Download the PDF
Lowest vacancy rate on record
Austin’s overall vacancy rate dropped to 8.6% in Q4 2017—the lowest vacancy ever recorded in the Austin office market, and a decrease of 20 basis points quarter-over-quarter and year-over-year. Net absorption registered 591,486 sq. ft. as of the quarter’s end, adding up to 2.2 million sq. ft. of positive net absorption year-to-date, with only 2006 and 2015 surpassing the current annual total. Demand has outpaced supply in the last five years, excluding 2015, although ending 2017 evenly balanced. New construction delivered during the fourth quarter stood at 441,336 sq. ft., resulting in a squeeze on vacant space. Another record-breaker, full-service asking rents jumped by $0.55 per sq. ft. quarter-over-quarter to close 2017 at $34.94; and soared year-over-year at $1.66 per sq. ft. The amount of space under construction averaged 4.3 million sq. ft. in 2017, indicating another all-time high, during a robust year for the Austin area office market.
Austin unemployment remains significantly below the state and national rates
The Austin economy grew at a healthy pace in November. The seasonally adjusted area unemployment rate for November was 2.8%, remaining well below the 10-year average of 4.3%. In addition, the state average jobless rate fell to 3.8%, the lowest on record. Job growth in Austin picked up speed over the three months through November with professional and business services employment climbing at 12.2%, adding 5,000 jobs. Austin enters 2018 with a labor market and economy as strong as any it has seen since 2000, together with Apple, Facebook, Google and Amazon ready to fill up their campuses and offices.
As we move into 2018, Austin continues to experience a healthy commercial real estate market across all property types. In 2017, the Austin office market ended the year with strong activity, with technology companies accounting for one-third of lease signings in the fourth quarter. Co-working options continued to expand, as WeWork signed leases for two more spaces: 65,000 sq. ft. in Downtown and 90,000 sq. ft. at 801 Barton Springs; and Firmspace took 30,000 sq. ft. at 500 W 2nd Street.
Tenants in the suburban market will start to see additional office options available in 2018 with almost 4 million sq. ft. of office space being delivered, which will provide some relief to tenants that are willing to commit to a lease for the next five to seven years. One market factor tenants need to keep in mind when evaluating shell space is the increasing cost of construction. It is not uncommon for construction in a new shell building to be in excess of $75.00 per sq. ft. Another area of increasing costs has been the continued rise in operating expenses across the metro area. Some Downtown Class A buildings now have operating expenses over $26.00 per sq. ft. Much of the increase in operating expenses is being driven by The City of Austin’s and Travis County’s increasing property tax assessments.
Texas continues to see strong population growth and added more people than any other state from 2016 to 2017, according to national and state population data released by the U.S. Census Bureau. Austin remains one of the prime locations for individual relocations, especially among millennials. This trend, combined with the quality of technical skills of the Austin labor force, continues to lure companies to Austin and encourage local businesses to grow. There is perhaps no greater evidence of this than Amazon’s announcement that Austin was one of only two locations in Texas that made its shortlist of 20 cities that could become the site of the retail giant’s planned second headquarters project.
Managing Vice President | Austin
Supply and demand evenly matched
Austin ended the fourth quarter of 2017 with 600,000 sq. ft. of net absorption, all of which was represented by direct space except 95,000 sq. ft. of sublease space, continuing the quarterly streak of consecutive positive absorption at 27. During the same period, 441,000 sq. ft. delivered to the Austin office market. All told, vacancy fell to 8.6% from 8.8% last quarter. Overall, supply and demand are generally evenly matched, as they have been for some time now. Largely, growth in property demand is meeting equal levels of new supply, leaving vacancy rates mostly unchanged. For example, the average vacancy rate for office properties in the area has held steady near 8.9% for seven consecutive quarters, and the same holds true for net absorption at roughly 475,000 sq. ft.
The major move-ins contributing to net absorption in 2017 include 303,836 sq. ft. of space occupied by Google at 500 W 2nd St.; 246,665 sq. ft. taken by University of Texas Systems at 210 W. 7th St.; and Home Depot Technology Center moving into 184,500 sq. ft. at Parmer 3.1 in the Northeast submarket.
Construction thrived in 2017
As of Q4 2017 there is 4.3 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 at the end of fourth quarter 2017 were the 100% owner-occupied Oracle Campus, a 550,750-sq.-ft. building at 2300 Cloud Way at The Waterfront in the Southeast submarket with an expected completion date of January 2018; and Third + Shoal, a 347,072-sq.-ft. facility that is 92% pre-leased, located at 208 Nueces St. in the CBD, with a scheduled delivery date of October 2018. Currently, overall occupancy in the Austin office market is at 91.4%, up from 91.2% at the end of Q3 2017, and at this time last year. At the end of 2017, reported occupancy was the highest level recorded by NAI Partners since 2000.
Leasing and Sales Activity
Leasing activity increased during the fourth quarter with a total of 1.9 million sq. ft. taken off the Austin market, all of which was fulfilled by direct space except 26,800 sq. ft. of sublease space. These amounts are down from 2.5 million sq. ft. at this time last year. On a percentage basis, transactions grew quarter-over-quarter by 10%, while the year-over-year drop was at 9.5%. The largest lease signings occurring in 2017 included the 231,506-sq.-ft. lease signed by Facebook at Third + Shoal in the CBD submarket; the 118,000-sq.-ft. deal inked by Newgistics at The Summit at Lantana – Building 3 in the Southwest market; and the 72,824-sq.-ft. lease agreement by Life Size at Two Barton Skyway in the Southwest market.
Real Capital Analytics data reports year-to-date office sales volume in the Austin area at $1.694 billion, resulting in a year-over-year change of -15.1% as investors are having a difficult time locating assets to acquire in Austin. The buyer composition is made up of 60% institutional, 21% private, 11% REIT/listed, and 6% cross-border. A positive sign for the Austin office market in December was the acquisition by Ascentris of Paloma Ridge, a two-building, two-story 210,351-sq.-ft. office property at 13620 Ranch Road 620 N. in the Cedar Park submarket, from Alliance Bernstein JV Stream Realty.
Austin makes the cut for Amazon’s headquarters
The e-commerce giant issued its short list of 20 metro areas making the next cut for the companies North America headquarters. Throughout the U.S., Canada, and Mexico 238 proposals were submitted in the bidding process. Amazon will be compiling more information on each of the locations as it narrows down the list further for the planned $5 billion investment including jobs for up to 50,000 employees. Moody’s Analytics has ranked Austin as the No. 1 metro most likely to land Amazon HQ2 thanks to several selling points such as its close proximity to the University of Texas; the fact that it is a representative of a “hip Texas-version” of Seattle; it’s home to the headquarters of Whole Foods, which Amazon purchased in 2017; no state income tax; and an established tech industry. The full list of metros includes: Atlanta; Austin; Boston; Chicago; Columbus; Dallas; Denver; Indianapolis; Los Angeles; Miami; Montgomery County, Md.; Nashville; Newark, N.J.; New York City; Northern Virginia; Philadelphia; Pittsburgh; Raleigh; Toronto; and Washington, D.C.
Tight market driving rents up
The tight office market continued to push Austin metro asking rents up, reaching $34.94 per sq. ft. to close out 2017 at a record high. At the end of the fourth quarter, prices have climbed 14.1% above the five-year average of $30.62 per sq. ft. Overall direct rates ended the year at $35.14 per sq. ft. and sublease at $32.40. Looking at submarket rents, Class A space in the CBD hit $51.10, while Class A in the Central Austin submarket listed $40.37 per sq. ft. for Q4 2017. In addition, year-over-year asking rents grew by 5.0%-although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator. Brokers report net effective rents dropping significantly once negotiations begin.
Director of Research
tel 713 275 9618