Austin Office Market Report | Q4 2017

by CoyDavidson on January 18, 2018

Austin’s Office Market Closes The Year With A Strong Finish

The final quarter of 2017 was a strong finish for Austin’s office market. Year-end 2017 net absorption was close to 900,000 SF and rates continued their upward trend. The ease of finding quality space at market rates continues to be dependent on the specific submarket you target and the size of the space. The North/Domain submarket is still one of the hottest office submarkets in the nation. The vast majority of new buildings have been leased in whole prior to delivery. There are three large class A buildings in the pipeline (totaling close to 1 million SF) and another building is expected to break ground in early 2018. In the next 18 months, we will, for the first time, see a 50,000-170,000 SF block of second generation space become available in the Domain. Finding space for a small to medium user in the Domain has been difficult and we don’t expect that to change.

Northwest and Southwest Austin continue to offer some of the best values available in the market. There are plenty of opportunities for small to medium users, while large blocks of space are difficult to come by due to a lack of new construction. There is a noticeable difference in both demand and final deal structures on those buildings that can offer even minimal walkability to coffee and food options. Rates are holding firm but we’re seeing Landlords begin to make larger concessions (higher improvement allowances, rent abatement, etc.) to attract users. The CBD submarket has remained tight and expensive. There is significant competition for big blocks of space (with Parsley Energy signing a 300,000 SF lease and additional large announcements expected in Q1 2018), although recently we’ve noticed increased availability for 5,000-15,000 SF users. Increased availability has not yet translated to tenant leverage, however and we’re starting to see clients seriously consider moves outside of the CBD due to high cost and lack of parking.

East Austin has been the biggest beneficiary of the rising rates and limited parking in the CBD. Competition for existing spaces has been high and new developments are having success with preleasing. Most of the groups considering large blocks in these new buildings are coming from the CBD, which has allowed Landlords on the East side to retain relatively low parking ratios and, in many cases, begin to charge for parking. Rates on the East side have been moving up quickly and we believe that trend will continue.

Future Forecast

We expect rates to remain flat, or trend slightly up in prime submarkets (North/Domain, CBD and East). The majority of “shovel ready” office development sites will hold until they have a signed anchor tenant, which means that a sudden burst of availability, which would push rates down, remains unlikely in the coming months. Timing the market has never been more imperative. We continue to advise our clients to be well out ahead of their lease expirations in order to maximize leverage.

Austin Office Overview

In the fourth quarter of 2017, Austin’s office market reported 319,028 SF of positive net absorption. This sets the absorption for 2017 at 886,556 SF of positive net absorption. A majority of the positive absorption happened in class A buildings with a total of 243,910 SF of positive net absorption. Class B buildings in Austin posted 13,331 SF of positive net absorption and class C properties posted 61,787 SF of positive net absorption.

There is currently 3,844,632 SF of office space under construction and 2,511,634 SF of that is pre-leased. The first quarter of 2018 is expected to see 1,813,951 SF of deliveries and 1,234,568 SF of that is pre-leased. One of the buildings set to deliver in the first quarter of 2018 is 801 Barton Springs Road. The 90,500 SF building is currently 4.8% pre-leased despite being in talks with WeWork about leasing a majority of the building for the later part of 2017. Shoal Creek Walk at 835 West 6th Street was the largest of the three buildings that delivered in the fourth quarter. The 218,180 SF building was 87.5% pre-leased when it delivered in December. As of now, the first quarter in 2018 is expected to see fourteen new buildings deliver.

The citywide average rental rate increased marginally over the quarter from $34.09 per SF in Q3 2017 to $34.92 per SF in Q4 2017. Class A rental rates in Austin’s CBD increased by 3.1% over the quarter to $50.97 per SF from $49.43 per SF in the third quarter of 2017. Overall suburban Class A rental rates increased, from $34.78 per SF to $36.06, over the quarter.

In November, the Austin-Round Rock, TX MSA was ranked #3 on Brooking Institution’s “Share of Jobs that Require High Digital Skills”, which ranks MSAs across country based on the digitalization of the jobs within the MSA. Austin-Round Rock was the highest ranked MSA in Texas and also beat out other major tech cities such as Raleigh, NC (#6), Seattle-Tacoma-Bellevue, WA (#8) and San Francisco-Oakland-Hayward, CA (#9).

ANNUAL ABSORPTION, NEW SUPPLY, AND VACANCY

Vacancy & Availability

Austin’s citywide vacancy rate decreased, falling from 12.1% in the third quarter to 11.5% in the fourth quarter. The CBD class A vacancy rate also decreased from 12.8% in the third quarter to 11.9% in fourth quarter. The suburban class A vacancy rate dropped quarter over quarter from 11.1% to 10.2%.

Overall suburban vacancy decreased quarter over quarter from 12.4% in Q3 to 11.8% in Q4. Submarkets that saw a decrease in vacancy over the quarter include CBD, Cedar Park, Northeast, Northwest, Round Rock, South, Southeast, Southwest and West Central. The South submarket saw the largest decrease in vacancy,falling from 9.9% to 5.3% over the quarter.

Absorption & Demand

Austin’s office market posted 319.028 square feet of positive net absorption in Q4 2017. The three submarkets that experienced the largest positive net absorption gains over the quarter include South, Northwest and Southeast. A majority of the positive net absorption in the fourth quarter occurred in the class B South submarket, totaling 73,934 square feet of positive net absorption. Some of this can be attributed to Mood Media moving into their 56,000 square foot space at 2100 S Interstate 35 S, and Altrua Healthshare moving into their 14,403 square foot space at 4401 Westgate Boulevard. The second highest positive net absorption occurred in class A space in the CBD submarket, with 72,174 square feet absorbed in the fourth quarter, with Facebook moving into their 29,952 square foot space at 300 West 6th Street.

The CBD submarket had the most tenants sign leases for spaces 10,000 square feet or larger in the fourth quarter. There were eleven leases signed in Q4 in the CBD submarket including WeWork taking 65,076 square feet at Chase Tower (221 West 6th Street). The submarket with the most square feet leased in Q4 was Northwest with 233,900 square feet. One of the most notable is Alcatel-Lucent’s 38,044 square foot lease at Campus at Arboretum V (10431 Morado Circle).

Rental Rates

According to CoStar, our data provider, Austin’s citywide average rental rate increased marginally over the quarter from $34.09 per SF to $34.92 per SF. As expected, the highest rates across the Austin office market in the fourth quarter were in CBD class A buildings where rental rates averaged $50.97 per SF. Rental rates were also high in the Central submarket and West Central submarket where class A rental rates reached $43.45 per SF and $42.70 per SF, respectively.

Citywide class B rental rates decreased in Q4 by a penny per square foot to $28.72 per square foot from $28.73 in Q3. Class B rental rates in the CBD decreased by 1.3% over the quarter from $43.15 per square foot to $42.59 per square foot in Q4.

Leasing Activity

Austin’s office leasing activity recorded 1,361,924 SF in Q4 2017. Major transactions this quarter included SailPoint taking 170,000 SF at 11120 Four Points Drive (Four Points Centre, Building 3) and Texas Children’s hospital signing a 51,000 SF lease at MoPac Centre (8611 North MoPac Expressway).

Sales Activity

Austin’s office investment sales activity included eleven transactions. Starwood Capital Group purchased nine office buildings from Brandywine Realty Trust, which totaled 1,153,988 SF. Ascentris, LLC bought two office buildings from Stream Realty Partners. The two buildings totaled 210,610 SF. That portfolio also included 13.42 AC on Ranch Road 620 North.

Office Development Pipeline

3,844,632 square feet of office space was under construction during Q4 2017. The largest of the three buildings to deliver in Q4 was Shoal Creek Walk, 835 W 6th Street at 218,180 square feet. Four buildings were given the green light to begin construction this quarter.

▸ Click here to download the report as a PDF.

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