Patrick's Austin Commercial Real Estate Blog

Back to Austin and Real Estate

2008-08-08T21:46:58Z

Not that I expect anyone to have noticed, but I haven't been doing too much blogging of late. I've been doing some work in New York since May, and have been passively working some commercial deals back home, but have had most of my attention focused here.

Fortunately, I make the trek back home tomorrow, and boy am I ready to have some great BBQ and Mexican food. With all that said, I thought I'd make some general comments on real estate, the economy, and some things for the future.

Real Estate

It always seems that as soon as you leave town, you are getting busier than ever. Does that ever happen to you? It sure happens to me, and it happens to my Dad as well (an Executive Broker for a large Arkansas real estate firm). Judging from the amount of phone calls and e-mails I've gotten in the past couple of months, and seeing how busy my colleagues are back in Austin, the commercial real estate market remains pretty healthy. This is exciting to see, given the general weakness in other parts of the country, and the world. I can only hope that it remains so.

That said, in scanning my e-mails, it does seem that there is a bit more supply out there than demand. This was corroborated by some of the sublease data I discussed in my previous post from about two weeks ago. Lets hope this isn't a sign of impending weakness.

All that said, I have a lot on my plate for when I get back to Austin, and i'm looking forward to being busy and hitting the ground running.

Economy

The economy is an interesting animal. Though we have certainly seen some signs of weakness in consumer spending, unemployment, and other bellwethers, we have also been pleasantly surprised by the strengthening dollar, weakness in commodity prices, and surprisingly good earnings from some companies. Perhaps the U.S. isn't in such bad shape???

My thought is that if credit becomes freed up, as the fed intended when they began their rate cutting spree about a year ago, the economy will be seriously aided. Once real estate (nationwide) picks up again as buyers are attracted by lower borrowing rates, we will be in a much better position. Construction will begin to pick up along with the industries supplying contractors and the more service-based aspects of real estate (us, banks, title companies, etc) and hopefully that will lead to upticks in employment. More employment should lead to increased consumer confidence and spending, which will both greatly help our economy. I think this will happen, but there is likely more falling to do to the downside before we start bouncing back. Look to the equity markets as a tell to the broader economy, as these markets generally bounce back before the actual economy does.

Future

College football season is fast approaching, as the baseball season begins to wrap up. Unfortunately my Astros haven't exactly been knocking anybody's socks off, though they haven't been playing too badly of late (such a 2nd half team). It looks like Texas is a big question mark for 08, though if the secondary is improved under Muschamp and Colt can perform, who knows where we might be come Dec/Jan.

As I said above, I think I will be very busy with real estate when I get back to Austin, but feel free to comment/ask questions/bring clients my way/etc...

The Sublease Report - Revived

2008-07-27T22:09:00Z

The Sublease Report is Back

Our firm has revived its popular sublease report from a few years ago. The report asks all the brokers in Austin to fill out information on their subleases which we compile and run some analysis on. As of now, the report is still preliminary, and we are targeting a more complete report to be ready at the end of this week. I thought, however, it might be helpful to share some of the more salient points with our audience. As I mentioned in previous blogs, sublease data can be very telling of the broader market trends.

We see approximately 580,000 SF of sublease space available, with another 172,000 SF believed to be available on the market.

This total represents about 2.05% of the total market, within the historical range of 2% - 3% of sublease space in the market at any one time.

One of the hottest markets in the Austin area over the past several years has been Southwest Austin. Here we have seen the tightest vacancy rates and highest rental rates, and lately we have seen a great deal of construction. So perhaps it stands to reason that this market is now representative of the majority of sublease space available in our report. Approximately 48% of the reported space is Class A office space in the Southwest market. Could this be a sign that the SW is becoming overbuilt and we may see rates coming down? If you've read my pieces in RedNews or on this blog, you know this is something I've called for for several quarters now.

Texas retains one of the healthiest economies in the nation, for that we can be very thankful, and I don't think we are going to see a serious crisis in commercial real estate in Central Texas, at least for a while. Don't forget that the summer time is generally a rather slow time for commercial sales and leasing, so don't let any numbers fool you.

For any questions about the sublease report, or to submit your listings, please contact me at 832.659.5076 or patrick.foley@bulshodge.com

Mexico Isn't So Bad

2008-05-29T14:42:04Z

Last night I returned from a trip down to the Valley, where I was fortunate enough to make a jaunt across the border to Matamoros, Mexico. Judging by what I have heard on the news and read in the paper, one would think that the U.S. Mexico border area (primarily on the Mexico side) is a warzone. Police chiefs are being beheaded, children being murdered, and families double-crossing each other in the name of drugs and the associated gangs.

Well folks, I hate to burst everyone's bubble, but it isn't as bad as you might think. Now, I do believe that things in Nuevo Laredo and other areas are getting out of hand. I personally don't think I would venture across the bridge in Laredo, even though I would have just a few short years ago. The point that I want to hammer home is that you can still have a really great time in the border towns in South Texas. By all means, go down there and buy a pair of boots, bottle of vanilla, and a beautifully carved set of bookends. You'll save money, experience some culture, and see for yourself that things are really that bad.

That said, I would remind everyone to be cautious, as you would be in any unfamiliar place. Don't forget that in a different country there are different laws and customs!

Conservatives are Happier than Liberals - It's Official

2008-05-07T17:35:17Z

For the complete story check out the link here.

The National Science Foundation funded a study that shows conservatives and happier than liberals, and it even pinpoints the reason why. Apparently, conservatives tend to rationalize in their mind inequalities. This supports a Pew Research poll that states that approximately 47% of conservative republicans are self-described as "very happy" while liberal democrats feeling the same way only number 28%.

Next time you are having a debate with a liberal friend or co-worker and they ask you why the hell you feel the way you do, tell them because it makes you happier!

Why Executive Suites?

2008-05-07T16:40:35Z

Recently in Austin I have noticed a trend, executive suites are popping up everywhere! It seems that everyone is jumping into the game, myself included. The question is, why are they so popular all of a sudden, especially given the big names like Regus that tend to dominate the market?

Well, as it turns out, they make quite a bit of money and are great incubators for small tenants. Not many traditional office buildings are willing to sign up a tenant for only 6 months, nor are they willing to only lease a few hundred square feet. However, there is quite a bit of demand for these types of spaces, and where there is smoke there is generally fire. Hence the creation of executive suites.

Here are some of the positives and negatives of executive suites from a tenant's perspective:

Positives

Short Term Lease Opportunities
Can lease a small space
Can often expand very easily by leasing additional suites
Generally a Full Service environment

Negatives

Expensive on a $ PSF basis
Often hit with lots of add-on fees that may not be relevant
Difficult to personalize the space (i.e. no finishout etc...)

Here are some of the positives and negatives of executive suites from an owner's perspective:

Positives

Great price per square foot
Flexibility with space since leases are short-term
Can incubate tenants for other properties when they expand
Generates high fee-based income

Negatives

High tenant turnover
Constantly paying commissions due to turnover
Constantly marketing the space
Higher maintenance costs due to turnover

In the end the model works. Tenants don't mind paying the high price per square foot because they can't go anywhere else. Owners don't mind dealing with the problems associated with high turnover because of the higher rental rate.

I've put clients into executive suites in the past, and it is generally a rather easy process. Last week I picked up a listing of SOCO Suites in Austin which is my first foray into listing executive suites, and I'm very pleased with the outcome thus far. The traffic through my phone and email is incredible because the demand is so high. So next time you consider how to lease out a new building you have listed, you might consider adopting (or partially adopting) the executive suite model.

One question for all of you agents out there: How can I compensate brokers that bring clients to these suites? The commission structure is such that you are paid 1/2 months rent on a 6-month lease and one months rent on a 1 year lease. So a 6 month lease would generate only $250 - $500. When you split that between two brokers, there isn't a whole lot. What are some creative ways to entice agents?

Need Help Understanding Commercial Leasing? - Expenses Demystified

2008-05-06T17:12:12Z

Realtor's love their acronyms. CRS, CCIM, NNN, FS, etc... What do all of these mean?

When I took my first foray into real estate, I had to learn a lot about terminology. When I stepped into the commercial world, it became that much more difficult. I thought I had stepped back in time to square one. One of the most difficult concepts for me to wrap my head around was expense terminology. So for all those of you out there wondering what the heck makes a triple net lease different from a modified gross lease, I'll try to help. That said, I find that most brokers have slightly different interpretations, so please keep that in mind.

Full Service - Tenant doesn't pay any additional expenses (generally), though some full service leases state that if they use a disproportionate share of utilities, they must compensate the landlord. Internet isn't always included in a full service lease.
Gross -Similar to a full service lease.
Modified Gross - Similar to a full service lease, but it does not include all of the services. The tenant will often have to pay electric, janitorial, or other services in a modified gross lease.
Triple Net (NNN) - The triple nets represent taxes, property insurance, and common area maintenance or CAM.
Double Net/Net Net (NN) - The double nets are property insurance and property taxes.
Net/Single Net - Tenant pays property taxes.
Expense Stop - The landlord covers the expenses up to a certain threshold, the tenant is responsible for anything above that threshold.

I hope that helps some of you out, tenants or brokers.

Just Starting Out? Want to Move Out of Your Home Office? Need a Temporary Office Suite Cheap? Look No Further

2008-05-05T12:04:50Z

If you are in the market for a small office suite but don't want to pay the exorbitant prices at many executive suites companies, check out this new listing at 4719 South Congress. With rates starting as low as $500/month, your only other out of pocket expense will be telephone service. The building has just been renovated and has that new building smell (not quite as good as the new car scent, I know). We're working every day with building management to make it more comfortable for suite users. Please contact me with any questions.

Industrial Space Subleases - Austin & Everywhere

2008-05-05T11:48:13Z

When you hear the word sublease, what comes to mind? Probably an apartment or office space. These are certainly valid thoughts. However, I want to challenge you to expand your horizons.

In Austin, the industrial market is hot. Warehouses, flex space, and R&D space is leasing like mad. If you have a warehouse with a dock high door from 2500 SF and higher and it isn't leasing, call me right now at 832.659.5076 and we will get it leased in nothing flat. Sorry, I didn't mean to digress. Since industrial space is going crazy, there isn't a ton of sublease space available right now but it does certainly exist. It's important to look at these spaces because of the savings you get on rates.

When demand is greatly outpacing supply, as it is in the Austin industrial market right now, it can become difficult to negotiate a rate down. So how do you save money on an equivalent space? Find a sublease space.

Having a tough time finding a commercial sublease? Here are some tips:

Search Craigslist. There are a lot of subleases on here, though they are mostly office.
Google it. Austin commercial sublease or Austin industrial sublease for example.
Get a copy of a sublease report. I have a report that I can send you, just contact me at 832.659.5076 or patrick.foley@bulshodge.com and I will be happy to send our most updated version.

Save money, find a sublease. Happy hunting!

Not a Lead....But Close

2008-05-05T11:29:48Z

I hope that everyone had a great weekend. It makes it a little easier to come to work today since the weather is pretty drab today in Austin.

I just thought I would let everyone know my little testimonial for Activerain. I was handed a lead from another agent I work with, and the client came across my blog on AR and contacted me. Though it wasn't really a lead that came to me through Activerain, it goes to show how easy AR makes it for people to find you. So I figure that's about 1/2 way there. Just though I'd share with everyone.

Have a great week everyone, go out there and get some deals done!

Will We Ever Travel Again?

2008-04-30T16:23:29Z

For those of you who don't already know, the federal reserve cut another 25 basis points today. No big surprise, as that was what the market was calling for. It's great for business, and the aggressive cuts should certainly help out all of us in real estate, but there are a lot of other ramifications to consider.

A fed cut likely signals continued weakness in the dollar, meaning gold and oil will continue their march higher. That's great for my Halliburton (HAL) stock and Yamana Gold (AUY) call options, but it isn't good for everday living. I'm sick of paying so much for gas, and it doesn't help the price of any other consumer good either. You don't have to go too far back to remember eggs for $0.79 or a loaf of bread for well under that. That said, I can deal with paying more for the little stuff, even though it adds up.

What I really don't like is how the federal reserve is dampening my lust for travel, especially international travel. I can ill afford to spend significant time outside of our country when a dollar is worthless. Nor can I afford to buy a plane ticket because fuel costs have forced the airlines to ramp up their fares. Not to mention the consolidation in the airline industry that is reducing competition (not that I blame them, they have to survive).

So, will I ever get to leave the confines of my office again? Probably so. I just have to do some more deals to finance it. I guess I can always sell a kidney or some other organ in South America, but I'd rather the fed just stop devaluing our dollar.

Augustin to the NBA

2008-04-23T17:10:56Z

It's with a heavy heart that I must inform all of you that Texas Longhorn point guard D.J. Augustin will be leaving the Longhorn basketball team to enter the NBA draft. Another great UT basketball player fails to stick around, what a shame.

For all of you who bleed burnt orange, have hope for next year. For the rest in the Big XII, don't rejoice too hard.

All that said, I wish D.J. the best of luck in the NBA.

Know a Medical Professional Needing an Austin Office? Here it is! $21.50/SF Full Service Sublease

2008-04-23T16:34:32Z

This is a really great space, available immediately. If you, or a client of yours, is in need of cheap medical space in North Austin, this is the space you have been looking for. For additional information on this property, or if you would like assistance in finding another commercial property in Austin, please call me at 832.659.5076 or e-mail me at patrick.foley@bulshodge.com . Thanks!

Pull Out of the Market Now - Fact or Fiction?

2008-04-18T21:21:21Z

I'm scared...really scared. At this point in my life, I can't afford to buy any investment real estate. So, what do I do? Trade stocks and options. What scares me is that if the Bush tax cuts are not made permanent, investing in the stock market suddenly becomes much less attractive. This is much more likely to come to pass if a democrat is elected in November. Will the market sell off if it appears that a democrat will take office? I think that it is a very likely scenario. Both leading democratic candidates have clearly stated their intentions via a number of media. I'm scared, are you?

Interesting E-mail About Houston

2008-04-18T19:12:43Z

Being a native Houstonian, I could certainly appreciate this e-mail I received today, so I thought I might share it with everybody else.

Rules of Houston , H-Town, 3rd Coast, Bayou City , The Dirty 3rd, or
whatever you wanna call it.

1. You must learn to pronounce the city name. It is "Hue-stun," not
"Ewe-stun", or "house-tun" Oh yea, the street is pronounced "San
Phil-ee-pay," not" San Phil-eep" (San Felipe). Enunciate, you idiots!

2. Forget the traffic rules you learned elsewhere. Houston has its own
version of traffic rules...Hold on and pray. There is no such thing as a
dangerous high-speed chase in Houston . We all drive like that.

3. All directions start with, "Go down to Loop 610".... which has no
beginning and no end.

4. The Chamber of Commerce calls getting through traffic... a " Scenic
Drive .."

5. The morning rush hour is from 6:00AM to 10:00AM . The evening rush hour
is from 3:00PM to 7:00PM . Friday's rush hour starts Thursday morning.

6. If you actually stop at a yellow light, you will be rear-ended, cussed
out and possibly shot. When you are the first one off the starting line,
count to five when the light turns green before going, to avoid getting into
any cross-traffic's way.

7. Kuykendahl Road can ONLY be pronounced by a native Houstonian.(
kirk-en-doll)

8. Construction on I-10, I-45, US 59 and Loop 610 is a way of life and a
permanent form of entertainment.

9. All unexplained smells are explained by the phrases, "Oh, we must be in
Pasadena !" or "God, I hate Baytown !" or "Mmm, smell that Texas City !"

10. If someone actually has their turn signal on, it is probably a factory
defect.

11. All old ladies with blue hair in a pink Cadillac have total
right-of-way.

12. The minimum acceptable speed on Loop 610 is 85 mph. Anything less is
considered downright sissy. In turn, the minimum speed on Westheimer is at
least 45mph...

13. The wrought iron on windows in east Houston is NOT ornamental.

14. Never stare at the driver of the car with the bumper sticker that says,
"Keep honking, I'm reloading." In fact, don't honk at anyone.

15. If you are in the left lane, and only going 70 mph in a 60 mph zone,
people are not waving when they go by.

16. The Sam Houston Toll road is our daily version of NASCAR.

17. If it's 100 degrees, Thanksgiving must be next weekend.

18. When in doubt, remember that all unmarked exits lead to Louisiana ..

22. If you live in Katy and I live on the south side of Houston we'll never
hang out.

23. The best thing about being drunk between 2-5 am is Whataburger will
serve both breakfast and normal menus.

24. You are always able to be pulled over by any police vehicle, even if
you were just given a ticket.

25. You don't have to wait for an exit to get off a freeway, just follow
the ruts in the grass to the feeder like everyone else. This is how Houston
residents notify Texas Department of Transportation where exits should have
been built.

26. Else-where, they are called frontage roads... Here in Houston , they
are called FEEDER roads, so don't look stupid when we say "Exit the feeder
road and use the loop-d-loop"

If you don't live here, most of this will sound utterly insane, but to all
of us who call this home..nothing but the truth and you know it!!!

Don't Avoid the Doctor

2008-04-17T13:36:13Z

This is a different type of post than my usual, but it's dominating my life at the moment, so I thought I would write a short piece.

I've been sick for about 2 weeks now, and until recently, I figure it was just allergies. Austin is, after all, one of the worst cities in the nation for allergies. Being a native of Houston, I never dealt with allergies, but I figured that I may have succumbed to this terrible plight.

Well as I sat in bed the last few nights unable to sleep due my coughing and sneezing, I decided I should just break down and go to the doctor. As we all know, being self-employed, it seems like a good idea to skip out on the doctor's visit. Unfortunately, I chose poorly this time around.

When I went in to the doctor, he asked how long I'd had my symptoms. When I told him two weeks, he looked at me like I was crazy. He said, why'd you wait so long. After my explanation I got one of those looks of, "Understandable, but probably not the smartest way to treat your body." It turns out that I have bronchitis, and if I had gone in a week or 10 days ago, I likely could have avoided this infection and the $85 in medicine that I had to get.

Next time you think about skipping out on the doctor, think again, it might just be worth taking the time and effort to make the trip!

Why You Need to Invest NOW, Not Later

2008-04-17T13:28:09Z

You'll Make More Money - It's that simple!

Why?

When you turn on CNBC or the nightly national news, what are some of the major stories? Oil is getting more expensive, Steel is getting more expensive, Copper is getting more expensive, Gas is getting more expensive, etc... I think you get the idea.

Not only is inflation on the rise, but more importantly, the input costs for new construction are going up. It is only going to be more expensive to build, whether it's a house or a commercial property.

One of the ways of valuing commercial property is through replacement cost. Simply stated, how much would it cost me to build an equivalent structure? As construction costs rise, the replacement cost rises, and property values go up.

Want more net operating income and higher capitalization rates (NOI/Price)? This is also coming down the pike. As we already see in Austin, lease rates are going up in part because of the new supply coming online. As these buildings are completed, they have to ask high rates because of the construction costs they faced. With these new buildings becoming more expensive, people will be driven to existing structures that have cheaper rates, thus driving up demand, and in the end driving up price for these places. Voila, you have higher NOI and a higher cap rate. It's all simple supply and demand.

How to Profit

The further you are in front of the curve, the more likely you are to benefit. Sure, the market may turn down temporarily, but it will bounce back. Even if you don't buy at the bottom, you may miss the move and have to buy much higher than you would right now. Either way, you are likely to be set with an investment by purchasing today.

Naturally, if you have any desire to invest in Austin commercial real estate, I'm your guy. Give me a call or send me an e-mail.

How to Mint Money - Even in this Market

2008-04-13T22:17:53Z

This is just my personal opinion, as all postings in my blog are, but you can mint money by investing in real estate right here and right now. To be a little more specific, you can mint money by investing in student housing close to college campuses. Living in Austin, and working in real estate, it's hard to ignore this. Unfortunately, I don't have the capital to make the investment, but if I did, you could bet the farm that I would.

Going around the campus area, it would seem that you can buy 1 BR apartments for as cheap as $85,000. Considering the outrageous rents that landlords command as a result of the lack of supply and increasing demand, you can likely get $550 - $800/month for this apartment. Assuming a 20% downpayment and a 15 year note at 6%, you have an investment that requires very little cash inflows. After 15 years you are free and clear, have seen significant appreciation, and are probably garnering quite a bit more a month in rent. You can pay a management company 10%, and you don't even have to deal with the property. Does it get any better?

Yes it does! You can purchase a brand new 3/3 for $385,000 and charge $2500/month in rent, plus $100/month for a parking spot. Again, you won't cash flow much for the first few years, but you have an asset that will likely begin to cash flow after 5 years or so, and after the note is paid off, you have a gold mine.

I think that the better option is to go around and purchase older condos because there isn't a ton of difference in pricing of rents, and you may have the opportunity to sell out to a developer at a pretty premium due to the ever-increasing focus of large corporations on student housing opportunities. If they are going to get rich from it, why shouldn't you?

Unfortunately, I don't represent buyers looking at student housing, but if you are a developer looking at buying land for a large complex, I'll be jumping to answer the phone. Regardless, I hope all of my readers have the opportunity to take a look at this oft-overlooked segment of investing in real estate. Go out there and mint some money, and when you do, don't forget who told you about it :-)

Austin Commercial Subleases

2008-04-11T16:57:00Z

Hello All,

I hope everyone is having a fantastic Friday and is ready to jump into the weekend. I know I am, as allergies have been kicking my butt this week, I need some R&R.

I thought that today I would post an example of how subleases can be such great deals. In order to maximize effectiveness, I'll show you some numbers that are appropriate for comparisons. These numbers represent the averages in the market as of the 1st quarter.

Class A Office

CBD - $35+
NW - $29
SW - $32

Class B Office

CBD - $24
NW - $25
SW - $25

Class A Subleases

CBD

3,388 SF Near Capitol for $17/SF
650 SF by River for $15/SF
1000 SF in Heart of Downtown for $22/SF

2193 SF with Hill Country Views for $23/SF
1450 SF off Hwy 290 for $21.50/SF
11,151 SF off MoPac for $24/SF
1400 SF of Office/Retail in Wealthy Area + Tenant Improvement Dollars for $28/SF

8,827 SF off Research for $16/SF
3932 SF in Arboretum for $22/SF

Class B subleases are even cheaper. There are incredibly significant savings to be had if you look at subleasing as an option. It's a win-win for both sides. Somebody needs and office, and the other party is desperate to offload their space. Deals will be struck!

Although an office sublease is most common, you can easily find a warehouse sublease, retail sublease, medical sublease, or flex space/R&D sublease.

Activerain Advertising - Your Thoughts Please

2008-04-10T14:50:37Z

I'm curious as to whether or not anyone has used the advertising (paid) on Activerain, and if so, has it provided any meaningful results?

Our firm recently began running ad campaigns on Google and Yahoo, and we have had a considerable amount of traffic driven to our website, though not many of the people visiting have chosen to contact us (around 4 out of 150+ visits directed from these google and yahoo ads. I would imagine that activerain ads are cheaper than ads with a search engine, and I would think the results would be better. So I'm looking for some testimonials, good or bad.

Thanks!

Doom & Gloom? Or a bright spot?

2008-04-09T17:01:08Z

Sublease

An almost mythical word. Below market rates in beautiful Class A buildings with oodles of incentives offered to a prospective tenant. Talk about enticing.

But what does sublease really mean? Is a sublease a good thing, or not? Who benefits? What does it tell you about the broader market? These are all valid questions. Read on to find out!

What is it?

With a regular lease, there are generally two parties. The tenant and the landlord, or the lessor and the lessee. With a sublease there are generally two and a half parties. The tenant, sub-tenant, and landlord, or the sublessor, sublessee, and landlord (respectively).

It's important to keep in mind that a sub-tenant is bound to all the provisions of the master lease (between the tenant and landlord), and that a sublease must be approved by the landlord in most situations (refer to your master lease for clarification). It's also important to remember that a strict sublease, meaning you didn't assign the lease or weren't released from the master lease, means the original tenant/sublessor is still responsible if the sub-tenant defaults. You are not off the hook with the landlord! Naturally, you should discuss with a lawyer in order to get all the facts straight on the implications of a sublease in your particular situation.

Bad or Good?

Hopefully I didn't confuse you with the first part. Now to what you really want to know, is a sublease good or bad? Well, the easy way out is to say that it depends. Generally, however, it is a good thing. As a tenant looking for space, you should definitely consider sublease space. You will likely get a lease rate lower than market, in addition to other concessions that include free/reduced rent, some tenant improvements, and a fabulous space.

As a tenant that needs to get out of a space before their lease up (regardless of the reason), subleasing is a great option. You get the lease off your hands and are free to move to a much more appropriate space/location. In a really great market, you can actually profit from a sublease. When rates are skyrocketing, you have locked in at lower rates and can offer a sublease rate above what you are paying, and still be well below market. For example, if Class A rental rates have increased 7% annually over the past 5 years, and you are 2 years into your 3 year lease, the rate you are paying represents a 14.5% discount to market (assuming you locked your rate in at the then-market rate). So you can offer a 10% discount to the current market rate and still make a 5% profit for you! You can use that to defray commissions, tenant incentives, or a new jet ski for the summer at the lake or beach. That being said, it isn't always possible to get a greater rate than what you are paying. Most people just want to get the space off their hands. Even if you have to sublease it below the rate you're paying, it saves you a considerable sum of money over the term of the lease compared to leaving it vacant.

One thing I ALWAYS stress to sublessors is that you need to be flexible. Consider the following example:
You are leasing 5,000 SF of Class A office space for $22.50/SF. The market rate is $25.00/SF for similar space. Your monthly rent expense is $9375, not including utilities and other expenses. It seems like you could ask for $23.00 - $24.00/SF and actually make money. However, if you ask those rates and it takes 4 months to lease the office, you are out of pocket a minimum of $37,500! If you lease the space for $20.00/SF immediately, over the remaining 2 years on our lease, you are only out $2.50 * 5000 * 2 = $25,000. While that is still a considerable sum of money, the rate is much more attractive, and hence, much more likely to get your space filled quickly. The break-even on the 4 dates would mean you could market it at $18.75 and be out the same $37,500 (assuming it is immediately leased). Don't you think somebody would jump at the opportunity to save 25% of the current asking price? I think so! Do the math, you might be surprised.

Who Benefits?

Everyone! In a sublease, you either lock in a space at great rates with great incentives, or you no longer have to worry about paying rent in a space you don't need, or that can't accommodate your needs.

The Macro Implications?

Sublease properties are a tell. When there starts to be a lot of sublease property on the market, times are getting rougher (generally). Economic conditions are forcing businesses to flee their spaces for something more economical, or their business has failed and they are no longer able to meet rent. In a better market, it can signal that businesses are growing so fast that they need to expand to larger spaces. How can you tell which case you are facing? Two things: what is the local economy like, and how long are the spaces staying on the market? If the local economy is chugging along, it is probably the latter possibility. If the economy is beginning to struggle, look at the former option. Finally, check how long the sublease spaces are staying on the market. In a good market, they will move fast. Businesses just move up the proverbial food chain as they too expand. Great deals are gobbled up in a second. When the market is souring, the opposite is often true.

What it Means for Austin NOW

Based on what I wrote above, I'd like to translate that to Austin here and now, April 2008. As I talked about in one of my first posts, construction of Class A office space is incredibly high right now. Supply is coming online like crazy, and will continue to do so for at least another year.
At the same time, supply of subleases (office in particular) is rapidly increasing. There are always subleases on the market, but over the last 6 months, I have seen the number of them increase 2, 3 or 4 times (and those are only the ones I know about). This is foreboding news for those of us working office space. In addition to the increase in sublease supply, they aren't moving all too quickly. As a result of what is perceived as a softening of rates coming down the pike in the next 2 - 4 quarters, sublease doesn't represent as a good of a deal anymore. Tenants that need out of a space don't have the money to subsidize the rent as much as in good times, and the discount to market is shrinking as subsidies decrease (thus sublease rates go up), and market rates decrease.
When sublease activity picks up, that means businesses perceive that traditional lease rates are going up, so they want to lock in a really great sublease rate. Soon after, you will see the market back on the upswing. It hasn't happened yet, and I'll be sure to let you know when I see it.

Regardless of the economic conditions, subleases still represent great opportunities. My firm (especially me) do a lot of work with subleases. If you have any questions about subleasing, please visit our website at www.bulshodge.com or contact me directly by e-mail at patrick.foley@bulshodge.com or 512.480.3131.

How was Your Last Flight? - Mine was TERRIBLE

2008-04-07T13:46:25Z

Today the 2008 Air Quality Rankings were released. You can view the entire 60 page report here. To no surprise, the overall scores for the industry dropped. Considering you don't even get a free glass of wine when you fly to Europe on an American flag carrier anymore, it isn't really surprising.

Regardless of what the rankings tell you, I want to talk about two airlines that are frequently used by Texans on the move, Southwest and Continental.

Continental

Being a native Houstonian, I have flown Continental pretty consistently for the past 15 or 20 years. I can't actually remember a really bad experience with Continental, even when they were really struggling in the early 90's. Continental still provides you with a meal on longer flights, often times the headsets are free for movies, their flights are usually on-time (and often early), and the Continental employees seem to be genuinely helpful. To top it all off, when flying from Houston, Continental goes almost anywhere for one of the cheapest fares. All that said, I wouldn't choose Continental when flying to many overseas destinations, international airlines generally have better service on these flights, in my opinion.

Southwest

Southwest has a really great reputation. I bet the other airlines are green with envy! I, for one, can not figure out why they have this reputation. I must admit, I hate to fly Southwest and avoid them at all costs. I will pay a substantially higher fare to avoid them, in fact. I find their airports are a pain to get to and from (Hobby, Midway, BWI, Love Field, etc), their fares aren't that much cheaper (if at all), they don't feed you, their planes are old, you don't have an assigned seat, and their customer service is not what it's cracked up to be.

Two weeks ago, for some rather complicated reasons, I had to fly from Houston to Austin. I thought I would give Southwest a try, since it was cheaper than Continental (I bought the ticket about 18 hours in advance) and I hadn't flown Southwest in a number of years. What a mistake. About 10 or 15 minutes after everybody had loaded onto the plane we're told that there is going to be a short delay while some maintenance issue is checked out. So far, no problem. After another 10 or 15 minutes the Captain informs us that there is indeed a maintenance issue, and it will take 1.5 - 3 hours to fix. After about 5 minutes we're told we can deplane if we so choose. Here is where my first problem is. If you are going to be stuck on a plane for a couple of hours, shouldn't they at least run the beverage service? I decided to deplane, and to speak with one of the vaunted customer service representatives about this. When I asked him, he basically laughed at me, and I asked to speak to a supervisor. He pointed in a certain direction. So I walked that way, but no supervisor (problem 2). So I return to the gate and bump into the customer service rep that had ill-informed me a moment ago and asked him again. He told me the other direction, still no supervisor (problem 3). Not to mention he was rude during our exchanges (problem 4). So at the ticket counter I explained my qualms and she said, sorry there is nothing I can do, so I asked again if I could speak with a supervisor. She called the supervisor who promised to be there shortly. It took almost 30 minutes for her to get there (problem 5). When she did get there she was unapologetic and told me that if I was thirsty, I could go get my own drink, which I found to be rather rude (problem 6). In the end, nobody on the plane got a drink. On any other airline this would have been done without a second thought. Even if they weren't going to give the flight any drinks while we waited, they could have been friendly about it, especially since we were all inconvenienced for several hours.

On a recent Delta flight from New York's LaGuardia airport to Cincinnati, I had to wait on the tarmac for abut an hour. The flight attendants were gracious enough to give us food and drinks, and allow us to move about the cabin, use our phones, and use the restroom.

Thanks Southwest, I needed a reminder of why I will never fly you again.

Next time you think about flying, Fly Smart & Fly Continental. I promise they aren't paying me to write this either ;-)

Could it be True?

2008-04-02T16:11:14Z

I HATE being Right...

when it means I'm losing money.

The Austin American Statesman reported today that office vacancies are rising in the Austin area, and that we can expect rental rates to plateau later this year, before beginning a slow decline. I've been warning people of the pending oversupply since last summer, and now it's happening. I don't mean to toot my own horn, but there are some very big cues that this was coming.

I already talked about the commercial buildings going up all around Austin, and how that is effecting the supply side of the supply & demand equation. The next big cue that I'm still planning to post about is the re-emergence of the sublease market for office space. Stay tuned for more!

Why I Can't Sell a House

2008-04-02T14:58:27Z

The simple answer is, it isn't my specialty.

Sure, I passed the same test and classes that everyone else took to get their Texas Real Estate license, but I don't have any experience in residential real estate. I've never sold a house, leased a house, leased an apartment, or sold a condo. Would you want me to represent you, as a homebuyer? Probably not! In fact, I wouldn't take it, I would refer you to somebody else that I was comfortable with.

For the same reason, I think it can be difficult for residential agents to work on commercial deals. The intricacies are very different, and the commercial brokerage community can be tough to break into on a social level. Given the shear difference in the number of agents, it tends to become very cliquish.

The reason I'm writing about this today is because I had a friend ask me to help his friend with the purchase of a home. Sure, I'd like to have an extra $5K in my pocket from working with a buyer, but if I can't do the job right, I'm not going to take it in the first place.

When I have a residential deal that needs to be done, which frankly doesn't come along that often, I'll likely refer it to somebody on ActiveRain. That's part of the reason I'm here. By the same token, if anyone needs help with commercial real estate in Austin, I'll be happy to return the favor.

Craigslist = $$$ in the Bank

2008-04-01T16:18:17Z

Do you like to make money? Do you like to save money?

Ostensibly, the majority of us would answer these two questions in the affirmative. Craigslist, a free online classified ad site allows agents to do both. While I can only attest to this from the Commercial side of the business, residential brokers in my area seem to utilize Craigslist a great deal.

Free Advertising

As I mentioned above, craigslist doesn't charge you anything to post your listings, or an advertisement for your real estate services. Services such as LoopNet, Costar, Exceligent, your local listing service, etc... are all fee-based services. Even if you don't think you will get a qualified hit on your listing, it increases awareness of you.

Conversion Opportunities

As I briefly alluded to above, craigslist can lead to business being driven to you because of increased awareness of you/your firm. If somebody is perusing craigslist for a small office space (or home/apartment for residential agents) and they see your name pop up for several listings, but they are unable to find anything that fits our needs, who are they most likely to call? Who's name is most likely to pop into their head if they want to contact an agent? You! How much did it cost? Nothing.

Now, if you are more proactive, you can seek out new tenants through Craigslist. One way is to simply advertise your services and hope that potential clients call you on those advertisements. The other way is to call owners and property managers that are listing their properties on craigslist. I have picked up several clients this way, and happily helped them sell or lease their properties. That said, this is not as easy as picking up the phone. Many people on craigslist list their property there because they don't want to pay a commission. So you have to be practiced in showing them the power of using a professional real estate agent. Show them the power of your marketing plan. Tell them the testimonials you have from past clients. Show them the power of knowing the market. Most people don't realize that using a broker can often save them over the long run.

Market Statistics

Though you aren't going to get pretty graphs and charts from Craigslist, you do get a good feel for what is going on. This is just one additional tool to have in your arsenal, and should not be relied on as a main source of information. If you see a lot of sublease space going up, maybe it means vacancy is greater than actually reported, and there might be a softening of rates. If you see a lot of brokers putting up new construction, you can infer the effects on the market.

Property Database

Similar to the services like Costar and LoopNet, craigslist gives you access to properties. You can go here in order to find spaces for your tenants. Often times smaller, cheaper, and less traditional spaces are available here. Have a tenant that only wants to lease for 6 months to a year? Craigslist may give you more options than LoopNet. Need open land to store landscaping supplies? Craigslist is more likely to meet your needs than Costar. That said, you aren't solely stuck with odds and ends on craigslist, many brokers post very traditional properties on Craigslist.

Search Engine Optimization

Craigslist shows up very high in search results, at least for Google (which is what I almost solely use). If you search "Austin Medical Office", my medical office sublease is the first thing that shows up in your search results. You can also advertise yourself on craigslist, and show up very highly in the search results. Search engine optimization can cost firms and individuals hundreds or thousands of dollars (tens of thousands of dollars is not out of the question). When you use craigslist, what do you pay? NOTHING. It's FREE.

This is just a brief overview of what I think about craigslist. For more detail on any specific portion, please comment or send me an e-mail, though comments benefit everyone. In fact, the reason I'm posting this is in response to a comment on my post about commercial advertising/marketing.

How to Advertise Commercial Listings

2008-03-31T17:01:04Z

A few minutes ago I was browsing through the Commercial Real Estate group on Activerain, and I saw an interesting question from a member in Michigan. She was asking about how you should advertise commercial property. The ironic part of this, is that my Dad (a residential broker in Arkansas) was just asking me the same question on Friday evening, as he tries to market a commercial listing he recently acquired.

What's the Difference?

There are certainly some parallels in advertising residential and commercial listings, but there are a number of differences as well. Instead of comparing and contrasting, I'm going to go over the methods that we use at our firm.

Listing Services

We utilize a number of listing services.

Costar - Costar is a fee-based service, but is free to upload your listings. Free publicity!
Excelligent - This service is very similar to Costar, and is free for agents to have their listings included.
LoopNet - This is another fee-based service, that we use extensively to find properties, and list our properties. The fee is nominal, around $35/month. You can get a free membership, but your listings aren't viewed by a great deal of searchers, I would recommend the premium membership.
CIMLS - A free listing service that looks somewhat like the old BBS services that were precursors to the modern-day internet. Not as popular, but it is free.
Craigslist - Although this isn't strictly a real estate site, you can post your properties here for free. Craigslist is very popular in some cities, so it would be wise to take advantage of this. It also helps your listings pop up high in Google. I would recommend using a service like Postlets to create a better presentation.

E-mail Broadcasts

E-mail broadcasts are some of the best ways to advertise your properties, and your clients' needs to other brokers. We subscribe to a list called the CIB list, which is currently only used in Texas. Check www.cib.net for more information on this service. Their list includes thousands of brokers from across the state, so you nearly always receive responses when broadcasting a listing or a client's need.

Buls Hodge also maintains an in-house e-mail list, that we broadcast similar e-mails to.

Website

Most real estate professionals today have some type of website, be it their firm's website or their personal website. This is a great way to teach potential clients about your personal level of service, as well as to show clients and brokers what you have available for lease or sale.

Signage

Property signage is very important for a number of reasons. First of all, it can have a broker or potential buyer/tenant call you because they are interested in that specific property/space. As a dual benefit, you are often able to pick up leads from a sign and convert them over and represent them. The marketing power of a sign can be very significant. We generally use 4' x 8' signs that can be viewed by traffic traveling in either direction. Though our signs run $400 - 500 each, they generally are worth the cost.

Direct Mail

Direct mail doesn't provide great percentage returns, but one deal can pay for an entire year of direct marketing. Our firm uses direct mail of postcards and flyers to potential tenants, buyers, and landlords. We market our services or listings (as appropriate) to the demographics that we feel are most appropriate. The average return is about 1%. The most costly parts of direct mail campaigns are the design and postage. Once you have the design, you don't have to pay it anymore, so you save money over time with this type of campaign. You also can save money by ensuring your list is accurate, so you aren't sending postcards (and the subsequent postage) to people and businesses that don't exist. Direct mail campaigns have proven to be more effective over time, don't expect great results after one, two, or even three mailings.

Print Advertising

Print advertising is expensive (usually). There are an array of options, and depending on the publication, you may or may not have the design of the ad included. Classifieds are probably the cheapest, but these aren't used as heavily in commercial real estate. Ads in business newspapers/journals and commercial real estate magazines are considerably more expensive, but they generally have a better rate of return. I find that you can generally work out deals with advertisers on rates.

Social Functions/Word-of-Mouth

One of the best ways to get the word out about your listings, and your name for referrals, is just by word-of-mouth. This is accomplished by getting out there and doing deals. It is also accomplished by attending networking functions. This is a great way to garner name-recognition and awareness of your properties. Not to mention the free cocktails and meals you get. It's a win-win for everyone!

This is by no means a one-size fits all solution for all brokers, but I hope some of it might be able to help. Feel free to get in touch with me if you have any questions.