Inside the resurgence of speculative builds in the area
7 Aug 2017
In the late 2000s the national housing bubble burst, and there was a crisis with subprime mortgages, putting the country in a financial tailspin. The Great Recession took hold throughout the nation, and development throughout Central Texas slowed.
Now, nearly a decade later, the area has recovered, and the resurgence of building of commercial and industrial space is a sign of economic strength Round Rock Planning and Development director Brad Wiseman said.
Spec buildings, built without any secured tenants, show faith the market will continue doing well and that the buildings will continue to be leased for years to come.
The process starts with developers securing loans from lenders who are willing to invest in the idea of a fully leased building. Cities often play a role in spec building by extending services, such as wastewater or roads, to the property for the intent of future economic
Wiseman said spec buildings allow development to catch up to area population and job numbers on the rise.
“If you already have product on the ground, it provides the opportunity [for companies]to relocate [to Round Rock]as opposed to there being no space available,” Wiseman said.
Ben White, vice president of economic development for the Round Rock Chamber, regularly works to attract businesses to the area and understands the urgent need to have space available for a move.
Larger companies tend to have a longer timeline and forecast out relocations within two to three years, but smaller businesses need to find a place within three to 12 months, White said.
White acknowledged that developers take a risk when constructing a building without any tenants, but they cannot take advantage of the reward otherwise.
“They are taking on a risk that the market could crash, the building could be empty in three to four years, but at the same time, you wouldn’t have the reward,” White said.
Amy Madison, Pflugerville Community Development Corp. executive director, said taking such a risk shows a renewed confidence in the marketplace.
“I think the resurgence [of spec building]is a result of the fact that there is so much pent-up demand in the marketplace for space,” Madison said. “Our vacancy rates are so low right now on available tenant space that developers are much more willing to invest in [spec building].”
In Pflugerville, vacancy rates are low with office, retail, multifamily housing and industrial space under 8 percent. Independence Title data shows 3.6 percent of Pflugerville office space vacant, and 3 percent of retail space available for leasing.
Independence Title is a title and escrow company in Central Texas. Mark Sprague, state director of information capital, said 15 percent vacancy indicates a comfortable market.
“The Austin area hasn’t seen 85 percent [occupancy]since the recession in multifamily, office or retail,” he said, referring to Austin’s unusually strong market since the recession.
Sprague said the recent resurgence of spec buildings shows lenders are seeing the long-term stability of vacancy rates at low numbers as a sign of the market’s recovery.
New Projects with promise of more
Developers are tuning into the potential for reward and getting projects on the ground now more than ever in recent times, according to city planning departments. Several projects are in the works in Round Rock, and the first-ever speculative space is on its way to Hutto.
In Round Rock, The Crow Group broke ground on the first of two towers that will provide the city with 45,000 square feet of Class A office space.
Crow Group Managing Director Justin Northcutt said the group chose Round Rock as its location because of its fast-paced job growth and population.
At a June budget meeting, city staff indicated the group was even looking into an additional 12- to 15-story building at a nearby location to continue capitalizing on the demand of the area.
In May, Savills Studley, commercial real estate advisors, helped to break ground on Mesa Creek, a 60,000-square-foot office building. At the ground breaking, the leasing agent, Alecia Burdick, said with the opening of this space, projected for May 2018, the city would double its available Class A office space.
Burdick said that even in the Central Texas area, which already has a low vacancy rate, Round Rock stands out.
At the time Mesa Creek broke ground, she said downtown Austin’s vacancy rate for office space was 7 percent, and Round Rock’s was below 3 percent.
Savills Studley expects to fully lease the building in one year and start on another adjacent property soon after.
Sprague said the trend of speculation builds in the area tends to skew toward office space. However, that might change with the city of Hutto’s recent announcement of a 2.5 million-square-foot industrial park.
In April, Titan Development announced it would be building more than 800,000 square feet of industrial and business space in six buildings over the next 15 years.
According to city officials, this is the first time Hutto has had speculative space for companies considering a move to Central Texas.
It also marks a turn in the trend to industrial space. Sprague said the new innovation park will disrupt the current state of the Austin market, which he said does not tend to offer benefits to industrial companies. He said Houston, San Antonio and Dallas attract more industrial companies because of quick routes to the Gulf.
That is not to say the Innovation Business Park will struggle.
Helen Ramirez, Hutto business and development services executive director, said Hutto believes it will likely expedite the 15-year timeline to 10 years, starting construction on new buildings once the previous one is 80 percent full.
“It will be the largest available space up and coming in the Austin area,” Ramirez said. “We are actually going to be competing with not only surrounding cities in the Central Texas market but throughout Texas.”
Even though more than 300,000 square feet of office and industrial space are under construction in Round Rock, Pflugerville and Hutto, more is nearly on the way. Here’s a list of buildings that are already planned following the completion of spec space nearby the property.
• 1-2 additional buildings near City Centre I
• 1 additional building near Mesa Creek
• 5 additional buildings at Hutto Innovation Business Park
• Summit II and Hutto Innovation Business Park were not under construction as of July 1, and therefore are not included in the square footage graphic on the cover.
Emily Donaldson, Community Impact, communityimpact.com, 8/7/2017