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The overall vacancy rate in the Austin office market was up only 10 basis points from 10.1% quarter-over-quarter, although up significantly from 7.9% year-over- year.


EXECUTIVE SUMMARY

Vacancy rate at 10.2%

The overall vacancy rate in the Austin office market was up only 10 basis points from 10.1% quarter-overquarter, although up significantly from 7.9% yearover- year. The vacancy rate for Class A properties is at 12.0%, and Class B at 20.7%. In the second quarter, overall net absorption totaled 142,000 sq. ft.—Class A represented 124,000 sq. ft. and Class B tallied 32,000 sq. ft. Of the 7.5 million sq. ft. currently under construction, about half of that space has been spoken for. Of the 2.0 million sq. ft. completed in 2020, 69.8% of that space is occupied. The overall Austin average asking full-service rent is at $38.94 per sq. ft.—up from Q2 2019 at $35.69 per sq. ft.— while Class A space the Central Business District (CBD) is averaging $52.24 per sq. ft.

 

Economic Indicators

The Federal Reserve Bank of Dallas reported that the Austin economy continued to contract in May due to the impact of COVID-19. The Austin Business-Cycle Index—a broad measure of economic activity in the metro—fell an annualized 20.3% in May, suggesting a weak economic performance. Austin’s unemployment rate dropped to a still elevated 10.4% in May, while the unemployment rate in Texas and the U.S. ticked down to 13.0% and 13.3%, respectively. Austin jobs dropped by 114,320 net jobs in the three months ending in May. All sectors except financial activities experienced payroll losses during this period. Leisure and hospitality plunged 87.0%, shedding the most jobs (-56,000), while Health and private education services declined 47.0% (-19,300). The financial activities industry saw a 30.7% gain, adding 4,750 jobs.


MARKET OVERVIEW

Positive net absorption

During the second quarter, Austin’s office market saw a decrease in the number of tenants moving into space compared to Q1 2020, and a year ago in Q2 2019. The aggregate effect of the net occupancy increase was just over 141,000 sq. ft. of positive net absorption for Q2 2020. The amount of total office inventory that is being marketed for lease was up 190 basis points quarter-over-quarter at an availability rate of 16.8%. The difference between this figure and the vacancy rate reflects expected future move-outs. The CBD overall vacancy rate is at 7.1%, although the availability rate is at 21.3%. This wide margin holds truer in Class A space in the CBD at 9.0% vacancy compared to 27.0% availability.

 

Leasing activity slowed

Leasing velocity decelerated at 626,000 sq. ft. during the second quarter—down from the previous quarter’s 1.8 million sq. ft.— and down from this time last year at 3.1 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.

 

Office construction

New supply delivered to the market in Q2 2020 stood at 371,000 sq. ft. The record-setting amounts of new construction that has taken place during the last 24 months has increased the overall inventory by 6.6% nearing 93 million sq. ft. Class A space has grown by 12.0% reaching a total inventory of 47 millions sq. ft. Going forward, it is likely that many construction date projections could be delayed due to COVID-19.

 

Investment sales activity

Real Capital Analytics data reports office sales volume for Q2 2020 in the Austin area at $21.8 million, down sharply from this time last year at $792.8 million. The primary capital composition for buyers in 2020 was made up of 48.8% private investors, and 37.4% crossborder (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). For sellers, the majority was 81.7% private investors, and 10.3% user/other investors. CoStar reported that Texas, the nation’s most populous nondisclosure state, had some record-breaking office tower sales by price per square foot in 2019, including the purchase of Third + Shoal in Austin for $820 per sq. ft. Meanwhile, property owners and tenants at some trophy properties throughout Texas are getting record-setting property tax bills as appraised values climb and put a heavier financial burden on tenants with triple net leases amid the pandemic.

 

Average asking rents

The Austin overall full-service average rates are at $38.94 per sq. ft., a 9.1% increase year-over-year from $35.69 per sq. ft. Asking rates for Class A space are averaging $43.10 and Class B are averaging $33.38 per sq. ft. Rent growth has varied across Austin’s submarkets. Many submarkets saw asking rates increase or remain the same, while some saw 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 uncertain.

 

Pandemic may change Austin in the long-term

The Austin Business Journal recently reported that a panel of local experts discussed how the pandemic may change Austin’s long-term outlook. In summary, Austin will face many of the same challenges it has continued to contend with on an ongoing basis, such as traffic congestion, the need for more affordable housing, and a tight labor market for tech talent. No one knows what Austin will look like in the future, but real estate investors and other businesses will be thinking about where to invest, and how those decisions will affect infrastructure moving forward.


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

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