The Texas capital has already drawn 38 corporate expansions or relocations in half a year.

EXECUTIVE SUMMARY

AUSTIN OFFICE SPACE AVAILABILITY REMAINS HIGH
Overall space availability, which includes current, sublease, and future vacancy, is at 18.6%. The East/Southeast submarket ended Q1 2022 with an availability rate of 22.8%, followed by the Northwest at a 21.7% availability rate, and in third place, the South submarket at 21.1%. The difference between this figure and the vacancy rate reflects expected future move-outs. As Covid-19 fears decrease, many large technology companies are preparing to welcome employees back to the office — or have already done so. The Austin office market is showing signs of demand improvement, as leasing volume increased in the first quarter by 44% to 2.1 million sq. ft. compared to this time last year at 1.5 million sq. ft. However, Q1 2022 marks the 11th consecutive quarter that delivered supply (636,000 sq. ft.) outpaced demand (represented by net absorption at 577,000 sq. ft.). With current projects under construction at 7.1 million sq. ft., demand will have to increase for the high availability rate to have an opportunity to decrease gradually.

AUSTIN’S ECONOMY CONTINUED TO GROW IN MAY, THOUGH AT A SLOWER PACE
Austin’s unemployment rate dropped to a revised 2.9% in May—a new low since the beginning of the pandemic. This compared with the state’s jobless rate of 4.2% and the nation’s rate of 3.6%. Austin employment increased at a 4.5% annualized pace, or by 13,600 net jobs, for the three months ending in May. Growth was led by manufacturing (up 10.6%, or 1,700 jobs), followed by leisure and hospitality (up 8.4%, or 2,600 jobs), and professional and business services (up 7.3%, or 4,500 jobs). Construction and mining remained weak, seeing a net decline in employment (down 8.0%, or 1,500 jobs). As of May, all major sectors except leisure and hospitality, government, and other services were above pre-pandemic levels.

AUSTIN OFFICE MARKET OVERVIEW

POSITIVE NET ABSORPTION RECORDED FOR Q2 2022
Net absorption closed the second quarter at a positive 422,000 sq. ft. This was a significant turnaround, up 100% compared to this time last year at 212,000 sq. ft. The vacancy rate is 14.3%, up from 14.1% this time last year and unchanged quarter over quarter. The overall vacancy rate in the CBD is 11.5%, and the availability rate is 17.1%. A comparable margin tracks for Class A space in the overall market at 14.4% vacancy, compared to 20.1% availability.

MORE RELOCATIONS TO AUSTIN
Quarterly leasing velocity comprised of both new leases and renewals tapered to 2.1 million sq. ft. during the first quarter—down from 3.1 million sq. ft. quarter-over-quarter. One recent significant transaction includes Atmosphere, a streaming television startup, signing a lease for 114,000 sq. ft. in the Bouldin Creek office building, almost six times the size of its current office on Congress Avenue. The company will occupy space on the first, third and fourth floors. Another transaction involves TikTok signing a lease for 125,000 sq. ft. at 300 Colorado Street, joining Meta and Google’s downtown presence. In addition, due in part to the new construction added to the market, the average asking full-service rent in the Austin office market metro is at $40.65 per sq. ft., up significantly by $2.90 or 7.7% from this time last year.

CONSTRUCTION ACTIVITY REMAINS HIGH
Construction levels in Austin are among the highest in the nation. 11.3 million sq. ft. is underway (54% preleased)—representing 11.1% of inventory—on top of the 1.1 million sq. ft. (57% preleased) delivered in the first half of 2022. There is 6.9 million sq. ft. of proposed projects in 2022 that have been announced, although they have yet to break ground. The amount of construction underway and in the pipeline is easily comprehendible, as the Austin office market remains one of the most dynamic in the country. Cielo Property Group is breaking ground on the Perennial, a 46-story, 750,000-sq.-ft. office tower on 0.81 acres along Fourth St. between Brazos St. and San Jacinto Blvd. – immediately east of Frost Bank Tower. Construction is planned to begin in the summer of 2022. In addition, 37,000 sq. ft. has been dedicated to retail, restaurants, and entertainment settings. Construction is scheduled for completion in late 2025.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly sales volume as of June 30, 2022 in the Austin metro area at $382 million, down from this time last year at $1.4 billion when Kilroy Realty announced it had closed the deal on the Indeed Tower for $580 million. One of the most notable office transactions in Austin in Q2 2022 was Arc Capital Partners finalizing a deal for Westview, a 100,166-sq.-ft., six-story building located two blocks from the Texas State Capitol between Guadalupe and Lavaca streets at 316 W. 12th St. The sale price was not disclosed, though Arc secured $39 million through Grant Street Funding for the purchase, according to public record. The primary capital composition for buyers so far in 2022 was made up of 64% private investors and 33% institutional. For sellers, the majority were 81% private investors, 9% REIT/listed, and 8% institutional.

RELOCATIONS AND EXPANSIONS
The parent company of messaging app Snapchat, Snap Inc., signed a lease for two floors at 405 Colorado St. downtown for about 38,000 sq. ft. This will be its first office location in Texas, becoming just the latest technology operation to commit to office space in the Texas capital. Snapchat’s Austin lease is also the latest from a major technology or social media company committing to or expanding its office space in the market. CoStar recently reported that digital streaming device company Roku expanded its office lease in Northwest Austin at Stonebridge Plaza I at 9606 N. MoPac Expressway for a total of nearly 90,000 sq. ft.

AVERAGE ASKING RENTS
Austin’s overall full-service average rates are at $41.54 per sq. ft., up 4.5% from this time last year at $39.74 and 2.5% quarter over quarter. Overall asking rates for Class A space is averaging $47.07, and Class B is averaging $33.35 per sq. ft. The asking rate is what is officially quoted for any given building and will differ from the ‘bottom line’ actual rental after negotiations, known as the effective rate. Over the long term, the outlook for rent growth in Austin should be optimistic. In marginal terms, rent has surpassed most major markets across the U.S. to become the fourth most expensive in the country, according to CoStar. While the near-term outlook may contain more downside risk, the performance over the past decade should leave little doubt that the market can sustain above-average rent growth over the long term.

Leta Wauson
Director of Research
[email protected]
tel 713 275 9618