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The overall vacancy rate in the Austin office market was up 60 basis points quarter-over-quarter, and up 90 basis points year-over-year.
Vacancy rate at 9.8%
The overall vacancy rate in the Austin office market was up 60 basis points quarter-over-quarter, and up 90 basis points year-over-year. The vacancy rate for Class A properties is at 11.2%, and Class B at 18.3%. In the first quarter, overall net absorption totaled 641,000 sq. ft.—Class A represented 264,000 sq. ft. and Class B corresponded to 415,000 sq. ft. Of the 7.4 million sq. ft. currently under construction, about half of that space has been spoken for. Of the 1.3 million sq. feet completed in 2020, 73% of that space is leased. The overall Austin average asking full service rent is at $38.07 per sq. ft.—up from one year ago at $34.88 per sq. ft.—while the Central Business District is averaging $52.53 per sq. ft.
The Federal Reserve Bank of Dallas reported that the Austin economy expanded at a strong pace in February. The unemployment rate held steady, and employment growth was strong. Austin added jobs at a 4.2% annualized rate, or a net 11,730 jobs, in the three months ending in February. Recent industry growth was led by the other services and manufacturing sectors, which added 1,260 net jobs and 1,080 net jobs, respectively. Additional sectors that experienced strong gains were professional and business services at 2,600 jobs, leisure and hospitality at 1,720 jobs and information at 480 jobs. Most of the data included precede the coronavirus (COVID-19) outbreak in the U.S.
Positive net absorption in Q1 2020
During the first quarter, Austin’s office market saw an increase in the number of tenants moving into space compared to the previous quarter. The aggregate effect of the net occupancy increase was just over 640,000 sq. ft. of positive net absorption for the quarter. The amount of total office inventory that is being marketed for lease was up 100 basis points quarter-over-quarter at an availability rate of 14.9%. The difference between this figure and the vacancy rate reflects expected future move-outs. The Central Business District overall vacancy rate is at 17.6%, up 160 basis points from this time last quarter at 16.0%, while the East/Southeast vacancy rate is at 12.1%, down from 13.3% in Q4 2019. Tenants Google, Inc. with 150,000 sq. ft. and Austin Municipal Court with 131,362 sq. ft. assisted in lowering the amount of vacant space in the East/Southeast submarket during the first quarter. Both tenants signed their lease agreements in 2019 and moved in January 2020.
Leasing velocity remained steady at 1.6 million sq. ft. during the first quarter—down from the previous quarter’s 1.9 million sq. ft.— and down from this time last year at 3.8 million sq. ft. As existing companies expand or relocate—examples include Facebook’s 230,000-sq.-ft. lease at Third + Shoal; Indeed’s 600,000 sq. ft. of leases in the Domain and Downtown; and Google’s nearly 1 million sq. ft. of leases in the CBD and East Austin—developers have responded to the strong demand with plenty of new supply in the pipeline.
New supply delivered to the market in Q1 2020 stood at 1.3 million sq. ft., with 27% of that space available for lease. Including the record-setting amounts of construction that has taken place during the last 12 months, overall inventory has increased by 18.1% during the past five years. Going forward, it is probable that most construction date projections will be delayed due to COVID-19.
Investment sales activity
Real Capital Analytics data reports office sales volume for Q1 2020 in the Austin area at $94.9 million, up from this time last year at $88.8 million. The primary capital composition for buyers in 2020 was made up of almost 100% private investors. For sellers, the majority was 61.6% private investors, and 38.4% user/other sponsors. According to the Austin Business Journal, Austin may not be seeing any big building sales anytime soon. 600 Congress and The Whitley have been removed from the market amid the COVID-19 pandemic and the amount of uncertainty in the marketplace.
Average asking rents
The Austin overall full-service average rates are at $38.07 per sq. ft., a slight decrease quarter-over quarter although a 9.1% increase from a year ago at $34.88 per sq. ft. Asking rates for overall Class A space are $42.32 and Class B are $32.23 per sq. ft. Rent growth has varied across Austin’s submarkets. Most submarkets saw asking rates increase or remain the same, while some saw slight decreases. Office tenants may have more leverage with regards to negotiating rental rates, terms, tenant improvements and concessions than they have had in the past. However, since the market was healthily prior to the current situation, the relative impact to occupancies and rents in the future is unclear.
The coronavirus outbreak
Economic analysis firm TXP Inc. recently reported to Austin City Council members that job losses in the Austin area during the coronavirus pandemic could top 250,000. Many unknown factors will determine the area’s future forecast, including the timing of receiving aid from the CARES Act—the federal coronavirus stimulus package, the impact to the city’s sales tax revenue, and the repercussions of decreased demand in the leisure and hospitality job sector, to name a few. Prior to the coronavirus outbreak, Austin had strong economic momentum, and the current statistics largely reflect the environment before the pandemic.
Director of Research
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