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The overall vacancy rate in the Austin office market in the third quarter of 11.6% represented an increase from Q2’s 10.2%, and a substantive 240-basis-point jump year-over-year from 9.2%.


EXECUTIVE SUMMARY

Vacancy rate at 11.6%

The overall vacancy rate in the Austin office market in the third quarter of 11.6% represented an increase from Q2’s 10.2%, and a substantive 240-basis-point jump year-over-year from 9.2%. The vacancy rate for Class A properties is at 13.4%, and Class B at 10.6%. In the third quarter, overall net absorption totaled negative 675,000 sq. ft.—Class A represented negative 149,000 sq. ft. and Class B tallied negative 502,000 sq. ft. Of the 7.2 million sq. ft. currently under construction, about 44% of that space has been spoken for. Of the 2.3 million sq. ft. completed in 2020, 78% of that space is occupied. The overall Austin average asking full-service rent is at $38.56 per sq. ft.—up from Q3 2019 at $36.03 per sq. ft.— while Class A space the Central Business District (CBD) is averaging $53.32 per sq. ft.

 

Economic indicators

The Federal Reserve Bank of Dallas reported that the Austin economy continued to improve in August. While jobs and the unemployment rate improved in June, July and August, neither metric has returned to its March level. Regional consumer spending since mid-July held at pre-COVID-19 levels. Austin’s unemployment rate fell further to a still elevated 5.4% in August. The jobless rate ticked down to 6.8% in Texas and 8.4% in the nation. Austin payrolls expanded 6.1% (nonannualized), or by 62,620 net jobs, in the three months ending in August. Leisure and hospitality led the expansion with a 19.1% increase, or 16,570 jobs. Sectors that experienced losses were construction and mining (-1.2%, or 840 jobs) and information (-0.6%, or 210 jobs). Manufacturing and financial activities were the only sectors to post positive job growth for the first eight months of the year.


MARKET OVERVIEW

Negative net absorption

During the third quarter, Austin’s office market saw an increase in the number of tenants moving out of space compared to both the prior quarter, as well as a year ago in Q3 2019. The aggregate effect of the net occupancy decrease was 675,000 sq. ft. of negative net absorption for Q3 2020. The amount of total office inventory that is being marketed for lease was up 180 basis points quarter-over-quarter at an availability rate of 18.5%. The difference between this figure and the vacancy rate reflects expected future move-outs. The CBD overall vacancy rate is at 8.0%, although the availability rate is at 22.0%. This wide margin holds truer in Class A space in the CBD at 9.6% vacancy compared to 27.4% availability.

 

Leasing activity increased

Leasing velocity rose to 1 million sq. ft. during the third quarter—up from the previous quarter’s 703,000 sq. ft.— and down from this time last year at 2.6 million sq. ft. Top transactions during the third quarter included Auctane LLC signing a deal for 104,158 sq. ft. at 4301 Bull Creek Road in the West Central submarket; and a deal inked for 41,068 sq. ft. at 2909 Flintrock Trace in The Overlook at Lakeway, a new construction Class A office/medical project in the Southwest submarket. BAE Systems Inc. announced in August it plans to build a large corporate campus in North Austin. The aerospace and defense contractor plans to employ more than 1,400 at a $150-million, 390,000-sq.-ft. facility to be built in the Parmer Austin business park. Construction is scheduled to begin this year and be completed in 2022. BAE will continue their lease at 6500 Tracor Lane with plans to transition to the new facility at Parmer Austin once completed.

 

Office construction

New supply delivered to the market in Q3 2020 stood at 690,000 sq. ft. The record-setting amount of new construction that has taken place during the last 24 months has increased the overall inventory by 7.2% at 93 million sq. ft. Class A space has grown by 13.2% reaching a total inventory of 47.4 million sq. ft. during the same time period. Developers have been busy across Austin, particularly in the CBD. Tenants like Main Street Hub (now GoDaddy) and Oracle have looked beyond traditional office locations like East Austin and Southeast Austin, opting for less expensive locations that are still close to urban areas. In a crowded tech labor market such as Austin, companies are doing all they can to recruit and retain talent by leasing well located offices with amply amenities.

 

Investment sales activity

Real Capital Analytics data reports office sales volume for Q3 2020 in the Austin area at $88.7 million, down sharply from this time last year at $825.2 million. The primary capital composition for buyers in 2020 was made up of 56.8% private investors, and 29.3% cross-border (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 71.1% private investors, and 12.3% cross-border.

 

Average asking rents

The Austin overall full-service average rates are at $38.56 per sq. ft., a 7.0% increase year-over-year from $36.03 per sq. ft. Asking rates for Class A space are averaging $42.61 and Class B are averaging $33.19 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 healthy prior to the current situation, the relative impact to occupancies and rents in the future is uncertain.

 

Dealing with uncertainties

According to an annual report by the Urban Land Institute and PwC, Austin, the reigning champ, has been unseated and dropped to the No. 2 spot—behind North Carolina’s Triangle—for the top market in the country for real estate prospects heading into the new year. The report is among the largest in the industry and comprises a survey of around 3,000 real estate professionals to forecast the trends and markets to watch in the coming year. ULI and PwC also rank the top 80 U.S. cities in the country based on their real estate prospects headed into 2021. A frequent subject in the report is the pandemic’s acceleration of trends in demographic shifts, retailing, as well as working from home. Additionally, uncertainty is high for the future of office space as companies around the country continue loosening restrictions on work-from-home policies, opening up more options for where workers may choose to live and work. All this could spell opportunity for markets like Austin, though the impact of demand for office space long term is yet to be clear.


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

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