Q3 2014 | Austin Office | Market Report

by CoyDavidson on October 28, 2014

Austin downtown skyline and lake / river

2.8M SF of construction paired with high occupancy rates prove Austin’s office market is hotter than ever.

Office vacancy rates decreased by 4.0% between quarters as new tenants lease space in Austin’s CBD. Citywide absorption reached 728,703 SF in the Q3 2014 compared to 99,000 in Q2 2014, making this by far the strongest quarter for Austin’s office market this year.

Although there were no deliveries in Q3 2014, nearly 2.9 million SF of office space is currently under construction. Some of these buildings include the Colorado Tower, already 95% preleased, IBC Bank Plaza, which is 90% preleased, and finally 311 Bowie Street where Whole Foods has preleased 40,000 SF of office space.

The citywide average rental rate increased 0.9% from $27.70 per SF to $28.20 per SF over the quarter and 6.2% from $26.56 per SF to $28.20 per SF over the year. The average CBD rental rate increased to $39.34 from $37.90 last quarter, and the average suburban rental rate increased slightly from $26.02 to $26.43.

According to the Texas Workforce Commission, the Texas economy and workers across all major industries continue to perform at a record pace. Austin’s unemployment rate fell to 3.9% from 4.9% over the year.

The continued construction paired with high demand for office space both inside the CBD and out, proves that Austin’s market is stronger than ever. Competition for downtown office space is at an all time high as we see a creative, well-educated workforce infiltrate the city and continue to drive occupancy rates up.

ABSORPTION, NEW SUPPLY & VACANCY RATES

CHART2

VACANCY & AVAILABILITY

Austin’s citywide vacancy rate decreased 100 basis points from 10.7% to 9.7% between quarters and vacancy decreased across both the CBD and suburban markets. With the influx of growing companies into Austin’s CBD, others are forced out of the city and into suburbs, causing vacancy rates to decrease across the board. Between quarters, the average suburban vacancy rate decreased slightly from 10.5% last quarter to 10.1% in Q3. The average CBD vacancy rate saw an even greater drop this quarter from 11.3% to just 8.4%.

The average CBD Class A vacancy rate decreased 390 basis points between quarters from 16.0% to 12.1%, and the average CBD Class B vacancy rate decreased 190 basis points from 5.0% to 3.1%. The average suburban Class A vacancy rate decreased 40 basis points from 10.5% to 10.1% between quarters, and the average suburban Class B vacancy rate fell 80 basis points from 11.5% to 10.7% between quarters.

ABSORPTION & DEMAND

Austin’s office market posted 728,703 SF of positive net absorption in Q3 2014 making this the most successful quarter in almost two years.

The CBD submarket posted the largest gain, with 279,332 SF of positive net absorption, followed by the Southwest submarket, posting 196,082 SF of positive net absorption in contrast to the previous quarter where the Southwest submarket saw a negative net absorption of 89,623 SF.

Demand for office space remains strong even as office building construction continues. Of the 25 buildings currently under construction citywide, 38.6% of that office inventory is already preleased.

RENTAL RATES

The citywide average rental rate increased slightly from $27.70 per SF to $28.20 per SF over the quarter and increased 6.2% from $26.56 per SF to $28.20 per SF over the year. Average citywide Class A rents increased from $32.47 to $32.99 and Class B rents increased from $22.76 to $22.91 over the quarter.

The Class A average rental rate in the CBD increased 4.6% from $39.76 per SF to $41.57 per SF between quarters, while the suburban Class A average rental rate increased only slightly from $30.49 per SF to $30.81 per SF. The average Class B rental rate in the CBD remained unchanged at $33.03 per SF, while the average suburban Class B rental rate increased slightly between quarters.

LEASING ACTIVITY

Austin’s office leasing activity reached 1.0M SF in Q3 2014 with transactions including renewals, expansions, subleases, and pre-leases in buildings currently under construction.

SALES ACTIVITY

Austin’s office investment sales activity included 13 sales transactions with a total sales volume of approximately $65 million, averaging $166 per SF.

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