Austin’s overall vacancy rate rose to 9.7% in Q1 2017, an increase of 20 basis points quarter-over-quarter. Net absorption stood at negative 51,821 sq. ft. as of the quarter’s end—a modest about-face following the more than 1.2 million sq. ft. of positive absorption for full-year 2016. In addition, Austin citywide leasing activity is at about 857,000 sq. ft., down from the previous quarter’s 2.2 million sq. ft. However, despite some market slowdown, overall vacancy decreased 40 basis points year-over-year. As for the amount of space delivered to the market during the first quarter of 2017, the construction pipeline remained steady at just north of 1.0 million sq. ft.
Austin added 27,000 net new jobs, at a growth rate of 2.7% in the 12 months ending in February, making Austin the 14th-fastest-growing major metro. The Transportation, Warehousing and Utilities sector increased jobs by 5.8% (1,000 jobs), while Leisure and Hospitality increased by 4.1% (4,800 jobs). Austin’s non-seasonally adjusted unemployment rate is 3.7%, up from 3.5% in January, and 3.1% one year ago. Commercial properties in Central Texas will be affected by the recent rise in property taxes, including a 23% escalation in Travis County, directly increasing building operating expenses and rental rates.
During the first three months of 2017, we have seen a change in the activity levels of the Austin office market—an encouraging sign following a slight cooling in the second half of last year (manifested in slower activity and lengthier decision-making windows). Despite a mild slowndown, the market was still strong, just not at the level seen at the end of 2015 and beginning of 2016.
We are still seeing pockets within specific submarkets with vacancy rates higher than the citywide rate, which is less than 10%. In some of these segments, vacancies range as high as 20%, though these rates have not expanded beyond small areas, and do not seem to reflect a downward trend.
One of Austin’s more significant storylines to keep an eye on is whether the cooling will affect proposed development and future construction. In December, our analysis showed that demand continued to stay level or even outpace deliveries for the near future, but with the number of hoops a developer has to jump through to get a project off the ground, it will be interesting to track how the new market dynamics affect deliveries in 24 months.
We are now eight years into the current growth cycle and continue to see strong numbers. How long it will last? Commercial real estate market cycles are typically seven years long, and by now we would expect to see this expansion tail off, but based on the demand, deliveries and analysis, we will most likely see Austin continue to defy expecations with an out-of-cyle market into 2019.
Major projects under construction and delivering at the end of this year or in the first part of 2018 include 500 W 2nd in Downtown and the Domain. In the Southwest submarket, a major planned development called the Bee Cave Backyard is projected to break ground in April. We also continue to see a transformation of up-and-coming areas such as the section of Congress Avenue that is south of Ben White Blvd. Over the next few years, you will see many warehouses, auto repair shops and other similar-type uses replaced by creative offices. We also see this trend in East Austin, which has now become the newest “hip” area.
Growth is still being partially driven by out-of-state regional headquarters and specific lines of business expansions and/or relocations. Pflugerville recently added two new companies that will now have regional HQs and add 100 jobs. Additionally, Merck has selected Austin as a potential IT hub, and is working on an incentive agreement with the city. With or without a corporate incentive package, I would expect the company to move forward due to the composition of our workforce and create up to 600 new jobs. The Austin-Round Rock metro has the second lowest unemployment rate in Texas at 3.7% (up from 3.5%) and we had a net gain of 159 people added to the metro area per day during 2016. That number is more than projections and ranks Austin as the fastest-growing metro for its size and the ninth-fastest overall growth rate among U.S. metros.
The combination of high demand vs. new office product coming online, continued business expansion and out-of-state relocations should keep Austin’s overall office market vacancies low and rental rates increasing as we move into the eighth year of a rising market.
Managing Vice President | Austin
Austin ended the first quarter of 2017 with negative 51,821 sq. ft. of net absorption. Direct space represented positive 147,917 sq. ft. of that total, and sublease space was responsible for negative 199,738 sq. ft.
Largely contributing to the negative absorption of sublease space was 72,895 sq. ft. at 10431 Morado Circle, and 59,406 sq. ft. at 7171 Southwest Parkway, Building 3, both becoming vacant in Q1 in the northwest submarket.
Availability and Vacancy
The overall availability rate, which measures the total amount of space being marketed for lease, rose to 13.8%, an increase of 20 basis points from the previous quarter’s 13.6%. Available sublease space rose from close to 1.3 million sq. ft. in Q4 2016 to 1.4 million sq. ft. as of the first quarter of 2017. There has been a large amount of sublease space bombarding the Austin market recently. While a lot of the increase in sublease space is due to traditional reasons—i.e., tenants no longer needing that type of space—a rise in demand for co-working spaces, along with a shifting age paradigm in the workforce increasingly interested in more modern workplaces, are also notable factors. Traditional sublease space may see more time on the market as it will have to continue to compete with a heightened desire by tenants for more unique space requirements.
The five largest blocks of contiguous sublease space currently available are 72,895 sq. ft. in Campus at the Arboretum V in the Northwest submarket; 59,406 sq. ft. in The Summit at Lantana; and 36,421 sq. ft. in Lantana Corporate Center (each in the Southwest submarket).
In early 2015, Google, Inc. inked a deal to occupy more than 200,000 sq. ft. at the new 500 West 2nd Street building that is currently under construction. Google will be the largest tenant of the 500,512-sq.-ft. building, which is nearing completion downtown as part of the redevelopment of the site that once housed the Thomas C. Green Water Treatment Plant. It is said that Google is sparing no expense as it consolidates some of its Austin offices into its new space, with about $9.5 million allocated to just 66,000 sq. ft. on the 23rd and 24th floors. Construction is expected to be finished by January 2018.
The market saw overall full-service average asking rates, which include real estate taxes, insurance, maintenance and any fees typically included in a lease agreement, fall $0.14 per sq. ft. quarter-over-quarter to finish at $33.35 per sq. ft. at the end of Q1 2017. Sublease rates increased to $30.47 per sq. ft. quarter-over-quarter, although they were down $0.33 from a year ago.
Construction & Deliveries
There is currently about 1.1 million sq. ft. under construction in the Austin office market, with about one-third of that space available for lease. Non-owner-occupied buildings underway with more than 50,000 sq. ft. of available space include 500 W 2nd Street, a 29-story, 500,512-sq.-ft. Class A office building in the CBD scheduled to deliver near the end of 2017; 801 Barton Springs Road, a nine-story, 90,500-sq.-ft. Class A office building in the south submarket planned for completion in December 2017; and The Overlook at Barton Creek, a four-story office building, with more than 60,000 sq. ft. of space located equidistant to Highway 71, RR 620, and Loop 360 along Bee Caves Road, scheduled to deliver in the summer of 2017. Currently, overall occupancy in the Austin office market is at 90.3%, down slightly from 90.5% at the end of Q4 2016, the highest level recorded in 17 years.
As leasing activity has slowed, a total of 857,802 sq. ft. was leased in the overall Austin market during Q1 2017—down quarter-over-quarter from 2.2 million sq. ft., and year-over-year from 2.1 million sq. ft. The average sq. ft. leased per quarter over the last ten years is approximately 1.7 million sq. ft. Class A space fulfilled 457,000 sq. ft., while Class B space realized about 385,700 sq. ft. The Southwest submarket had the highest amount of activity with 202,479 sq. ft. of space leased, followed closely by the Northwest submarket with 197,438 sq. ft., both with the majority in Class A space. The Northeast came in third with 184,741 sq. ft.—all but 2,700 sq. ft. of that total was Class B space.