Austin s office market is fast, competitive and expensive

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1 Research & Forecast Report AUSTIN OFFICE Q Austin s office market is fast, competitive and expensive Kaitlin Holm Research and Marketing Coordinator Austin Boots On The Ground Commentary by David Bremer Our Boots on the Ground viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market. Austin s current office market can be summed up in three words: fast, competitive and expensive. While absorption decreased and vacancy went up slightly in the second quarter, the market has been extremely busy in comparison to past summer slowdowns. Rates and operating expenses have continued to trend upward, primarily due to skyrocketing taxes. We are seeing competition for prime spaces in almost every submarket in the city. We are setting rental rate records in the CBD ($45+ operating expenses), Eastside properties continue to mimic the CBD s upward rate trends (including the obligation to pay for parking at most new developments) and Class A suburban properties are commanding record rental rates as well. Fast can be a bit misleading, but tenants are being forced to move on properties very quickly in order to separate themselves from competition. Deal pace has simultaneously slowed down as Landlords take their time to negotiate and document the deal the way they want it. While small and medium sized office users are feeling the pain of higher rents and operating expenses, the competition for space isn t as significant. There are plenty of options available, but Landlords continue to push for longer lease terms (which are often necessary to cover increasing construction/improvement expenses). With increasing rents, Austin follows the national trend of trying to fit a lot of people in a small space. In the CBD, the average tech tenant now targets 5.5 people per 1,000 SF, yet the average parking ratio is closer to 2.5 per 1,000 SF. It s important to do your homework and consider the possible pitfalls associated with high density: Are you at risk of triggering a density clause? Can you park your employees? Will the air conditioning and electric capacity keep up in August? Also, all tenants need to pay close attention to continuously rising construction costs. Taking the time to think through construction and get preliminary bids can be the difference between a great process and a messy one. Future Forecast If the rumor mill is correct, there are some more big deals coming down the pipeline. Our market has been waiting patiently for new product to come to market in order to provide some breathing room, but as we get closer to buildings being delivered (Domain, North, East) and beginning construction (CBD), we re hearing about big corporate users preleasing space. We ll give you a hint: Look at the big users that have been taking down space for the past 3 years and expect more of the same. We don t think much of the space that is set to deliver over the next two years will deliver free and clear. As long as we don t see a tech bust, we feel that the market is going to remain fast, competitive and expensive. By The Numbers TOTAL INVENTORY 51.9M SF Q2 NET ABSORPTION -446,698 SF TOTAL UNDER CONSTRUCTION 4.09M SF AVERAGE /SF $34.51 CBD CLASS A $56.98 as tracked by Colliers *Rates inclusive of estimated operating expenses. TOTAL 12.3% YTD NET ABSORPTION -684,045 SF TOTAL PRE-LEASED 2.1M SF SUBURBAN CLASS A $36.26

2 Austin Office Overview In the second quarter of 2018, Austin s office market reported 446,698 SF of negative net absorption. The majority of the negative absorption happened in class A buildings with a total of 241,458 SF of negative net absorption. Class B buildings in Austin posted 218,469 SF of negative net absorption and class C properties posted 13,229 SF of positive net absorption. There is currently 4,090,698 SF of office space under construction and 2,131,315 SF of that is pre-leased. The third quarter of 2018 is expected to see 1,155,314 SF of deliveries and 729,396 SF of that is pre-leased. One of the buildings set to deliver in the third quarter of 2018 is Domain Tower. The entire 309,883 SF building has been leased to Indeed.com, who is set to move in at the end of the year. 810 Barton Springs Road in the South submarket is WeWork s newest location. The 90,500 SF building delivered in July Barton was also the largest of the four buildings to deliver in the second quarter. Looking forward, the third quarter in 2018 is expected to see eleven new buildings deliver. The citywide average rental rate decreased over the quarter from $35.06 per SF in Q to $34.51 per SF in Q Class A rental rates in Austin s CBD decreased by 3.6% over the quarter to $49.59 per SF from $51.45 per SF in the first quarter of Overall suburban Class A rental rates decreased, from $37.03 per SF to $36.26, over the quarter. In April, Austin was named the best place to live in the United States for the second year in the row by U.S News & World Report. This list ranks the top 125 largest metropolitan areas in the U.S. and is based on affordability, job prospects and quality of life. Austin was followed on the list by Colorado Springs and Denver, Colorado. Des Moines, Iowa and Fayetteville, Arkansas rounded out the top five top places to live. San Antonio was ranked 14th on the list and Dallas-Fort Worth was ranked 18th. Houston was ranked the lowest of the major Texas metros, but it was ranked 26th on the list just below Boston, Massachusetts. Vacancy & Availability Austin s citywide vacancy rate increased from 11.2% in the first quarter of 2018 to 12.3% in the second quarter of The CBD class A vacancy rate increased from 8.9% in the first quarter of 2018 to 9.9% in the second quarter of The suburban class A vacancy rate increased quarter over quarter from 11.0% to 12.2%. Overall suburban vacancy increased quarter over quarter from 11.0% in Q to 12.2% in Q The only submarkets that recorded a decrease in vacancy over the quarter include Cedar Park, Central, East and South. The Southeast submarket reported the largest increase in vacancy, climbing from 14.6% to 24.7% over the quarter. ANNUAL ABSORPTION, NEW SUPPLY, AND 700, , , , , , , , ,000 Market Indicators Relative to prior period NET ABSORPTION NEW CONSTRUCTION UNDER CONSTRUCTION *Projected Annual Change Quarterly Change Quarterly Forecast* Summary Statistics Austin Office Market Q Q Q Vacancy Rate 11.5% 11.2% 12.3% Net Absorption (Million Square Feet) New Construction (Million Square Feet) Under Construction (Million Square Feet) Class A Vacancy Rate CBD Suburban Net Absorption New Supply Vacancy Gross Asking Rents Per Square Foot Per Year % 11.4% 8.9% 11.0% 9.9% 12.2% Average $33.99 $35.06 $34.51 CBD Class A $49.84 $51.45 $49.59 Suburban Class A $34.69 $37.03 $ Austin Research & Forecast Report Q Office Colliers International

3 QUARTERLY ABSORPTION, NEW SUPPLY, AND 1,200,000 1,000, , , , , ,000 Absorption & Demand Net Absorption New Supply Vacancy Austin s office market posted 446,698 square feet of negative net absorption in Q The submarkets that experienced positive net absorption gains over the quarter include Cedar Park, Central, East, Round Rock, South and Southwest. We believe a lot of the negative absorption being recoreded on CoStar is due to some of Oracle s old spaces being put on the market. 16.0% 14.0% 12.0% 10.0% A majority of the positive net absorption over the quarter occurred in the class A Northwest submarket, totaling 52,198 square feet of positive net absorption. Some of this can be attributed to Alcatel- Lucent moving into their 38,044 SF space at Campus at the Arboterum V (10431 Morado Cirle). The second highest positive net absorption occurred in class B space in the Central submarket, with 44,108 square feet absorbed over the second quarter and with three undisclosed tenants moving into a total of 71,720 square feet of space throughout the submarket. The Southwest submarket recorded the greatest number of leases for spaces 10,000 square feet or larger in the second quarter. There were eight leases signed in Q2 in the Southwest submarket including the City of Austin taking 25,137 square feet at Barton Oaks Plaza V (901 S MoPac Expressway). The CBD submarket had the highest amount of square feet leased in Q2 with 416,005 square feet reported. One of the leases signed was Indeed s 307,771 square foot lease at Block 71 (200 West 6th Street). Rental Rates According to CoStar, our data provider, Austin s citywide average rental rate decreased over the quarter from $35.06 per SF to $34.51 per SF. Since we are seeing an upward trend in rental rates throughout the market, this decrease may be due to some Lower Level or Basement space coming availale. As expected, the highest rates across the Austin office market in the second quarter were in CBD class A buildings where rental rates averaged $49.59 per SF. Rental rates were also high in the Southwest and West Central submarkets where class A rental rates reached $40.67 per SF and $43.09 per SF, respectively. 8.0% 6.0% 4.0% 2.0% 0.0% Job Growth & Unemployment (not seasonally adjusted) UNEMPLOYMENT 5/17 5/18 AUSTIN 3.0% 2.8% TEXAS 4.1% 3.7% U.S. 4.1% 3.6% JOB GROWTH 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 CBD Vacancy Annual Change # of Jobs Added AUSTIN 3.3% 33.9K TEXAS 2.8% 344.7K U.S. 1.6% 2.4M CBD vs. Suburban CLASS A OFFICE CLASS A OFFICE RENTS Suburban Vacancy Citywide class B rental rates increased in Q2 from $28.24 in Q1 to $28.80 per square foot. CBD class B rental rates increased by 1.3% over the quarter from $43.38 per square foot to $43.96 per square foot in Q CBD Rents Suburban Rents 3 Austin Research & Forecast Report Q Office Colliers International

4 Leasing Activity Austin s office market recorded 1,424,506 SF of leasing activity in Q Major transactions this quarter included Indeed pre-leasing ten floors at 200 W 6th St (Block 71), totalling 307,771 SF. Block 71 is not set to deliver until Q2 of 2021 and is already 46% leased. Q Top Office Lease Transactions BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE 200 W 6th St CBD 307,771 Indeed May Directors Blvd Southeast 206,418 Internal Revenue Service 1 May Park Thirty Five Cir North/Domain 197,496 Texas Commission on Environmental Quality 1 May Tracor Ln East 44,418 American Honeybee Protection Agency Jun E 6th St East 43,000 Zebra Jun Quick Hill Rd North/Domain 42,739 Undisclosed Jun E 6th St East 30,309 ForeFlight Jun Marathon Blvd West Central 26,391 Undisclosed Jun E 9th St CBD 25,805 YouEarnedIt Apr S MoPac Expy Southwest 25,137 City of Austin May S MoPac Expy Southwest 25,001 Undisclosed Jun E 6th St East 24,625 Car2Go Jun Bridgepoint Pky Northwest 22,559 Undisclosed Apr N MoPac Expy Northwest 22,328 MHNet Jun W 6th St CBD 22,118 Procore May Airport Blvd Central 21,363 Undisclosed Jun N MoPac Expy Northwest 21,034 Undisclosed Apr Congress Ave CBD 20,304 Undisclosed Jun Wadley Pl North Ind 20,000 Undisclosed Apr-18 1 Renewal Sales Activity Austin s office investment sales activity included three transactions. Boyd Watterson Asset Management purchased the 206,418 square foot IRS Compliance Center from Honeck Properties, LP as part of a portfolio sale that sold for almost 65 million dollars. Met Center 9 was purchased by Digital Realty Trust from World Class Property Company for around $ per square foot. Q Significant Sales Transactions (100,000 SF or greater) BUILDING ADDRESS SUBMARKET RBA YEAR BUILT BUYER SELLER SALE PRICE $/SF CLOSED IRS Compliance Center Directors Blvd 1 Southeast 206, Met Center E Ben White Blvd 1,2 Southeast 103, Quarry Lake Business Center Seton Center Pky Sources: CoStar and Real Capital Analytics 1 Part of a portfolio 2 Sale Price is Approximate Boyd Watterson Asset Management World Class Property Company Honeck Properties, LP $64,750, $ Apr-18 Digital Realty Trust $13,703, $ Apr-18 Northwest 117, Velocity Credit Union Riverside Resources Undisclosed May-18 4 Austin Research & Forecast Report Q Office Colliers International

5 This Austin is placeholder Office Market text. Place Summary your text (CBD, here. Suburban, & Overall) INVENTORY DIRECT SUBLEASE NET ABSORPTION RENTAL CLASS # OF BLDGS TOTAL TOTAL Q Q Q Q CBD A 31 7,750, , % 38, % 765, % 8.9% -79, ,927 $49.59 B 36 2,831, , % 43, % 263, % 9.2% -2,958-47,199 $43.96 C 9 524,277 13, % 11, % 24, % 3.0% -8, $30.29 Total 76 11,106, , % 93, % 1,054, % 8.7% -91, ,676 $47.98 SUBURBAN A ,350,576 2,046, % 438, % 2,485, % 11.0% -161, ,179 $36.26 B ,463,385 2,439, % 201, % 2,640, % 13.5% -215, ,674 $27.32 C 60 3,017, , % 3, % 226, % 8.2% 22,168-12,170 $24.03 Total ,831,328 4,707, % 644, % 5,352, % 11.9% -355, ,023 $32.04 OVERALL A ,101,388 2,773, % 477, % 3,251, % 10.4% -241,458 45,748 $38.98 B ,294,573 2,658, % 245, % 2,904, % 12.9% -218, ,873 $28.80 C 69 3,541, , % 14, % 250, % 7.5% 13,229-11,222 $24.57 Total ,937,605 5,668, % 737, % 6,406, % 11.2% -446, ,347 $34.51 AVG ($/ SF) Austin Suburban Office Market Summary INVENTORY DIRECT SUBLEASE NET ABSORPTION RENTAL CLASS # OF BLDGS TOTAL TOTAL Q Q Q Q AVG ($/ SF) CEDAR PARK A 2 232,274 28, % 0 0.0% 28, % 14.2% 4, $34.05 B 4 174,000 26, % 0 0.0% 26, % 19.3% 7, $27.00 Chart Title One Line Total 6 406,274 54, % 0 0.0% 54, % 16.4% 11, $31.14 CENTRAL. Chart Title A 3 474,288 51, % 4, % 55, % 15.9% 19,899-44,568 $39.89 SUBHEAD 1 SUBHEAD 1 SUBHEAD 1 SUBHEAD 1 B 33 1,869, , % 12, % 138, % 9.8% 44,108-41,796 $28.82 C Body ,153 15, % 0 0.0% 15, % 1.8% -1,739-4,478 $25.54 Total 49 3,120, , % 16, % 209, % 8.7% 62,268-90,842 $29.16 EAST A 3 162, % 0 0.0% 0 0.0% 0.0% 0 4,866 $40.55 B 14 1,086, , % 0 0.0% 492, % 45.6% 3,314-5,276 $32.98 C 4 147, % 0 0.0% 0 0.0% 0.0% Total 21 1,396, , % 0 0.0% 492, % 35.5% 3, $34.31 FAR NORTHEAST B 1 23, % 0 0.0% 0 0.0% 0.0% Total 1 23, % 0 0.0% 0 0.0% 0.0% FAR NORTHWEST A 15 2,206, , % 30, % 261, % 10.6% -26,555-30,771 $31.67 B 7 282,360 15, % 0 0.0% 15, % 3.3% -6,283 21,720 $24.24 C 3 139,876 9, % 3, % 13, % 5.5% 0-5,515 $21.39 Total 25 2,628, , % 34, % 290, % 9.8% -32,838-14,566 $ Austin Research & Forecast Report Q Office Colliers International

6 Austin Suburban Office Market Summary - Continued INVENTORY DIRECT SUBLEASE NET ABSORPTION RENTAL CLASS # OF BLDGS. TOTAL TOTAL Q Q Q Q AVG ($/SF) NORTH/DOMAIN A 15 2,187,755 93, % 19, % 113, % 3.1% -45,948 1,964 $38.42 B 37 2,176, , % 14, % 244, % 13.1% 41,434-7,797 $26.62 C 2 102,925 76, % 0 0.0% 76, % 74.6% Total 54 4,467, , % 33, % 434, % 9.6% -4,514-5,833 $31.86 NORTHEAST A 5 413,863 11, % 92, % 104, % 2.0% -96,408 36,240 $25.51 B 19 1,308, , % 117, % 333, % 20.3% -66, ,718 $20.65 C 8 276,413 80, % 0 0.0% 80, % 30.2% 2,690-2,690 $22.54 Total 32 1,998, , % 209, % 518, % 17.9% -160,671-81,168 $21.51 NORTHWEST A 73 6,906, , % 107, % 719, % 11.2% 52,198-8,458 $35.15 B 96 4,282, , % 28, % 670, % 13.0% -115,391-71,346 $29.13 C 5 425, % 0 0.0% 0 0.0% 0.0% 0 1,013 $22.78 Total ,614,537 1,253, % 136, % 1,389, % 11.4% -63,193-78,791 $33.02 ROUND ROCK A 5 436,764 98, % 0 0.0% 98, % 1.0% ,150 $32.54 B ,635 33, % 10, % 43, % 10.2% 4,500-8,896 $24.76 C 5 189,274 2, % 0 0.0% 2, % 1.6% $26.67 Total 22 1,101, , % 10, % 145, % 5.4% 4,737-10,046 $30.21 SOUTH A 5 395,493 18, % 0 0.0% 18, % 7.9% 12,352-9,705 $40.16 B 24 1,159,867 38, % 9, % 47, % 4.8% 8,035-5,462 $28.06 C ,997 23, % 0 0.0% 23, % 6.6% 19,871-1,206 $25.45 Total 41 2,209,357 80, % 9, % 89, % 5.9% 40,258-16,373 $34.55 SOUTHEAST A 1 330, , % 0 0.0% 212, % 44.8% -64,392-10,321 $27.72 B 17 1,795, , % 0 0.0% 351, % 10.3% -166,654 2,665 $23.53 C 4 161,933 1, % 0 0.0% 1, % 0.6% 0 0 $15.00 Total 22 2,287, , % 0 0.0% 564, % 14.6% -231,046-7,656 $22.98 SOUTHWEST A 50 6,014, , % 180, % 841, % 13.9% -3,385-41,984 $40.67 B 70 2,742, , % 8, % 274, % 8.6% 33,753 2,970 $32.03 C 3 94,138 8, % 0 0.0% 8, % 9.3% $27.33 Total 123 8,850, , % 189, % 1,123, % 12.3% 30,964-39,014 $38.04 WEST CENTRAL A 5 590,450 28, % 3, % 32, % 3.2% -13, $43.09 B 3 85,148 2, % % 2, % 0.0% -2,884 3,152 $43.03 C 1 50,132 4, % 0 0.0% 4, % 9.6% Total 9 725,730 35, % 4, % 39, % 3.3% -16,205 3,664 $ Austin Research & Forecast Report Q Office Colliers International

7 Office Development Pipeline 4,090,698 square feet of office space was under construction during Q The largest of the four buildings to deliver in Q2 was Summit II at La Frontera, a 95,000 square foot building at 710 Hester s Crossing Road. Ten buildings were given the green light to begin construction this quarter. BUILDING NAME ADDRESS SUBMARKET SF PRE- LEASED DEVELOPER EST. DELIVERY Fourth & Office 1800 E 4th St East 42, % Capsa Ventures Jul-18 Building Sheldon Cv Northeast 32, % Unknown Jul-18 Building Sheldon Cv Northeast 50, % Unknown Jul-18 Preserve at N FM 620 Far Northwest 226, % PacVentures, Inc. Jul-18 Texas Mutual Insurance 2200 Aldrich East 270, % Catellus Austin LLC Aug N Lamar Blvd 1000 N Lamar Blvd West Central 20, % Unknown Aug-18 Harrison Building 3205 Industrial Ter North/Domain 11, % Unknown Aug-18 Domain Tower Domain Dr North/Domain 309, % HPI Real Estate Services & Sep-18 Investments Parmer McCallen Pass Northeast 115, % Karlin Real Estate Sep-18 Mesa Creek 801 E Old Settlers Blvd Round Rock 60, % Halff Associates Sep-18 Scottsdale East - Building G 1615 Scottsdale Rd Cedar Park 20, % Unknown Sep-18 Third + Shoal 208 Nueces St CBD 347, % TIER REIT Oct E 6th St 901 E 6th St East 129, % Pegalo Properties Oct-18 Parmer Office Condos 3109 Kenai Dr Cedar Park 18, % Unknown Oct-18 The Reserve at Oak Hill 6804 Old Bee Caves Rd Southwest 38, % Unknown Oct-18 Springdale General 1023 Springdale Rd East 165, % Unknown Nov-18 Chandler Creek Business Park - Bldg Eagles Nest St Round Rock 16, % Unknown Nov-18 K1 Chandler Creek Business Park - Bldg Eagles Nest St Round Rock 16, % Unknown Nov-18 K2 Building S Lakeline Blvd Cedar Park 22, % Unknown Dec-18 Bldg E Pflugerville Pky Far Northeast 10, % Unknown Dec-18 Bldg E Pflugerville Pky Far Northeast 15, % Unknown Dec-18 Domain Esperanza Xing North/Domain 315, % Endeavor Real Estate Group Dec S Lamar Blvd 2010 S Lamar Blvd South 78, % Unknown Dec-18 The Hills Professional II 4615 Bee Caves Rd Southwest 29, % Unknown Dec-18 Foundry 310 Comal St East 75, % Cielo Realty Partners Feb E 6th St 1801 E 6th St East 134, % Riverside Resources Mar-19 Building III 7717 Southwest Pky Southwest 20, % Unknown Mar-19 Saint Elmo Plaza 4223 S Congress Ave South 100, % GroundFloor Development Apr-19 Wesco 8656 W State Highway 71 Southwest 19, % Unknown Apr-19 SXSW Center 1400 Lavaca St CBD 140, % Greenbelt Commercial Jun-19 Offices At Saltillo 901 E 5th East 150, % Endeavor Real Estate Group Jun-19 Buildings 2, 3, 4,, 5, 7, 9, Ronald Regan Blvd Round Rock 36, % Huffman Builders Jun-19 Domain Esperanza Xing North/Domain 320, % TIER REIT, Inc. Aug-19 Building S Congress Ave South 53, % Unknown Oct-19 Block W 6th St CBD 678, % Trammell Crow Central Texas Ltd Apr-21 7 Austin Research & Forecast Report Q Office Colliers International

8 QUOTED GROSS RENTAL S FOR EXISTING TOP PERFORMING OFFICE BUILDINGS BUILDING NAME ADDRESS SUBMARKET RBA YEAR BUILT % LEASED AVAIL. SF RENT ($/SF) OWNER Frost Bank Tower 401 Congress Ave CBD 535, % 86,229 $78.20 CalSTRS 600 Congress 600 Congress Ave CBD 503, % 100,694 $54.54 CalSTRS 301 Congress Ave 301 Congress Ave CBD 446, % 67,097 $63.79 PGIM, Inc. 816 Congress 816 Congress Ave CBD 433, % 38,249 $54.98 Cousins Properties San Jacinto Center 98 San Jacinto Blvd CBD 410, % 49,144 $64.79 Cousins Properties Chase Tower 221 W 6th St CBD 389, % 88,692 $60.51 Lincoln Property Company University of Texas System 210 W 7th St CBD 342, % 27,244 $59.50 Board of Regents of the University of Texas System 7700 W Parmer Ln - Bldg B 7700 W Parmer Ln Far Northwest 335, % 5,373 $40.27 Accesso Partners LLC Austin Centre 701 Brazos St CBD 326, % 70,937 $52.46 Sidra Real Estate, Inc W Parmer Ln - Bldg C 7700 W Parmer Ln Far Northwest 287, % 11,540 $41.48 Accesso Partners LLC Bank Of America Center 515 Congress Ave CBD 263, % 65,393 $61.31 KBS REIT III, Inc. University Park 3300 N Interstate 35 Central 206, % 39,229 $47.53 Lionstone Investments Note: Avail. SF includes direct and sublet space as well as any future available space listed. Source: CoStar Property Q Austin Office Highlights FOR MORE INFORMATION Kaitlin Holm Research and Marketing Coordinator Austin kaitlin.holm@colliers.com Copyright Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International Market 000 Colliers Address, International Suite # Austin Congress Address, Avenue, Suite # Suite Austin, 000 Texas colliers.com/<<market>> colliers.com/texas/austin 8 North American Research & Forecast Report Q Office Market Outlook Colliers International