Deconstructing Downtown

The Economy Sneezes -- and Austin's Central Business District Catches a Cold

In March, Intel Corp. suspended work on its building at Fifth and San Antonio.
In March, Intel Corp. suspended work on its building at Fifth and San Antonio. (Photo By Jana Birchum)

On a drizzly afternoon in late March, a handful of Intel officials arrived at an old car dealership on West Fifth Street armed with an overhead projector and a stack of agendas for a meeting with downtown neighborhood representatives. They had hoped to put the best possible spin on what had already become a public relations nightmare: Two weeks earlier, Intel Corp. had stunned the town with the news that it was halting construction on its downtown office project. At the meeting, the company managers offered a public apology, and outlined some ideas for camouflaging the eyesore while the company weighed its financial options over the next nine months.

It wasn't supposed to happen this way. In heartier times, the thinking was that the $124 million chip design center would stand as one of Austin's classier corporate additions to downtown, and would represent a "first" for the historically suburban Intel, laying stakes in an urban core. At the company's groundbreaking ceremony last year, environmental, neighborhood, and city leaders turned out to applaud the traditional dirt-turning celebration. There was barbecue, and the Damnations played a short set. No one imagined then that the world's largest semiconductor company would ever pull the plug on such a high-profile project, located on a choice piece of land just west of Republic Square Park, within hollering distance of Waterloo Brewing Company.

What a difference a year makes. In the broad scheme of things, the decision to stop construction was not a local decree but a corporate one, handed down from Intel's flagship offices in Santa Clara, Calif. Clearly, Intel is an old hand at weathering economic slowdowns -- and shutting down construction projects. The company acknowledges its poor track record in Texas. An industry downturn in 1997 prompted Intel to postpone its chip-making plant in Fort Worth, despite the city's willingness to cut the company's tax bill by $117 million over 10 years. Intel has yet to resume the project. More recently, the company stopped 20 other office projects around the globe, and suspended work on manufacturing plants under way in Colorado, Massachusetts, and Ireland. "This," company spokesman Fred Shannon said, pointing across the street to the Intel structure at Fifth and San Antonio streets, "was the last building that we stopped. We kept it moving forward, in the hope that we could escape the axe." That sentiment, of course, was little comfort to aggrieved audience members, who stared blankly when Shannon described how Intel is still fully committed to boosting community spirit in Austin.

Obviously, Intel's plans to let its project languish indefinitely behind an eight-foot chainlink fence -- replete with a flourish of barbed wire -- does not play well in a town whose patience is already worn thin by the havoc created by a number of simultaneous construction projects and accompanying traffic snarls wrought by willy-nilly street closures. On another, more political, level, there is growing dissent over the inclination of Mayor Kirk Watson, with the City Council's blessing, to grant tax breaks and other incentives (worth $15.1 million in Intel's case) to lure major employers to the city center and away from sensitive watershed areas in Southwest Austin.

The Convention Center expansion, Fourth and Trinity, is scheduled for completion in spring of next year.
The Convention Center expansion, Fourth and Trinity, is scheduled for completion in spring of next year. (Photo By Jana Birchum)

Even before the Intel fiasco, people were starting to question the true spirit of Smart Growth incentives. Eventually, Save Our Springs attorney Bill Bunch noted recently, "It became obvious that the city's so-called 'Smart Growth matrix' that was supposed to yield a fair and consistent set of incentives, was really extremely loosey-goosey, basically hiding the fact that this was just rank dealmaking, with the companies usually getting what they wanted. It also became obvious," he continued, "that a corporate welfare/deal-making practice was simply masquerading as a program to protect Barton Springs."

Watson, of course, disagrees with Bunch's assessment. "Keep in mind," he told the Chronicle, "that all of this [the use of incentives] has resulted in the desired effect of spurring downtown and creating a domino effect for other new developments. And we've kept major employers like Motorola, Tivoli, and CSC [Computer Sciences Corp.] off the aquifer. Mr. Bunch himself went to El Segundo, Calif., to ask CSC not to build over the aquifer."

Indeed, those who have benefited from the shot in the arm that Watson promised -- and delivered -- for downtown, speak much more highly of the mayor. "We'd be looking at a much worse situation downtown if not for the efforts and leadership of Kirk Watson," said Michael Kennedy, president of Commercial Texas, a commercial real estate company.

Nevertheless, Intel's decision to leave its project in limbo has outraged downtown developers and real estate brokers whose livelihoods depend on the overall success -- or at least the perceived success -- of the central business district. Moreover, the idea of Intel dressing up its unfinished structure with a colorful mesh screen is drawing a considerable amount of ridicule. "I think that's a silly idea," sniffed Charles Heimsath, president of Capitol Market Research, a downtown firm that tracks real estate trends. "They should either commit to construction or abandon the property."

While Intel has assigned real estate brokers at Trammel Crow to field outside inquiries on a possible sale of the property, company officials gave no indication at the March meeting that selling might be an option. But former SOS president Robin Rather openly suggested that Intel could end the agony of a stalled project by simply cutting its losses and putting the property on the market. "Even though you're Intel," she said, "you're not the only player interested in doing the right thing. If the writing is on the wall, let's get it over with and not delay out of pride or a sense that maybe somewhere down the line this will play out better."

Eleftherios Sofikitis, owner of Ted's Greek Corner
Eleftherios Sofikitis, owner of Ted's Greek Corner (Photo By Jana Birchum)

Those sentiments seemed to be shared by Jackie Goodman and Will Wynn, the only council members to attend the Intel meeting. Later, back at his City Hall office, Wynn pondered, "How badly do I want to see Intel as a downtown tenant? That's the $64,000 Question." Of course, whatever the final cost to Intel or some prospective new owner, $64,000 surely won't cover it.

But local developers and real estate brokers agree that if Intel isn't prepared to take immediate action, it should move on, out of Austin's living room. Downtown is already feeling the pinch of the downturn, they say, and if the Intel site remains in its current state, it will create a sense that things are all the more bleak. Scott Young, who sold Intel the property a year ago after initially trying to market the land as a speculative office site, said he has mixed feelings about the situation. He sympathizes with the company's industry-related woes, he said, but he's more concerned about the ripple effects of an idle construction site. "It gives the perception that downtown isn't doing well."

Still, when pressed on downtown's economic outlook, real estate experts are apt to cast the marketplace in a positive light, despite the obvious signs that downtown isn't nearly as frisky as it was a year ago. In a nutshell, rents are up, occupancy is down, and several residential and office projects slated to get off the ground this year will likely have to wait for the next rebound. Even more striking, storefronts along Congress Avenue are starting to take on the same vacant look they presented 12 years ago, when things were really bad. In short, promises of an exciting new retail economy downtown may have to be shelved for several more months.

As downtown developer Perry Lorenz observed the other day: "We've gone from a dynamic, powerful real estate market to a market that's clearly softening, and in fact becoming really squishy. I mean really squishy."

Good News, Bad News

Two years ago, when the downtown office occupancy rate was at 97%, there were five prospective high-rise projects on the table, setting the scene for a horserace to determine which developer would be the first to get his project off the ground. Only this time around, the moneylenders weren't as quick to shell out the big bucks the way they did in the Eighties. Having learned some lessons from the savings and loan debacle of that decade, bankers started putting more teeth into their lending criteria, forcing developers like Jeff Pace of CarrAmerica Realty Corp. to first lock prospective tenants into pre-lease agreements. In 1999, most bets were on Pace to be the first to break ground with his project at 300 West Sixth, and, as it happens, his is the only office project underway -- the first downtown tower to rise from the dust since 1987. That was the period when Austin's inventory of "see-through buildings" -- meaning no tenants were inside -- earned the city the dubious distinction of having the highest office vacancy rate in the nation. "Back then," Pace recalled recently, "the demand shrunk by half and the supply of buildings doubled. Now," he added, "the demand is still good and it will probably stay that way for a while, although construction-related tie-ups are causing some companies to weigh the value of downtown vs. the pain of downtown."
CarrAmerica Realty's project, 300 West Sixth, is the first office tower built downtown since 1987.
CarrAmerica Realty's project, 300 West Sixth, is the first office tower built downtown since 1987. (Photo By Jana Birchum)

Pace's 23-story development is about 70% leased, with a mix of tenants representing both old economy (the law firm of Akin Gump Strauss Hauer & Feld) and new economy (capital investors Austin Ventures). Guaranty Bank Senior Vice-President Tom Etheredge facilitated the financing for the project, which he said met the bank's equity and pre-lease agreement requirements. Plus, he said, CarrAmerica, a Washington, D.C.-based real estate investment trust, already holds a proven track record of high-rise successes in other cities. (Guaranty Bank is also financing the Nokonah, a residential project whose developers -- partners Lorenz and former City Council Member Robert Barnstone -- also met strict pre-sale requirements on their condominiums, Etheredge said. The development is slated to begin actual construction in June.)

Since the financing of the CarrAmerica and Nokonah projects, the downturn in the economy has forced lenders to apply even higher standards than they did two years ago, Etheredge noted. "We are much more cautious today, and the pre-leasing and equity requirements are substantially greater." In a similar vein, Scot Krieger, vice-president of JP Morgan Chase, said his bank now requires developers, office developers in particular, to have tenant commitment on at least 50% of their space before financing can be approved. High-quality tenants, such as longtime companies in good standing, are also favored over tenants whose livelihoods are less predictable, Krieger said.

The latest number-crunchings of Colliers Oxford Commercial show the office vacancy rate more than doubling in the central business district. But that's not necessarily a bad thing, says Colliers Oxford broker Kevin Kimbrough, because the additional space creates some much-needed breathing room. Though current vacancies downtown stand at 7.5%, compared to 3.0% in the last quarter of 2000, downtown tenants recently experienced an overall rent increase of $1.50 per square foot. "While a 7.5% vacancy might be an indicator that the market is moving in a downward direction," Kimbrough said, "it's moving in a direction that is healthy. Any time you see a tight market, you're going to see rent increases. A 7.5% vacancy indicates that landlords in the CBD might be more willing to rethink their rent structure."

Looking ahead, developers predict that the next big office project to come on line will be at the Fourth and Congress property that Atlanta-based Cousins Properties Inc. acquired earlier this year from Tom Stacy and Will Wynn for a cool $13.8 million. (Wynn had previously found himself in the awkward -- and controversial -- position of trying to swing a deal on the property, which required approval from his fellow council members.) Cousins' Texas-based outfit, Cousins Stone, will develop and manage the 33-floor high-rise that already has a lease commitment from the law firm of Jenkins & Gilchrist. Tim Hendricks, a senior vice-president of Cousins Stone, says he's continuing to pursue lead tenants for the 500,000 square-foot project and hopes to break ground by September. Those familiar with the project, however, say a 2002 or 2003 groundbreaking appears more realistic, unless the economic climate bounces back sooner.

Out With the Old

It's one thing for downtown boosters to cheer the efforts of the mayor and developers to breathe new life into downtown, but this new wave of progress doesn't always bode well for local businesses. Along Congress Avenue, the Cousins Stone development represents the end of the road for two longtime institutions -- Ted's Greek Corner restaurant and Oscar Snowden's TV & Appliance store. Both business owners recognize that their days are numbered in the space they have leased for several decades, but they say they'll hang tough until they get their walking papers.
Computer Sciences Corp. is officially planning three buildings along Town Lake -- insiders bet two out of three.
Computer Sciences Corp. is officially planning three buildings along Town Lake -- insiders bet two out of three. (Photo By Jana Birchum)

The other day, Ted's Greek Corner owner Eleftherios Sofikitis, a native of Greece, sat at a table in his diner-style eatery and reminisced about the downtown he used to know. "When I opened this place, on Oct. 1, 1970, downtown was more like a community. The businesses were family-owned and people would come downtown to shop, to get something to eat, to say hello. It reminded me of Greece. Now," he said, "there's nothing here for families. There are nightclubs and restaurants with high prices, and nothing to remind me of Greece. So when I get homesick, I put on some music, drink a glass of wine, and I sit here and look at the photographs on the wall over there. They're nice, no?"

Overall, Sofikitis seems to take his pending eviction in stride: Where will you go? "I don't know." Would you like to stay? "If they let me." Are you angry? "No, you can't be angry, you can't be bitter. It's not my property." He paused a moment and then smiled and shrugged. "It was nice while it lasted."

A few blocks north and around the corner at 112 E. Seventh, one finds a locked door and a diplomatic note from Thundercloud Subs management, explaining that the sandwich shop's departure, effective March 31, wasn't by choice. "We were booted out," Thundercloud co-owner Andy Cotton declares. (Cotton pens the "Coach's Corner" column published in this paper.) "We are another victim of downtown," he said. "We were squeezed between construction projects in the Perry Brooks building and the Stephen F. Austin Hotel, and our business just went down, down, down, down."

Cotton said that the building's owners, T. Stacy and Associates, kept offering Thundercloud assurances on two fronts: that business would pick up once the construction stopped and that renovations to the sandwich shop would "make it slicker." Then, the construction stopped and business indeed picked up, but the owners stopped returning Thundercloud's phone calls, Cotton said. "Then we got a letter from a law firm telling us we had to be out in 30 days. We had been on a month-to-month lease for the last couple of years, so what they did was perfectly legal, but it was completely unethical in my opinion," he said. "We've been in business 25 years and this is one of the sleaziest things that's ever happened to us."

Tom Stacy, whose firm owns the newly renovated Perry Brooks building that housed the sandwich shop, has a different story to tell. He said the decision to terminate the month-to-month lease was strictly economic. "We did not renew their lease because they didn't need the amount of space that they had. We wanted to lease the space to someone who could better utilize all that was available," he said. Thundercloud's replacement, Stacy added, will be The Money Box, a national check-cashing chain.

Texspresso, a coffee shop down the block that had spent two years in the historic building at 718 Congress, decided to call it quits in the face of stiff competition from nearby Starbucks, which had already carved out its downtown niche before the local cafe's arrival. "They were there first," said co-owner David Hall, "but because of the success of our other shops, we thought we could make a go of it on Congress. We had a good core base of customers downtown, including the mayor -- he was in there all the time -- but it just wasn't enough." In the end, Hall said, Texspresso may have lost the coffee war, but it had the last word. In its final two months, the owners placed a sandwich board in front of the shop that read: "Austin! Why do you support Seattle?" end story

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