Austin Office Market Report | Q2 2016

by CoyDavidson on July 20, 2016

Austin downtown skyline and lake / river

Austin absorption drops significantly in Q2

After a major spike in the second half of 2015, Austin’s citywide positive net absorption decreased in Q1 2016 to 290,047 square feet.

Three buildings totaling 321,024 square feet delivered in the first quarter. Projects that delivered in Q1 include the fully leased NorthShore building in the CBD, Research Park Plaza V in the Northwest submarket, and Domain I in the North/Domain submarket. Domain I has yet to sign a tenant. In the East submarket, there is over 350,000 square feet of proposed new construction with average rates in the low 30s.

The citywide average rental rate increased by 0.5% from $31.12 per square foot to $31.27 per square foot over the quarter. Class A rental rates in Austin’s CBD decreased by 1.1% over the quarter to $44.64 per square foot from $45.14 per square foot in Q4. Overall suburban Class A rental rates increased from $33.46 per square foot to $33.98 per square foot over the quarter.

Texas added 2,100 nonfarm jobs in February, expanding the state’s employment for the 11th consecutive month. Austin’s unemployment rate remains the second lowest in the state behind Amarillo. Since Q1 2015, Austin’s unemployment rate has dropped from 3.5% to 3.1%.Texas has seen an upward trend in the education and health services industry for 37 consecutive months. Seven out of eleven major industries saw growth in the first quarter across the state.

VACANCY & AVAILABILITY

Austin’s citywide vacancy rate remained unchanged between quarters at 11.2%. However, since the first quarter of 2015, citywide vacancy has dropped 140 basis points from 12.6%.

Vacancy in the CBD remains lower than the average at 6.7%. Since Q1 2015, vacancy in the CBD has decreased dramatically by 210 basis points. Over the quarter, overall vacancy in the CBD fell by ten basis points.

Overall suburban vacancy remained the same over the quarter at 12.4%. Submarkets that saw a significant decrease in vacancy over the quarter include Central, Far Northwest, and West Central. Vacancy in the Far Northwest submarket in Class A properties dropped from 15.2% to 6.8% over the quarter.

Submarkets that experienced increases in vacancy in Q1 include Northwest, and North/Domain. In the North/Domain submarket, Domain I, a 124,578 SF office building, delivered in January and remains completely vacant.

ABSORPTION & DEMAND

Austin’s office market posted 290,047 square feet of positive net absorption in Q1 2016, a dramatic decrease from the second half of 2015 which saw 1,889,284 square feet of positive net absorption. A majority of the positive net absorption in the first quarter can be attributed to the Far Northwest submarket’s Class A office space that saw 160,581 square feet of positive net absorption. LDR Spine USA, a medical manufacturing facility, moved into their 53,170 SF space in Aspen Lake One.

The second highest positive net absorption occurred in Class A space in the CBD with 63,213 square feet in the first quarter, due in a large part to the delivery of the NorthShore building where Galvanize moved into 23,592 SF of space. NorthShore was 100% leased at completion. Citywide Class B space saw 42,442 SF of negative net absorption in the first quarter. Negative net absorption in Class B space occurred in the Northwest, South, Southwest and CBD.

Absorption, New Supply & Vacancy Rates

Q2 2016 Austin Office Market Report Texas Colliers International

RENTAL RATES

According to CoStar, our data provider, Austin’s citywide average rental rate increased over the quarter from $31.39 per square foot to $31.65. As expected, the highest rates across the Austin market in the second quarter were in CBD class A buildings, where rental rates reached $45.52 per square foot. Rental rates were also high in the West Central submarket and South submarket where class A rental rates reached $40.26 per square foot and $39.35 per square foot respectively.

Citywide class B rental rates rose slightly in the second quarter to $25.91 per square foot from $25.73 in Q1. Class B rates in the CBD decreased by 1.5% over the quarter from $36.91 per square foot to $36.34 per square foot.

LEASING ACTIVITY

Austin’s office leasing activity recorded 1,422,727 SF in Q2 2016. Major transactions this quarter included a new 74,804 S.F. lease for Trend Micro at Domain 5 and a 47,755 S.F. lease for Deloitte at 500 W 2nd St. in the CBD.

SALES ACTIVITY

Austin’s office investment sales activity included four sales transactions (including one portfolio sale) with an average sale price of $302 per SF.

OFFICE DEVELOPMENT PIPELINE

1,097,050 square feet of office space was under construction during Q2 2016. Three buildings totaling 196,463 square feet delivered in Q2 including 2700 La Frontera, an 87,657 square foot building in the Round Rock submarket. No proposed buildings were given the green light to begin construction this quarter.

Click here to download the report as a PDF.

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