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Lucky seven for Austin (as in consecutive years of positive absorption in the office market)
Vacancy up slightly as development soars
Austin’s overall vacancy rate grew to 8.1% in Q1 2018, an increase of 20 basis points quarter-over-quarter, although down 30 basis points year-over-year. Net absorption registered 648,577 sq. ft. as of the quarter’s end, outpacing the five-year quarterly average of 516,365 sq. ft. New construction delivered during the first quarter stood at 954,758 sq. ft., as the development pipeline has soared, averaging 4.2 million sq. ft. over the past five quarters. Full-service average asking rents dropped slightly by $0.06 per sq. ft. quarter-over-quarter to $34.86 per sq. ft., after a record-breaking close to 2017 at $34.94.
Austin economic indicators
The Austin Business-Cycle Index grew at its fastest pace since late 2015, boosted by strong employment growth over the first two months of the year. The unemployment rate increased slightly to 3.0%, due to a surge in the local labor force, but remained near a two-decade low. Census data for 2017 reported population growth in Austin slowed slightly to 2.7% in 2017 from 3.0% the prior year, and below the long-term population growth rate of 3.5%. However, this was nearly double the 1.4% pace for the state, and in a further comparison, the U.S. has averaged a 1.0% population increase per year since the early 1980s.
Austin No. 1 on ‘best places to live’ list
Austin was named the best place to live in the United States for the second year in a row, by U.S. News and World Report. That distinction tends to be an economic boon, attracting new residents to the workforce as well employers looking for a new location to live, work, or expand their business.
Seven years of positive net absorption
The Austin office market ended the first quarter of 2018 with 650,000 sq. ft. of net absorption, all of which was represented by positive direct space except 80,000 sq. ft. of negative sublease space. The run of consecutive overall positive net absorption continues, marking seven years, back to Q2 2011. The major move-ins contributing to net absorption in Q1 2018 include 93,000 sq. ft. taken at Springdale General, and Texas Children’s Hospital moving into 51,198 sq. ft. in MoPac Centre.
Vacancy continues to tighten
Vacant space in the Austin market has continued to tighten for the better part of a decade. The overall vacancy rate grew to 8.1% in Q1 2018, an increase of 20 basis points quarter-over-quarter, though a decrease of 30 basis points year-over-year. Shrinking direct vacant space has also remained consistent, with rates at or below 7.0% for the last six quarters. Supply and demand have been generally evenly matched for some time now. Fundamentally, growing property demand is supported by sustaining levels of new supply, while vacancy rates are gradually squeezed.
Construction boom carries on into 2018
As of Q1 2018 there is 4.0 million sq. ft. of space under construction in the Austin office market, including buildings that are primarily owner-occupied, with 40% of that space available. The largest projects underway were Third + Shoal, a 347,637-sq.-ft. facility that is 90% pre-leased, located at 208 Nueces St. in the CBD, with a scheduled delivery date of October 2018, and Domain 11, a 315,862-sq.-ft. office tower that is 100% pre-leased, located at 3110 Experanze Xing in the Domain, with a scheduled completion date of December 2018. Currently, the overall occupancy rate is at 91.9%, averaging above 90% for the past 15 consecutive quarters, back to Q3 2014. At the end of 2017, reported occupancy was at 92.1%, the highest level recorded by NAI Partners since 2000.
Almost 1 million sq. ft. of space was delivered to the Austin market during Q1 2018. Over half of that space was Oracle moving into its new five-story, 550,750-sq.-ft. building in Southeast Austin, at 2300 Cloud Way.
Leasing activity decelerates
Leasing activity slowed during the first quarter with a total of 1.9 million sq. ft. taken off the Austin market—all of which was fulfilled by direct space except 51,000 sq. ft. of sublease space—down from 3.0 million sq. ft. in Q4 2017. On a percentage basis, transactions quarter-over-quarter and year over-year dropped by 64%. The largest lease signings occurring in 2018 included the 53,000-sq.-ft. lease signed by Bank of America at Third + Shoal in the CBD submarket; the 27,775-sq.-ft. deal inked by DRP Construction at The Foundry in the East submarket; and the 24,753-sq.-ft. lease agreement by CS Identity Corp. at One Barton Skyway in the Southwest submarket.
Difficulty locating assets to acquire
Real Capital Analytics data reports year-to-date office sales volume in the Austin area at $262 million, resulting in a year-over-year change of -51.4% as investors continue to have a difficult time locating assets to acquire in Austin. The buyer composition is made up of 71% private and 29% institutional. A positive sign for the Austin office market in January was the acquisition by Endeavor RE Group of Domain Point I and II, a two-building, 240,000-sq.-ft. office property at 11902 Burnet Rd. and 11903 MoPac Expy. in the North/Domain submarket, from Crow Holdings.
If Amazon did pick Austin, where would HQ2 go?
When the ecommerce giant issued its shortlist of 20 metro areas for the companies HQ2, Austin made the cut. Now the question is, where would it go? Amazon has said it needs up to 500,000 sq. ft. of space by 2019, and ultimately requiring as much as 8 million sq. ft. Local experts have given their list of predictions that includes, but is not limited to: the 66-acre Broadmoor campus, which is next to the Domain; Motorola’s former 100-plus acre campus in East Austin; the 19-acre American-Statesman property along Lady Bird Lake, just south of downtown Austin; a proposed 79-acre development called Project Catalyst planned for Southeast Austin; and family-owned +/-6,000-acre Robinson Ranch spanning Travis and Williamson counties. Many in the real estate industry believe Austin is a viable candidate and meets the most important criteria to be selected. It is reported that Amazon expects to make a final decision by year-end.
Tight market driving rents up
The tight office market has continued to keep Austin metro asking rents high, with an overall average gross rate of $34.86 per sq. ft. to end Q1 2018. Looking at submarket rents, Class A space in the CBD registered at $50.58 per sq. ft., while Class A in the Central Austin submarket checked in at $41.86 per sq. ft. At the other end of the spectrum, Class B space in the Northeast submarket ended Q1 2018 at $21.46 per sq. ft.
Director of Research
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