Austin Office Market Report | Q2 2017

by CoyDavidson on July 26, 2017

Austin’s Office Market Continues to Deliver As We Hit the Midyear Mark

BOOTS ON THE GROUND
Commentary by David Bremer

Our “Boots on the Ground” view point is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market.

There are two mistruths I’ve heard perpetuated by the real estate community, including myself once or twice, over the past year: (1) This occupancy and these rates can’t last forever, and (2) MoPac construction should be done soon.

The Austin office market rebounded sharply in the 2nd quarter, with extremely high Net Absorption of almost 600,000 RSF. Vacancy remained relatively flat, however rates continue to trend higher.

Our local experts have seen an increase in general activity over the past few months. CBD and East submarkets are still extremely hot with significant competition for prime spaces. On the East side, several large projects delivering throughout 2018 should help create additional leasing opportunities near the CBD and in East Austin, but new deals continue to trade at high rates, therefore we’re not predicting rates to decline. There is no substantial help on the horizon for the core CBD, however. The suburbs continue to be reasonably healthy with a surge in medium and large activity over the past five months, but there are still plentiful options and Landlords are being forced to compete for deals.

We continue to see the trend toward greater density (less space, more people), which will continue to create more parking issues. Many of the developments in the East submarket, which we had hoped would help soften the parking dilemma, have decided to charge for parking (due to high construction expense) and very few are delivering with a self-sustaining parking ratio. While solutions are on the horizon in the form of ridesharing, Chariot, trains and Luxe, we expect parking to be a major headache for HR departments for years to come.

FUTURE FORECAST

We expect continued strength in the office market with the CBD and East Austin continuing to lead the way. It’s likely that rents will remain reasonably flat due to planned deliveries over the next 12 months, but significant pre-leasing success could again pressure vacancy and push rates higher. Monitoring continued growth by some of the current Austin juggernauts (WeWork, Amazon, Facebook, Indeed, and HomeAway) should provide a reasonable bellwether for the entire market. If they keep gobbling up space and Austin’s job growth continues to expand, which is probably in the near future, then it’s likely to remain a Landlord’s Market. Also, there will be a continued increase in sublet space coming on the market, and those availabilities will sit longer as co-working opportunities continue to grow in number and popularity.

AUSTIN OFFICE OVERVIEW

In the second quarter of 2017, Austin’s office market saw 599,982 SF of positive net absorption. This sets the year-to-date absorption at 551,119 SF of positive net absorption. A majority of this absorption happened in class A buildings with a total of 577,789 SF of positive net absorption. Class B buildings in Austin saw 6,844 of negative net absorption and class C properties saw 29,037 of positive net absorption.

There is currently 1,584,879 SF of office space under construction and 340,959 SF of that is pre-leased. The third quarter of 2017 is expected to see 594,504 SF of deliveries and 232,835 SF of that is pre-leased.

Nine buildings totaling 1,443,538 SF delivered in the second quarter, and 1,183,557 SF of that was pre-leased. The largest building that delivered was the 500,512 SF, 80.3% pre-leased, 500 West Second Street located in the CBD submarket.

The citywide average rental rate increased slightly over the quarter from $33.83 per SF in Q1 2017 to $34.02 per SF. Class A rental rates in Austin’s CBD increased by 1.2% over the quarter to $49.84 per SF from $49.25 per SF in the first quarter of 2017. Overall suburban Class A rental rates increased, from $33.46 per SF to
$34.02, over the quarter.

In April, Austin was ranked #1 on Savills’ “Tech Cities 2017 Report”, which ranks 22 cities across the globe that are at the forefront of the global tech industry. Austin beat out four other U.S. cities, including San Francisco, New York, Boston, and Seattle, along with international giants, such as Hong Kong and Berlin. Some of the reasons Austin was chosen were the low taxes and entrepreneurial culture. Austin’s lower cost of living, compared to places like San Francisco or New York, has a knack for attracting some of the world’s top talent.

VACANCY & AVAILABILITY

Austin’s citywide vacancy rate increased marginally between quarters from 11.3% to 11.7%. The CBD Class A vacancy rate also increased from 7.3% in Q1 to 10.4% in Q2. The suburban Class A vacancy rate dropped quarter over quarter from 11.7% to 11.6%.

Overall suburban vacancy remained the same for the first half of 2017 at 12.3%. Submarkets that saw a decrease in vacancy over the quarter include Cedar Park, Central, Far Northwest, North/ Domain, South, Southeast, Southwest and West Central. The Cedar Park submarket saw the largest decrease in vacancy, falling from 20.9% to 6.8% over the quarter.

ABSORPTION & DEMAND

Austin’s office market posted 599,982 square feet of positive net absorption in Q2 2017. The three submarkets that experienced the largest positive net absorption gains over the quarter include North, CBD, and Southwest.

A majority of the positive net absorption in the second quarter happened in the Class A North/Domain submarket, totalling 282,475 square feet of positive net absorption. This can be attributed to Facebook and Amazon moving into their spaces, totaling 273,168 SF, at Domain 8 (11601 Alterra Parkway). The second highest positive net absorption occurred in Class A space in the CBD submarket, with 233,113 square feet absorbed in the second quarter.

The Southwest and CBD submarkets had the most tenants sign leases for spaces 10,000 square feet or larger. There were ten leases signed in Q2 in the Southwest submarket while the CBD inked seven. The submarket with the most square feet leased in Q2 was North/Domain with 324,046 square feet, while the Southwest submarket came in second with 203,228 square feet of leases. One of those leases was Linebarger Goggan Blair & Sampson LLP’s 29,854 square foot renewal.

Annual Absorption, New Supply & Vacancy Rates

RENTAL RATES

According to CoStar, our data provider, Austin’s citywide average rental rate increased slightly over the quarter from $33.83 per SF to $34.02 per SF.

As expected, the highest rates across the Austin market in the first quarter were in CBD Class A buildings, where rental rates averaged $49.84 per SF. Rental rates were also high in the West Central submarket and Central submarket where Class A rental rates reached $42.92 per SF and $41.59 per SF, respectively.

Citywide Class B rental rates increased in Q2 to $28.21 per square foot from $27.82 in Q1. Class B rental rates in the CBD increased by 6% over the quarter from $38.04 per square foot to $40.28 per square foot.

LEASING ACTIVITY

Austin’s office leasing activity recorded 879,716 SF in Q2 2017. Major transactions this quarter included HomeAway/Expedia taking several floors at 3110 Esperanza Crossing (Domain 11). They will be occupying 298,815 SF there once construction has finished.

SALES ACTIVITY

Austin’s office investment sales activity included just one transaction. GLL Real Estate Partners, Inc. purchased a seven story office building, located at 320 South Capital of Texas Highway, from Riverside Resources for $96,000,000 ($443/SF). This building is currently 100% occupied by Apple, who’s lease expires in about 11 years.

OFFICE DEVELOPMENT PIPELINE

1,584,879 square feet of office space was under construction during Q2 2017. Nine buildings totaling 1,443,538 square feet delivered in Q2 including Domain 8 at 11601 Alterra Parkway. Three 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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