Have Lakefront, Will Sublet
Back in those long-ago, flush days of 1999, the city gave Computer Sciences Corp. nearly everything it asked for, to lure the company downtown. Now, in the wake of the Nasdaq crash, CSC is faced with a whittled-down workforce and a surplus of lakefront office space that it wants to lease to outside tenants. And the city may or may not -- depending on who you ask -- have egg on its face as a result of this latest turn. Clearly, this is not what the city or CSC had in mind when they sealed the $12.5 million deal for the tech company to build a 700,000-square-foot campus on three choice city-owned blocks. But a little-known escape hatch in the two-binder, eight-inch thick contract does, in fact, allow CSC to lease up to 50% of its building space in the event of a deflated employee roster, such as the one it has now.
While three rounds of CSC layoffs have left fewer than 1,000 workers at its Financial Services Group in Austin, company spokesman Howard Falkenberg said CSC fully expects to reach its projected beefed-up work force of 3,500 -- but it could take a few years. Today's leaner market has the company planning (when it begins moving in July 1) to occupy less than half the space of its first 175,000-square-foot building on Cesar Chavez between San Antonio and Guadalupe. A second 175,000-square-foot building, between Lavaca and Colorado, is slated to open in November, but a third building planned on Second Street is on a less-certain timetable because construction, Falkenberg said, will hinge on demand. The layoffs, combined with CSC's $568 million acquisition last month of South Carolina-based Mynd Corp., a developer of insurance industry software, has slowed job growth in the Austin office, Falkenberg added.
For now, CSC says it will sublet 100,000 square feet of its first building on short-term leases, possibly in the neighborhood of three to five years. Should CSC exceed its 50% sublet quota, the company would transgress its "major employer" requirement and lose a number of perks inked into the original deal, Deputy City Manager Toby Futrell said. "We negotiated very hard on this," she said. "If they lease more than 50% of the built space, they lose some incentives." The excess might also prompt a trip back to the negotiation table for some contract changes, Futrell said. That would be cheery news to at least one council member, who had kept her skepticism on high alert throughout the dealmaking process. "It could be a real opportunity to take another look at a dated agreement and put in provisions that would benefit all parties," said Council Member Beverly Griffith. Griffith was an early critic of the plan because she believed that the city short-changed itself overall, and that CSC's demands for bigger buildings forced the city to shrink its City Hall and public plaza to bantamweight proportions. But until any other changes warrant revisiting the CSC contract, Griffith says she is inclined to hold her tongue.
If there is a bright spot in this picture, it's that the city, for all it gave away, did manage to accomplish two important goals: It steered CSC away from the sensitive watershed region where the company was threatening to put down stakes, and it jump-started a revitalization boom downtown, plumping up tax revenue for the city. Commercial Texas President Mike Kennedy, a longtime downtown real estate guru, believes the re-energized downtown is strong enough to withstand dips in the economy, particularly given the 2% vacancy rate in top-class office buildings. Any space CSC has available, he says, will likely be absorbed fairly quickly.
Given CSC's decision to sublet, would the city consider leasing some of that space? "It would be convenient for the city," Futrell said, "but this is Class A space and it's probably going at market rate." Which means it won't be cheap. These days, downtown property owners are fetching $35 to $40 per square foot per year for top-class space. At that price, the city is better off sticking with its more modest leased spaces in all different corners of downtown. That also pretty much nixes at least one lofty idea: that the extra CSC space would make a fine home for the down-on-its-luck Austin Music Network, currently residing uncertainly at Eddie Wilson's Threadgill's on North Lamar.
As if the morass of fine print that makes up the city/CSC venture weren't perplexing enough, the company's decision to sublet creates a whole additional set of curiosities about the nature of the deal. For one, CSC is apt to rake in a few million a year by leasing space built with all kinds of infrastructure help from the city, and on top of land that it leases from the city. For another, downtown developers in the private sector are placed at a disadvantage when they have to compete for tenants with a city-subsidized property owner. For that matter, CSC may not be the only lease competitor on the horizon. Intel, which agreed to build new office space downtown with Smart Growth incentives, also has a sublease clause in its contract. Downtown real estate brokers say they expect Intel to lease up to 90,000 square feet of space by the time the project opens its doors. Similarly, Vignette, another tech company moving downtown, is trying to swing a similar sublease provision with the city, which is waiving $5 million in development fees and $20 million in property taxes over the next 20 years.
One downtown broker, who did not want to be identified, isn't happy about the city helping out potential competitors. "In some ways it pisses me off because it's so freaking hard to build downtown, and CSC and Intel have all those hurdles and objects removed for them," he said. Then he chuckled. "But what am I complaining about? Downtown is doing great. There's virtually no vacancy."