 $23.61 $22.50 $23.58

Central/West Central 4,411,506 46,000 10.2% 40,098 40,098 $28.60 $27.79 $28.53

Class A 1,112,043 46,000 18.7% 41,526 41,526 $36.87 $44.00 $37.23

Class B 2,160,196 0 10.1% -4,961 -4,961 $24.91 $23.56 $24.75

East/Northeast 4,320,603 39,400 21.0% 10,029 10,029 $19.64 $18.00 $19.65

Class A 799,967 39,400 25.4% -2,267 -2,267 $23.71 - $23.71

Class B 3,026,757 0 19.6% 12,296 12,296 $19.38 $20.71 $19.47

North 5,425,816 365,862 8.3% 48,838 48,838 $33.13 28.17 $32.82

Class A 1,766,891 291,058 12.8% 15,263 15,263 $36.77 $33.44 $36.61

Class B 3,524,512 74,804 6.3% 33,575 33,575 $27.07 $23.15 $26.71

Northwest 16,130,619 0 9.7% 120,945 120,945 $31.34 $26.27 $30.75

Class A 9,477,654 0 10.9% 168,890 168,890 $34.08 $26.62 $32.71

Class B 5,400,571 0 9.9% -52,345 -52,345 $27.18 $24.34 $27.21

South/Southeast 4,642,673 0 11.3% -15,963 -15,963 $29.50 $26.21 $29.24

Class A 669,450 0 1.9% 5,980 5,980 $38.46 $32.90 $37.86

Class B 3,078,587 0 15.8% -16,265 -16,265 $28.84 $25.42 $28.67

Southwest 10,525,820 87,748 10.7% -35,005 -35,005 $34.55 $32.52 $34.38

Class A 7,551,393 87,748 12.4% -5,158 -5,158 $35.72 $32.70 $35.24

Class B 2,769,029 0 6.6% -29,847 -29,847 $29.26 $27.54 $29.50


Class A 22,271,730 488,206 13.3% 166,887 166,887 $34.43 $29.25 $33.67

Class B 20,657,454 206,379 11.0% -51,768 -51,768 $26.19 $24.05 $26.14

Austin Total 57,836,298 1,374,943 10.4% 167,724 167,724 $32.24 $30.34 $32.12

Class A 29,390,740 1,168,564 11.9% 240,163 240,163 $36.76 $32.17 $36.17

Class B 23,460,133 206,379 10.3% -77,197 -77,197 $25.80 $25.39 $25.82

Total Under Total Qtr YTD Direct Sublet TotalTotal reflects Class A,B,C Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent




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Austin, January 2016, 12-Month % Change, Not Seasonally Adjusted


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Information

Other Services


Mining, Logging, andConstructionManufacturing

Education and HealthServicesLeisure and Hospitality

Professional and BusinessServicesTrade, Transportation, andUtilitiesGovernment

Austin, 2015 Annual Data


Texas Development Activity

Top 10 Submarkets by Square Feet


Under Construction

(SF)Rank Submarket1 Far North Dallas 2,728,0582 Houston Galleria/Uptown/West Loop 1,285,0003 Houston CBD 1,171,6584 Dallas Uptown/Turtle Creek 1,001,3305 Houston Energy Corridor 952,8936 Austin CBD 680,3587 Dallas Las Colinas 542,183

8 Houston Westchase 445,000

9 Houston The Woodlands 442,40310 Dallas Richardson/Plano 411,258

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to all aspects of that decision, including its legal, financial, and tax aspects and implications.

Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.

Newmark Grubb Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents.

Newmark Grubb Knight Frank Research Reports are also available at www.ngkf.com/research


David Wegman, CFADirector of Research - [email protected]

Leta WausonResearch Manager - [email protected]

Austin

901 S MoPac Expy

Suite 300

Austin, TX 78746

512.329.2782

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