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First Opportunity Zone Ground-Up Office Comes to Booming Austin, Texas

Building to Start Next Month on Project in Program Targeting Economically Distressed Areas


Brokers say the office building will be the first ground-up Opportunity Zone project in Austin. Image: Courtesy of Newmark Knight Frank.

The federal Opportunity Zone program, designed to lure investment to economically distressed areas, is getting its first ground-up office development in a city with a reputation for being anything but struggling: Austin, Texas, the nation's top city for office rent growth and a magnet for tech behemoths such as Apple and Google.

The 64,000-square-foot creative office building with retail and restaurant space is at 1141 Shady Lane in a growing area of East Austin that is about four miles from downtown. The federal Opportunity Zone program was created as part of the Tax Cuts and Jobs Act of 2017 to encourage development in areas designated as economically distressed by deferring or eliminating taxes for commercial real estate investors.

East Austin is well on its way to becoming the next hot area of the Texas capital city. Search engine provider Google recently confirmed it preleased the entire 150,000-square-foot Saltillo building between Fourth and Fifth streets, just off the east side of Interstate 35. The Saltillo will include a Whole Foods Market grocery store and Google plans to move into the seven-story building at the beginning of 2020, according to a Google spokeswoman.

The use of the Opportunity Zone program in a city that's already receiving a surge of investment reflects one of the concerns of the program when it began to attract investment last year, that some of the areas designated may not actually need the economic boost the program will provide.

Even so, the proposed office building still sits on the outer frontier of East Austin's office market about four miles from I-35 in a primarily residential part of the neighborhood, which is a bit of a drive compared with the hotbed of office activity in East Austin closer to downtown Austin, said Sam Tenenbaum, a CoStar market economist.

"I'd expect to see more residential construction in that Opportunity Zone versus commercial construction, but that doesn't mean commercial projects can't be successful there," Tenenbaum said in an interview.

The developers -- Saxum Real Estate, a New Jersey-based real estate investment and development firm catering to creative office space, and Placemkr, an Austin-based real estate firm that was an early entrant in the Opportunity Zone market -- are starting construction on a speculative basis, meaning without any tenants. Construction should start by the end of July.

Plans also include building out a 9,000-square-foot outdoor courtyard for tenants. Upon completion, the Shady Lane office project will represent the sole office project adjacent to about 875 planned apartment units, including Alta Trailhead and the Studio at Thinkeast, a master-planned community within East Austin.

"This is an extremely beneficial project for the progress of East Austin," said Jesse Weber, a senior managing director at Newmark Knight Frank, in a statement.

Weber, along with Newmark's Joshua LaFico, are representing the ownership group in leasing the new development. LaFico, a director within the real estate brokerage, said the project will have elements of affordability intended to support the creative class with two live-work units tied to a tenant's median income levels.

Weber and LaFico were not immediately available for additional comments.

Land values in East Austin have surged, according to CoStar, and investors are pouncing on opportunities. H-E-B's Innovation Center at 2498 E. 6th St. was recently bought by an undisclosed investor before employees of the top grocer had even moved into the new tech and innovation lab.

Meanwhile, an office building under construction at 607 W. 3rd St. in downtown Austin that is leased to Facebook recently sold in a deal that set a new price-per-square-foot record for Texas office deals.

In northwest Austin, Apple will soon be the city's largest non-government employer when it opens a second campus off Parmer Lane and McNeil Drive, west of MoPac in northwest Austin. The $1 billion, 133-acre project that’s expected to span about 3 million square feet could open by the end of 2021.

Article by CoStar

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