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Austin office

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The Austin office market’s overall vacancy rate of 12.9% in the fourth quarter represented an increase from Q3’s 11.8%, and a significant 340-basis-point jump year-over-year from 9.5%.


EXECUTIVE SUMMARY

Vacancy rate increases to 12.9%
The Austin office market’s overall vacancy rate of 12.9% in the fourth quarter represented an increase from Q3’s 11.8%, and a significant 340-basis-point jump year-over-year from 9.5%. The vacancy rate for Class A properties is at 14.8%, and Class B at 11.7%. In the fourth quarter, overall net absorption totaled negative 645,000 sq. ft.—equally divided between Class A representing negative 321,000 sq. ft. and Class B also totaling negative 321,000 sq. ft. Full-year 2020 total net absorption was negative 697,000 sq. ft. Of the 8.7 million sq. ft. currently under construction, about 47% of that space has been spoken for. Of the 2.7 million sq. ft. completed in 2020, 74% of that space is occupied. The overall Austin average asking full-service rent is at $38.21 per sq. ft.—down from Q3 2020 at $38.51 per sq. ft.—while Class A space in the Central Business District (CBD) is averaging $51.05 per sq. ft.

Economic indicators
The Federal Reserve Bank of Dallas reported that the Austin economy slowed in November as the Austin Business-Cycle Index decelerated due to an increase in the unemployment rate. However, job growth was positive in most industries, and regional consumer spending since mid-July continues to hold at pre-COVID-19 levels. Austin’s unemployment rate increased to 6.3% in November, while the state’s rate rose to 8.1%, and the nation’s rate fell to 6.7%. The rise in metro and state unemployment rates was largely due to an increase in individuals reentering the labor force seeking jobs. Austin payrolls grew an annualized 7.4%, or 19,320 net jobs, in the three months ending in November. Financial activities led job expansion (25.5%, or 4,000 jobs). Financial activities and professional and business services were the only sectors to post positive job growth for the first 11 months of the year.


MARKET OVERVIEW

Continued negative net absorption
During the second half of 2020, Austin’s office market saw an increase in the number of tenants moving out of space compared to the first half of 2020. The aggregate effect of the net occupancy decrease was 697,000 sq. ft. of negative net absorption for full-year 2020. The amount of total office inventory that is being marketed for lease was up 200 basis points quarter-over-quarter at an availability rate of 20.4%. The difference between this figure and the vacancy rate reflects expected future move-outs. The overall vacancy rate in the CBD is at 10.2%, although the availability rate is at 24.1%. This wide margin holds truer in Class A space in the CBD at 12.7% vacancy compared to 30.3% availability.

Leasing activity slowed
Quarterly leasing velocity slowed to below 1 million sq. ft. during the fourth quarter at 718,000 sq. ft.—only the second time Austin has registered a sub-1 million-sq.-ft. quarter of leasing since Q4 2009, with both decelerations taking place in 2020. In comparison, year-over-year, Q4 2019 leasing activity registered at 1.9 million sq. ft. Top transactions during the fourth quarter included Poly signing a renewal for 88,787 sq. ft. at 7700 W. Parmer Lane in the Far Northwest submarket; Everi Games signing a renewal for 51,000 sq. ft. at 206 Wild Basin Road S. in the Southwest submarket; and The Austin Stone renewing 20,149 sq. ft. at 313 E. Anderson Lane in the Central submarket.

Record-setting construction activity
An all-time high—8.7 million sq. ft.—of new construction is underway to end the year in 2020. During the last five years, overall inventory has increased by 14.7% or 12 million sq. ft. to register at 93.2 million sq. ft. Class A space has grown by 25.8% reaching a total inventory of 47.5 million sq. ft. during the same time period. Developers have been busy across Austin, particularly in the CBD and the East/Southeast submarkets making up over half of the space under construction. 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 ample amenities. New supply delivered to the market in Q4 2020 stood at 436,000 sq. ft., with an annual total in 2020 of 2.7 million sq. ft. of which 75% has been leased.

Investment sales activity
Real Capital Analytics data reports office sales volume for Q4 2020 in the Austin area at $89.6 million, down sharply from this time last year at $565.7 million. The primary capital composition for buyers in 2020 was made up of 52.9% private investors, and 24.9% cross-border investors (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 66.8% private investors, and 10.4% cross-border. A significant transaction that took place during the fourth quarter was Menlo Equities purchase of 7000 West at Lantana, a two-building, 136,075-sq.-ft. office complex 15 minutes southwest of downtown Austin. The complex was purchased from Starwood Capital Group for an undisclosed amount and fully leased at the time of sale to semiconductor manufacturer Advanced Micro Devices and medical equipment maker Smith + Nephew.

Average asking rents
Austin’s overall full-service average rates are at $38.21 per sq. ft., down slightly from this time last quarter at $38.51, and on par year-over-year at $38.22 per sq. ft. Asking rates for Class A space are averaging $41.73 and Class B are averaging $33.75 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.

Oracle moving HQs to Austin
Oracle is applying a more flexible employee work location policy and has changed its corporate headquarters from Redwood City, California to Austin, Texas. Oracle recently made headlines for its joint bid with Walmart to buy social media platform TikTok, part of the latest big tech companies transferring to Texas. Hewlett-Packard Enterprises and several smaller tech companies such as SignEasy, QuestionPro and DZS have also moved from California to Texas. In addition, Tesla and SpaceX CEO Elon Musk announced that he had moved to Texas as well, though his companies will continue to be headquartered in California.


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


Additional Research from NAI Partners

Austin Office | Monthly Market Snapshot | December 2020
Austin Office | Monthly Market Snapshot | November 2020

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