Office market continues on a steady path
Austin’s overall vacancy rate dropped to 9.0% in Q3 2017, a decrease of 10 basis points quarter-over-quarter and 30 basis points year-over-year. Net absorption remained positive at 259,418 sq. ft. as of the quarter’s end, adding up to 1.63 million sq. ft. of positive net absorption year-to-date. The decrease is driven in part by only 205,864 sq. ft. of new construction being delivered during the third quarter. Full-service asking rents dropped slightly by $0.06 per sq. ft. quarter-over-quarter to close Q3 at $34.35; however, rents were still up $0.48 per sq. ft. year-over-year. Additionally, Austin’s leasing activity increased to 1.6 million sq. ft., up from the previous quarter’s 1.5 million sq. ft., although down from 2.3 million sq. ft. a year ago. The amount of space under construction ended the third quarter at 3.66 million sq. ft. with over 900,000 sq. ft. scheduled to deliver this year, including buildings that are mainly occupied by the owner.
Austin unemployment remains significantly below the state and national rates
The Austin economy grew at a modest pace in August. The seasonally adjusted area unemployment rate for August was 3.1%, up from 3.0% in July, and significantly below the state and national rates of 4.0% and 4.2%, respectively. Jobs in Austin were flat over the three months through August with declines clustered in professional and business services—specifically in scientific and technical services. Construction led overall job growth, while manufacturing continued to accelerate despite weakness in computer and electronics production employment. Austin inflation-adjusted gross domestic product (GDP) grew 4.9% in 2016, slightly above the average rate of 4.8% since 2001, ranking as the second-highest rate of GDP growth among all the large metro areas in the country.
Equal supply and demand bumping vacancy down
Austin ended the third quarter of 2017 with positive 259,418 sq. ft. of net absorption, all of which was represented by direct space except 3,000 sq. ft. of sublease space, marking the 26th consecutive quarter of overall positive absorption. During the same period, 205,864 sq. ft. delivered to the Austin office market, dropping vacancy down to 9.0% from 9.1% last quarter. When supply and demand are evenly balanced, the market is said to be at equilibrium. The Austin office market is demonstrating steadiness, as the amount of space being supplied is the same as the amount of space being demanded.
The major move-ins contributing to net absorption in Q3 2017 include 118,000 sq. ft. of space occupied by Newgistics at 7171 Southwest Parkway in The Summit of Lantana plus an additional 59,000 sq. ft. leased by an undisclosed tenant at the same location; and 87,000 sq. ft. taken by Yeti Coolers at 7601 Southwest Parkway in Lantana Ridge; all of which are located in the Southwest submarket. Overall net absorption was represented by 151,371 sq. ft. of Class A space and 249,771 of Class B.
Construction boom continues
There is currently 3.66 million sq. ft. of space under construction in the Austin office market, with 60% of that space pre-leased. Furthermore, the quarterly amount of square feet under construction has averaged 3.16 million sq. ft. since Q3 2014. The largest projects underway at the end of third quarter 2017 were the 100% owner-occupied Oracle Campus, a 550,750-sq.-ft. building at 2300 Cloud Way at The Waterfront in the Southeast submarket with an expected completion date of January 2018, and Third + Shoal, a 347,072-sq.-ft. facility that is 67% pre-leased, located at 208 Nueces St. in the CBD, with a scheduled delivery date of third quarter 2018. Currently, overall occupancy in the Austin office market is at 91.0%, up slightly from 90.9% at the end of Q2 2017, and 90.7% at this time last year. At the end of Q1 2017, reported occupancy was 91.2%, which was the highest level recorded by NAI Partners in 17 years.
Tech tenants drawn to Downtown Austin
Leasing activity increased during the third quarter with a total of 1.61 million sq. ft. taken off the Austin market. Direct space fulfilled 1.44 million sq. ft., while sublease space realized about 161,000 sq. ft. These amounts are down from 2.30 million sq. ft. at this time last year. On a percentage basis, transactions grew quarter-over-quarter by 7%, while the year-over-year drop was at 30%. Austin’s appeal as a major tech talent hub continues to be a significant draw, as Facebook inked a deal leasing 231,507 sq. ft. at Third+Shoal – 208 Nueces Street in downtown Austin. Facebook will occupy ten floors within the 29-story, 345,000 sq. ft. tower in the Austin CBD. The office building is currently under construction and scheduled for completion in the third quarter of 2018. The Austin American-Statesman reported that Facebook has an option to purchase the building, which is being developed by Austin-based Cielo Property Group, TIER REIT and Invesco. Also, with the deadline nearing for cities to submit proposals to Amazon to lock in the company’s $5 billion second HQs, Amazon’s tech presence in Austin could help the city land the deal. The enormous headquarters is planned to be home to 50,000 employees with 8 million sq. ft. of office space upon completion. Amazon has made it clear that HQ2 will be located in a city with a talented workforce and world-class universities, a combination that was also recently cited by Apple Inc. CEO Tim Cook who noted that Apple continues to grow in Austin due in large part to the University of Texas’ and other area universities’ extraordinary education systems. Austin is Apple’s second-largest location outside its headquarters in Cupertino, California. It is anticipated that Amazon will announce the victor in 2018.
Real Capital Analytics data reports year-to-date office sales volume in the Austin area at $1.259 billion, resulting in a year-over-year change of -8% as investors are having a harder time locating assets to acquire in Austin. The buyer composition is made up of 57% institutional, 18% private, 15% public listed/REITs, and 9% cross-border. A positive sign for the Austin office market during the summer was the acquisition by Intercontinental RE of 5th+Colorado, an 18-story 179,351-sq.-ft. office tower at 201 W. 5th St. in downtown Austin, from Lincoln Property Co. and Goldman Sachs Group.
Class B direct full-service asking rates at an all-time high
The market saw full-service average rates drop $0.06 per sq. ft. quarter-over-quarter to close at $34.35 per sq. ft. at the end of Q3 2017. Class A direct rates were down at $38.22 per sq. ft. q-o-q, compared to Q2 2017 at $38.25 per sq. ft. A larger decline took place from a year ago when Class A direct average rates were at an all-time high of $38.60. Class B direct rates rose at $29.03 per sq. ft. quarter-over-quarter, compared to Q2 2017 at $28.87 per sq. ft., an $0.89 increase, reaching an all-time-high for Q3 2017.
Director of Research
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