These Australian Entrepreneurs Hope Combining Offices and Storage Units Stirs US Demand

Posted By: CoStar on November 18, 2022.  For more information, please click here to read the source article.

Two entrepreneurs from Australia picked Austin, Texas, to open their first U.S. commercial condominium project where tenants own their office or storage space, and plans are in the works to expand the concept into multiple cities across the country over the next two years.

The concept, known as XSpace, is a relatively new type of commercial, nonresidential real estate in the United States. Units can be used for office space, a showroom, a place to store fancy cars, a podcasting studio or really whatever the owner-tenant wants. Buyers of the 106 units — including former Major League Baseball All-Star pitcher Roger Clemens — will be invited to hobnob, network or host events at XSpace’s top-floor business lounge and outdoor terrace with panoramic views of Lake Travis and the Texas Hill Country.

XSpace’s co-founders Byron Smith and Tim Manson started the concept a few years ago in Australia. Central Texas was a natural starting point to launch XSpace in the United States because of low business costs and the Austin demographic being similar to what worked for them in Australia, according to Smith.

“We wanted to be in Texas and thought Austin was a great early adopter city” because it is home to lots of “early stage tech and cool companies growing here,” Smith said.

And it seems XSpace’s co-founders were right: Nearly 80% of the units at 4229 N. Farm-to-Market Road 620, about 30 minutes northwest of downtown Austin, were sold before construction was completed. The units operate like a combination of office or studio space with storage space, appealing to people who are looking to stop paying for a separate office lease and rent a monthly storage unit, Smith added.

“It started off as a place for car enthusiasts and personal businesses, but more small businesses have become engaged,” Smith said. “If you can get the financing, you are better off owning than leasing. The numbers work out to be the same.”

Austin’s population jumped 33% over the past decade, reaching nearly 2.3 million residents in 2020, making it the No. 2 fastest growing metropolitan area in the country during that time. The Texas capital has been a sought-after destination for investors and multinational companies such as Apple, Oracle and Tesla within the past few years.

Austin ranked No. 4 for overall prospects for real estate investors on the Urban Land Institute’s 2023 “Emerging Trends in Real Estate” report. However, Austin’s rapid growth has led to some growing pains with living costs, housing affordability and infrastructure quality, according to the ULI report.

Austin’s fast growth means storage space is in high demand, said Shravan Parsi, president and founder of Austin-based real estate company American Ventures. The average cost of a typical storage unit in Austin is up 13% compared to last year, but costs are still below the national average, said Parsi.

“This provides an opportunity for developers to invest in this asset class,” said Parsi, speaking about general storage space and not specifically about XSpace.

New Asset Class

The use of condos is far more common for residential and garage units, typically not property that is zoned for commercial. As rental rates keep rising in some markets, the use of condos is drawing more interest. XSpace’s condo units can also be bought as an investment and rented out for future returns in what XSpace refers to as a “high-demand asset class.”

XSpace started out as storage space for people who had expensive cars or high-end artwork. Then the pandemic hit, and XSpace’s executive team discovered there was a market for people, mostly entrepreneurs, to purchase their own space they could customize to their needs, said Howard Ecker, chairman of the board of XSpace.

“It’s a type of real estate that’s being sold, for the most part … to individuals of similar interests. You can go up to the [top floor lounge] and network with other entrepreneurs,” said Ecker, who has nearly 50 years of real estate experience representing tenants across the nation as founder, president and CEO of Howard Ecker and Co., a Chicago-based tenant rep brokerage.

“It’s a whole new class,” said Ecker. “It’s the fifth class of space. XSpace is what you want it to be.”

Most units have 18-foot ceilings and can be customized, like putting in a mezzanine to give off the vibe of a large loft. The space, for those who purchase it, can be cheaper than renting, according to Ecker.

To be sure, business condos are not for everyone. Parking and other shared spaces can be governed by the whims of a business version of a homeowner’s association, and condos may be difficult to sell should needs change, especially if a unit is highly customized to fit the original owner’s needs.

The Austin units range from 300 square feet to 2,500 square feet and are nearly all sold out. Initial asking prices ranged from $95,000 to about $500,000, but units ended up selling for between $135,000 and more than $1.3 million, according to Smith, who lives in Austin.

A subsidiary of XSpace bought the 5.4-acre site for the Austin location in 2019, and the four-story, 100,000-square-foot project broke ground in early 2021. Owners have access to the fourth-floor business lounge that can be used as work, event or meeting space and includes a commercial-grade kitchen. Other amenities include 24-hour security, HOA-style management and every unit being accessible by vehicle.

One of those owners is Clemens, the former MLB pitcher and seven-time Cy Young Award-winner who played college baseball at the University of Texas at Austin. Clemens plans to use his unit to store his baseball memorabilia and as office space for his charitable organization, the Roger Clemens Foundation.

Growth Plans

The success of the Austin location led the co-founders to map out expansion plans, starting in Houston and then at least 15 more locations planned to open by 2025 in high-growth U.S. markets.

The company has the land under control for the Houston location at 7022 Old Katy Road that is expected to be ready in 2024, according to the company’s website. Prices for units at the new XSpace in Houston will range from $199,999 for 429 square feet to $799,999 for a 2,007-square-foot space. The first phase includes 80 units and a 4,000-square-foot rooftop business lounge with views of downtown and uptown Houston.

Next up are plans to add an XSpace in Dallas and East Austin and finding sites in The Woodlands north of Houston and out of state in Las Vegas, followed by locations in Chicago and Miami and securing land in Atlanta, Denver and Salt Lake City by the middle of next year, according to an XSpace spokesperson.

Locations in Nashville, Tennessee; New York City; and Scottsdale, Arizona, are expected to be secured at some point in 2024.

XSpace’s executive team plans to keep positioning the company for property demands that have changed during the pandemic, catering to businesses and individuals that want size flexibility and a reduction in long-term, large floor plans.

“The contraction of traditional office space and the expansion of residential needs further emphasizes the XSpace opportunity,” XSpace said on its website.

For the Record

XSpace Lake Travis was designed by Fuse Architecture Studio and built by KDW.