Quarterly Market Report

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EXECUTIVE SUMMARY

 

Office market settling down

The Austin office market continued to level out during the second quarter. The average vacancy rate rose to 10.2% in Q2 2017, an increase of 30 basis points quarter-over-quarter—though a 30-basis-point decline year-over-year. The increase is driven in part by new construction being delivered with partially occupied space. Despite the additional space and slight increase in the vacancy rate, full-service asking rents increased $0.57 per sq. ft. q-o-q to close the second quarter at $33.85 per sq. ft. This also marks a $1.35 per sq. ft. increase from one year ago. Net absorption increased to 582,579 sq. ft. as of the quarter’s end, up from 12,833 sq. ft. at the end of the first quarter. Additionally, Austin’s leasing activity was at about 1.0 million sq. ft., unchanged from the previous quarter, although down significantly from a year ago at 3.0 million sq. ft. The amount of space under construction decreased to 414,824 sq. ft. from 1.5 million sq. ft. at the end of the first quarter of 2017, though several upcoming projects are expected to commence soon.

Austin’s economy cooling down after overheating

Economic indicators in Austin have been relatively moderate in recent months. Even with a May jobs decline the area jobless rate remains at 3.3%, placing Austin among the 10 metro areas nationally with the lowest unemployment. Overall, Austin added 28,300 jobs between May 2016 and May 2017, a growth rate of 2.8%. Although there has been a recent slowdown in job growth, a steady low unemployment rate implies a strong labor market. The goods-producing industries, primarily electronic parts and machinery production, have seen an increase in the amount of jobs added. The flip side of that coin has been a decline in administrative services such as executive assistants and facilities support services. Education and health care services jobs led Austin’s job growth over the past 12 months, according to a report from the Austin Chamber of Commerce regarding employment trends.

Research-Quarterly-Austin-Office-Q2-2017 Graph 1

Research-Quarterly-Austin-Office-Q2-2017 Graph 2


Broker’s Perspective

Even with a slight uptick in vacancy, the Austin office market remains a landlord’s market, underscored by 25 straight months of positive absorption. Landlord concessions remain low and negotiating rent downward is challenging. Although the increases in absorption rates aren’t jaw-dropping, they are strong enough as development continues to flourish. As Austin has remained a lower-cost alternative for new companies to set up businesses compared to other, similar-tiered markets along the east and west coasts, employment sector job growth has continued to thrive.

With Austin’s favorable business and casual culture, pro-business incentives, workforce talent, and proximity to natural and geographical amenities, the city will continue to not only attract new entries, but grow its existing base.

I can remember standing in front of downtown’s Lavaca Plaza in 2003 being interviewed by a local news station shortly after the tech-market crash. I spent hours rehearsing what I was going to say, worried that I didn’t bring visuals in illustrating the results of a depressed market. It didn’t take long for me to point in different directions to all the banners hanging from buildings and garages advertising free rent, without a crane in sight. Having been in the industry during three cycles, you can always tell when the local real estate market is thriving by counting all the moving cranes. They have almost become permanent fixtures in the landscape as optimism and speculation remain extremely high.

David Stojanik
Senior Vice President | Austin
NAI Partners


MARKET OVERVIEW

 

Increased supply with steady demand nudging vacancy up

As 870,590 sq. ft. delivered to the Austin office market in Q2 2017, about 258,000 sq. ft. of that space is not yet occupied by tenants. Net demand has slowed from the pace it was at in 2015, causing a slight uptick in vacancy. All told, the Austin office market is still strong. A testament to the market’s strength is the recent announcement of the upcoming start of Domain 11, a 16-story, 324,000-sq.-ft. office building located within The Domain submarket. The project is 98% pre-leased by HomeAway, the Austin-based leader in vacation rentals and part of the Expedia, Inc. family. Construction is scheduled to begin in July, with a late-2018 targeted delivery date. In addition to breaking ground on Domain 11, pre-development work at Domain 12, a planned 306,000-sq.-ft. office tower adjacent to Domain 11, is active with prospective tenant interest. Also, Gateway to Falconhead, an 80,000-sq.-ft. mixed-use endeavor located on Ranch to Market Road 620 in the Austin metro of Bee Cave has recently started construction on the retail phase of the six-building project, which will deliver office, medical and retail space upon completion.

Research-Quarterly-Austin-Office-Q2-2017 Graph 3

Net absorption positive for 25th consecutive quarter

Austin ended the second quarter of 2017 with positive 582,579 sq. ft. of net absorption. Direct space represented positive 593,464 sq. ft. of that total, and sublease space was responsible for negative 10,885 sq. ft. This marks the 25th consecutive quarter of overall positive absorption. The major move-ins contributing to net absorption in Q2 2017 include 136,584 sq. ft. of space occupied by Amazon and 102,438 sq. ft. taken by Facebook, both at 11601 Alterra Parkway; and 48,000 sq. ft. of space absorbed by an undisclosed tenant at 12301 Research Blvd. The major move-outs during the first half of 2017 involve PayPal vacating 128,302 sq. ft. of space at 7700 Parmer – Building D; 55,500 sq. ft. left by Kestra Financial at Cielo Center; and 40,279 sq. ft. emptied at Research Park Place-Building 7 by Cadence Design Systems.

Research-Quarterly-Austin-Office-Q2-2017 Graph 4

Construction projects underway have plenty of available space

There is currently about 400,000 sq. ft. of non-owner-occupied space under construction in the Austin office market, with much of the space available for lease. These projects include the 6th and Chicon St. mixed-use project at 1801 E. 6th St., a 5-story, 134,367-sq.-ft. Class A office building in the East submarket scheduled to deliver in January of 2019; 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 89.8%, down slightly from 90.1% at the end of Q1 2017, and 90.2% at the end of 2016, which was the highest level recorded in 17 years.

Research-Quarterly-Austin-Office-Q2-2017 Graph 5

Transaction spotlight

Travis County officials reported that the high-valued block at Guadalupe and Third streets has been selected by Lincoln Property Co. and Phoenix Property Co. for development, sealing the deal with a 99-year ground lease for the land. Travis County had wanted to build a new civil courthouse at the downtown location, which is now planned for a mixed-use center with office, residential, and retail space. The site is one of the largest undeveloped lots in the CBD Capitol View Corridors that doesn’t have restricted building height requirements. The land is said to be worth approximately $430 million in lease payments to be made to Travis County, which will retain ownership of the land.

Research-Quarterly-Austin-Office-Q2-2017 Graph 6

Leasing activity remains steady

Second quarter leasing activity has remained relatively unchanged from the first quarter at about 1.0 million sq. ft. Class A space fulfilled 545,000 sq. ft., while Class B space realized about 438,000 sq. ft. Year-over-year leasing activity is down notably from 3.0 million sq. ft. Significant lease agreements signed this quarter include 65,206 sq. ft. at 500 W. 2nd St. in the CBD; 56,000 sq. ft. of sublease space at 7300 Ranch Road 2222; and a 42,369 sq. ft. deal inked at 5707 Southwest Parkway. The two submarkets with the most leasing activity this quarter were the Southwest submarket at 317,000 sq. ft., or 32%; and the CBD at 236,000 sq. ft., or 23%.

Research-Quarterly-Austin-Office-Q2-2017 Graph 7

Average full-service asking rates rise

The market saw overall full-service average rates rise $0.57 per sq. ft. quarter-over-quarter to close at $33.85 per sq. ft. at the end of Q2 2017. Class A direct rates dropped at $37.21 per sq. ft. quarter-over-quarter, compared to Q1 2017 at $37.71 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 $38.90. Class B direct rates rose at $29.14 per sq. ft. quarter-over-quarter, compared to Q1 2017 at $28.38 per sq. ft., a $0.76 increase. While leasing activity remained steady quarter-over-quarter, the year-over-year decline was at 66.1%. Tenants took advantage of Class B sublease space at reduced asking rates of around $25.00 during the second quarter of 2017 across the Austin market.

Research-Quarterly-Austin-Office-Q2-2017 Graph 8


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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Resources

I-35 Corridor Activity Map

The New #CREcosystem Refresh - featuring contributions from Larry Koestler, VP of Marketing