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February 2001
Sublease Space Soars
Source: Austin Business Journal

Austin companies seeking space are finding their glass half-full of available real estate, thanks to a recent surge in subleasing.

"It wasn't until January that things started opening up everywhere," says Matt Marino, controller at Waveset Technologies Inc., an Austin software startup that's hunting for space.

Everywhere is right. A recent survey by real estate broker Michael Buls of Austin's Buls/Hodge Consulting identifies more than 1.2 million square feet of Austin space available for sublease from existing tenants.

Added to space available directly from landlords, the subleases push the citywide vacancy rate from 3.2 percent at the close of the fourth quarter to nearly 7.5 percent, based on Buls' calculation.

For companies operating on conservative budgets and rapid growth projections such as Waveset, the deluge of subleases is a godsend. CEO Mike Turner says the market has transformed from famine to feast in six weeks.

"Now there's so much space available that it's really become a buyer's market for the tenant," Turner says.

Waveset's Marino began looking for about 8,000 square feet for the startup last October, but he found a market with little available space and landlords demanding lengthy terms and extensive guarantees to back up a lease. The company tried to negotiate a direct lease in November.

"We were turned down strictly because we were a high tech startup, because the landlord had been burned on several other leases," Marino says.

Times changed this year. Waveset is negotiating to sublease 6,000 square feet from a company that has 18 months remaining on its lease. The deal includes an option to expand to 9,000 square feet.

"We are a growing company, [and] we really wanted to get into a short-term sublease as opposed to a direct lease," Marino says. "We're growing so fast that by the end of that 18 months, we'll be ready to go out and get a much bigger space."

For growing high tech companies such as Austin's Lane15 Software Inc., the shorter terms available on subleases might be the only reasonable options available. Lane15 has hired Diana Barbour at The Staubach Co. to find space and is focusing on subleases.

Richard Goode, operations manager at Lane15, says: "Because of the growth projections of our company, we don't want to get locked into a long-term lease. It's not flexible enough to meet our needs."

The software company recently completed a round of funding and expects to nearly double its staff in the next year.

With that kind of growth pattern, Lane15 and companies like it might not know how much space they will need three or five years down the road, so traditional leases can be a gamble.

"We will generally look at 12- to 15-month terms," Goode says. "A short term allows us to examine ourselves at each milestone and adjust accordingly."

Chances are some of the space Lane15 considers will be in Northwest Austin. Buls' survey found the bulk of Austin's sublease space available there -- about 670,000 square feet.

The largest chunk of space identified in Buls' survey is 103,000 square feet previously occupied by Globeset Inc. in Stonebridge I, a space Lee Combs of Emerson Group LLC is marketing for sublease. Among others, Randy Nunez of Landry Nunez Co. is marketing 47,000 square feet for Steck-Vaughn Co. in Quarry Lake Business Center, and John Hanly of The Staubach Co. is marketing 92,000 square feet on behalf of Janus Capital Corp. at Riata Corporate Park.

Average annual rent in Buls' survey was $25.24 a square foot, and the average sublease term was about three years. Buls found half the space marketed for subleases is in increments of at least 25,000 square feet.

Even if 1.26 million square feet of sublease space doesn't influence landlords to lower rental rates, that much inventory reintroduced to the market might make developers reconsider construction plans, says David Tomek, a real estate attorney with Vinson & Elkins LLP in Austin.

"For those that are in the business of speculative office development and construction, it can't be good news," Tomek says. "A longer-term effect could be dampening the rate of [rental] increase we've seen in the last year or so."

Tomek says space being returned to the market through subleases is probably "an inevitable correction that goes hand in hand with the decline in the stock market."

More space, not counted in Buls' survey, is expected to hit the sublease market soon. That includes more than 100,000 square feet Leonard Blangiardo of United Systems Integrators Corp. is marketing for sublease at the Computer Sciences Corp. campus, scheduled for completion later this year in downtown Austin.

The volume of subleases available hasn't softened the market so far, however. That's because subleased space, although available from a tenant, still is leased and generates rent for the landlord.

"There is some argument to say this sublease space may fuel companies moving to Austin," Buls says, by offering terms more attractive to startups and other fast-growing companies.

MATT HUDGINS can be reached by email at (

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