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Q2 2016 | Austin Office | Market Report

For the first time since 2012, Austin’s office market is experiencing negative absorption, dropping from 505,303 SF of positive absorption in Q1 2016 to 24,603 SF of negative absorption in Q2 2016. The absorption is falling, the construction is slowing, yet the rental rates are still on the rise in the Austin market.

Three buildings totaling 196,463 square feet delivered in the second quarter, and together the three buildings were 91.9% leased upon delivery. Projects that delivered in Q2 include the fully leased 74,804 SF Domian 5 building, located in the North/Domain submarket. The Round Rock submarket delivered 97,941 SF at 2700 La Frontera, and has three more buildings, totaling 79,634 SF, set to deliver next quarter.

The citywide average rental rate increased by 0.9% from $34.39 per square foot to $34.65 per square foot over the quarter. Class A rental rates in Austin’s CBD increased by 2.7% over the quarter to $49.52 per square foot from $47.31 per square foot in Q1. Overall suburban Class A rental rates increased marginally from $35.71 per square foot to $35.74 over the quarter.


  

In July, Georgetown was named the fastest growing city in the nation by the U.S. Census Bureau. Georgetown’s population grew by 50,000 people from July 2014 to July 2015 and has pushed the Austin-Round Rock area’s population to over 2 million for the first time. Though the population is increasing, Austin’s unemployment rate has decreased from 3.3% to 2.9% over the last quarter. Since Q2 2015, Austin’s unemployment rate has dropped from 3.5% to 3.1% and also added 3.7K jobs out of the 169.4K jobs created within Texas in the past three months.

Vacancy & Availability

Austin’s citywide vacancy rate increased between quarters from 11.4% to 12.2%. Accordingly, the CBD class A vacancy rate increased from 6.9% to 7.4%.

The suburban class A vacancy rate increased to 13.4% this quarter from 13.1% in Q1, which is only 0.5% lower than it was a year ago in Q2 2015.

Overall suburban vacancy increased over the quarter to 13.0%. The only submarket that saw a significant decrease in vacancy over the quarter was West Central, which fell from 16.3% to 8.0% since Q1 2016.

Submarkets that experienced increases in vacancy in Q2 include Cedar Park, East, North/Domain, Northeast, Northwest, Round Rock, South, Southeast and Southwest. In the Round Rock submarket, the vacancy increased by 11.4% despite delivering an 89.5% pre-leased building this quarter.

Absorption & Demand

Austin’s office market posted 24,603 square feet of negative net absorption in Q2 2016, the first quarter with negative absorption since Q3 2012. The top three submarkets that experienced the largest decrease in net absorption during 2016 include CBD, North/Domain, Northwest, and Southwest.

A majority of the positive net absorption in the second quarter can be attributed to the West Central submarket’s class A office space that saw 76,643 square feet of positive net absorption. The second highest positive net absorption occurred in class A space in the Northeast submarket with 36,518 square feet in the second quarter. The Northwest submarket had six tenants move into spaces 10,000 SF or larger, yet still saw 47,301 SF of negative absorption in class A space. One of the tenants that entered the Northwest submarket was Navitus Health Solutions, who moved into their 25,937 SF space at 12301 Research Boulevard.

Citywide, class B space saw 37,761 SF of negative net absorption in the second quarter. Negative net absorption in class B space occurred in the CBD, East, Far Northwest, Northeast, Round Rock, South, Southeast, Southwest, and West Central submarkets.

Absorption, New Supply & Vacancy Rates

  

Rental Rates

According to CoStar, our data provider, Austin’s citywide average rental rate increased over the quarter from $34.39 per square foot to $34.65. As expected, the highest rates across the Austin market in the second quarter were in CBD class A buildings, where rental rates reached $49.52 per square foot. Rental rates were also high in the West Central submarket and South submarket where class A rental rates reached $40.26 per square foot and $39.35 per square foot respectively.

Citywide class B rental rates rose slightly in the second quarter to $25.91 per square foot from $25.73 in Q1. Class B rates in the CBD decreased by 1.5% over the quarter from $36.91 per square foot to $36.34 per square foot.

Leasing Activity

Austin’s office leasing activity recorded 1,422,727 SF in Q2 2016. Major transactions this quarter included a new lease for Trend Micro at Domain 5 and a renewal for Catapult Systems.

Q2 2016 Top Office Leases

BUILDING NAME/ADDRESS
SUBMARKET SF TENANT LEASE DATE
Domain 5
North/Domain
74,804 Trend Micro Apr-16
Braker I North/Domain 56,995 State of Texas May-16
500 W 2nd St. CBD 47,755 Deloitte Apr-16
9500 Arboretum Northwest 35,751 Cognitive Scale Jun-16
Travesia Corporate Building III North/Domain 33,945 Sonic Healthcare3
Apr-16
5707 Southwest Pky Southwest 33,214 Unknown Apr-16
1901 Capital Pky Southwest 24,437 Emergo Group Jun-16
Encino Trace III Southwest 23,578 Mirna Therapeutics Jun-16
12301-B Riata Trace Pky Northwest 22,567 NextGen3
Apr-16
12301 Riata Trace Parkway Northwest 22,567 Quantcast Corp3  Apr-16 
Three Barton Skyway Southwest 21,373 Catapult Systems1 Jun-16
9500 Amberglen Blvd.  Far Northwest 19,171 Unknown Jun-16
Prominent Pointe II Northwest 18,419 Daybreak Games Jun-16
Chase Tower
CBD 16,711 Unknown May-16
500 W 2nd St.  CBD 15,932
Unknown Apr-16
12301 Research Blvd.   Northwest 15,639 Unknown May-16
12331-B Trace Pky Northwest 15,018 MobileIron Jun-16
201 W 5th St.  CBD 14,122 Unknown Apr-16
1101 S Capital of Texas Hwy Southwest 13,607 Deloitte LLP May-16
 7700 W Parmer Ln. Far Northwest   13,153  Deloitte LLP  May-16 
1 Renewal
2 Expansion
3 Sublease
4 Pre-lease/proposed or under construction

 

Sales Activity 

Austin’s office investment sales activity included four sales transactions (including one portfolio sale) with an average sale price of $302 per SF.

Q2 2016 SIGNIFICANT SALES TRANSACTIONS – (100,000 SF or Greater) 

BUILDING NAME SUB-
MARKET
RBA
(SF)
YEAR BUILT BUYER SELLER SALE PRICE $/SF CLOSED
Austin Centre CBD 326,335 1986 Sidra Real Estate, Inc. LPC Realty Advisors I, Ltd. 
$130,000,000 $398.36 Jun-16
Quarry Oaks III Northwest 137,615 2015 Np Quarry Oaks III LLC 10901 Stonelake Ltd.  Undisclosed N/A May-16
Plaza on the Lake I* Southwest 125,013 1998 Unknown Unknown
Undisclosed N/A Apr-16
Plaza on the Lake II* Southwest 111,549 1998 Unknown Uknown Undisclosed N/A Apr-16
Lakewood B Northwest   102,056  1997 CapRidge Partners  Equity Commonwealth  $20,958,958  $205.37  May-16 

Sources: CoStar and Real Capital Analytics

*Part of a portfolio

Office Development Pipeline

1,097,050 square feet of office space was under construction during Q2 2016. Three buildings totaling 196,463 square feet delivered in Q2 including 2700 La Frontera, an 87,657 square foot building in the Round Rock submarket. No proposed buildings were given the green light to begin construction this quarter.


BUILDING NAME
ADDRESS
SUBMARKET
SF PRE-LEASED DEVELOPER EST. DELIVERY
5th & Colorado 
201 W. 5th St.
CBD 
179,846  43.1% Lincoln Property Company Jul-16
411 W. Main St.  
Round Rock 
 
33,634 43.3% 411 Partners, LLC Jul-16
9811 Vikki 
9811 Vikki Ter.
Southwest 
22,000 64.10% Unknown  Jul-16
Presidio I
11900 W. Parmer Ln.
Round Rock 
24,000 50.0% Riverside Resources  Aug-16
Pioneer Banking Building
623 W. 38th St. 
Central 
46,000  77.7% Pioneer Bank Sep-16
Green Water Treatment Plant
500 W. 2nd St. 
CBD
500,512 50.8% Trammel Crow Co. Jan-16
Domain 8
11601 Alterra Parkway 
North/Domain 
291,058 0.0% Endeavor Real Estate Group  Feb-16

Q2 Office Highlights

  

Click here to download the report as a PDF.

Austin Office Market Indicators


Q1
2016
Q2
2016
 
VACANCY RATE 11.4% 
12.2% 
NET ABSORPTION
(Million Square Feet)
.505 (.025)
NEW CONSTRUCTION
(Million Square Feet)
.321 
.212 
UNDER CONSTRUCTION
(Million Square Feet)
1.357 
1.097 
CLASS A VACANCY RATE
 
     CBD 6.9% 
7.4% 
     SUBURBAN 13.1% 
13.4%
GROSS ASKING RENTS
(Per Square Foot Per Year)

 
     AVERAGE $34.39 $34.65
     CBD CLASS A $47.31  $49.52 
     SUBURBAN CLASS A $35.71  $35.74 


Job Growth & Unemployment (Not Seasonally Adjusted)

UNEMPLOYMENT 5/15 5/16
Austin 3.3% 2.9%
Texas 4.3% 4.2%
U.S. 5.3% 4.5%
JOB
GROWTH
ANNUAL CHANGE # OF JOBS ADDED
Austin 3.9% 37.7K
Texas 1.4% 169.4K
U.S. 1.7% 2.4M

Texas