Austin Office Market Report | Q3 2017

by CoyDavidson on October 17, 2017

Austin’s office market sees continued construction and rising rental rates

BOOTS ON THE GROUND
Commentary by David Bremer

Our “Boots on the Ground” viewpoint 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.

As predicted, the office market has remained extremely strong and rates have seen a slight increase over the past quarter. The trend of big companies eating up large spaces has become the norm and the expansions of tech giants and co-working spaces have continued to embolden landlords and developers to bring a speculative product to the market. Unfortunately for tenants, not enough of this product is becoming available beyond the preleasing phase to have a meaningful impact on rates or landlord concessions.

We continue to see mid to large sized companies chasing lower rates and pursuing developments just outside of the CBD in the East, South, or Domain submarkets. Companies such as FloSports, Nexstar Digital and Main Street Hub have stepped in as full building users for a few of these buildings and we are seeing very heavy activity on the remaining buildings currently planned or under construction. Significant demand for space in close proximity to downtown is driving average rates higher and is responsible for much of the absorption seen in the past three quarters, suburban Northwest and Southwest submarkets have not fared quite as well. Rising central rates have incentivized enough tenants to explore the “burbs”, balancing those markets with healthy/flat growth. The exception, of course, is the Domain, which continues to successfully deploy the “build it and they will come” tactic.

There are a few blockbuster deals that are in the works including: a redevelopment plan for the 3M campus (currently under contract), sale of the Brandywine/DRA portfolio (1,164,000 SF), a possible land assemblage in close-in South Central Austin that could pave the way for some impressive new product over the next seven years, and no less than three 250K+ SF downtown tenants vying for new buildings years in advance of delivery. All we need now is a couple of Amazon big-wigs to show up at the Austin airport to really generate some buzz for Austin development.

FUTURE FORECAST

In fear of sounding like a broken record, we expect the overall office market to remain strong but reasonably flat. Core properties will continue to push rates and garner the most attention, while suburban properties will potentially see a slight increase in vacancy, which could finally open the door for landlord concessions (or as a tenant rep, what I like to call “the good old days”). I’m not holding my breath.

AUSTIN OFFICE OVERVIEW

In the third quarter of 2017, Austin’s office market saw 41,974 SF of negative net absorption. This sets the year-to-date absorption at 609,304 SF of positive net absorption. A majority of the positive absorption happened in class B buildings with a total of 154,351 SF of positive net absorption. Class A buildings in Austin saw 74,003 SF of negative net absorption and class C properties saw 122,322 SF of negative net absorption.

There is currently 3,801,853 SF of office space under construction and 2,305,799 SF, or 60.6%, of that is pre-leased. The fourth quarter of 2017 is expected to see 1,223,152 SF of deliveries and 601,577 SF, or 49.2%, of that, is pre-leased.

Building 1 at 7601 Southwest Parkway was the only building that delivered in the third quarter. The 87,500 SF building was 33.4% pre-leased when it delivered in July. As of now, the fourth quarter is expected to see twenty-two new buildings deliver, but some projects may get pushed into the new year.

The citywide average rental rate decreased marginally over the quarter from $34.03 per SF in Q2 2017 to $34.02 per SF in Q2 2017. Class A rental rates in Austin’s CBD decreased by 0.8% over the quarter to $49.43 per SF from $49.84 per SF in the second quarter of 2017. Overall suburban Class A rental rates increased, from $33.57 per SF to $34.80, over the quarter.

In July, the Austin-Round Rock, TX MSA was ranked #9 on WalletHub’s “2017’s Most & Least Educated Cities in America”, which ranks MSAs across the country based on where the most educated Americans are putting their degrees to work. Austin was the highest ranked in Texas and also beat out other major tech cities such as Seattle-Tacoma-Bellevue, WA (#11), Raleigh, NC (#15), and San Diego-Carlsbad, CA (#21).

When recruiting the top talent with the best education, it helps to have the #8 ranked Public University in America in your city. The University of Texas – Austin was ranked #8 out of over 500 public and state colleges by Niche and has been providing the city of Austin with highly educated employees who strengthen the Austin area economy.

VACANCY & AVAILABILITY

Austin’s citywide vacancy rate stayed the same over the past two quarters remaining at 11.6%. The CBD class A vacancy rate increased from 9.3% in Q2 to 11.0% in Q3. The suburban class A vacancy rate dropped quarter over quarter from 12.2% to 11.8%.

Overall suburban vacancy decreased quarter over quarter from 12.2% in Q2 to 11.8% in Q3. Submarkets that saw a decrease in vacancy over the quarter include Central, East, North/Domain, Northwest, Round Rock, South, and Southwest. The Round Rock submarket saw the largest decrease in vacancy, falling from 9.3% to 5.0% over the quarter.

ABSORPTION & DEMAND

Austin’s office market posted 41,974 square feet of negative net absorption in Q3 2017. The three submarkets that experienced the largest positive net absorption gains over the quarter include Northwest, Central and Round Rock.

A majority of the positive net absorption in the third quarter happened in the class A North/Domain submarket, totalling 96,755 square feet of positive net absorption. Some of this can be attributed to Social Solutions moving into their 25,231 square foot space at Braker Pointe III (10801 North MoPac Expressway). The second highest positive net absorption occurred in class B space in the Northwest submarket, with 66,183 square feet absorbed in the third quarter.

The South submarket had the most tenants sign leases for spaces 10,000 square feet or larger. There were four leases signed in Q3 in the South submarket including Nexstar taking 17,900 square feet at Mirabeau at 2330 South Lamar Boulevard. The submarket with the most square feet leased in Q3 was the CBD with 283,695 square feet. The most notable is Facebook’s 231,506 square foot lease at Third and Shoal (208 Nueces Street). Third and Shoal is set to deliver in Q3 of 2018.

RENTAL RATES

According to CoStar, our data provider, Austin’s citywide average rental rate decreased marginally over the quarter from $34.03 per SF to $34.02 per SF.

As expected, the highest rates across the Austin office market in the first quarter were in CBD class A buildings where rental rates averaged $49.43 per SF. Rental rates were also high in the Central submarket and West Central submarket where class A rental rates reached $43.96 per SF and $42.82 per SF, respectively.

Citywide class B rental rates increased in Q3 to $28.50 per square foot from $28.18 in Q2. Class B rental rates in the CBD increased by 6.9% over the quarter from $40.28 per square foot to $43.08 per square foot.

LEASING ACTIVITY

Austin’s office leasing activity recorded 529,113 SF in Q3 2017. Major transactions this quarter included Facebook taking several floors at 208 Nueces St (Third and Shoal), moving into 231,506 SF there once construction has finished.

SALES ACTIVITY

Austin’s office investment sales activity included three transactions. Intercontinental Real Estate Corporation purchased the 5th & Colorado office building, located at 201 West 5th Street. The eighteen story building was purchased from Lincoln Property Company for $119,000,000 ($664/SF). This building was 94% leased at the time of the transaction.

OFFICE DEVELOPMENT PIPELINE

3,801,853 square feet of office space was under construction during Q3 2017. 7601 Southwest Parkway was the only building to deliver in Q3, totaling 87,500 square feet. Twenty 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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