Construction continues as tech companies keep taking space in Austin
Boots On The Ground Commentary by Volney Campbell
Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market.
In traveling around the country on business it seems if almost everyone is at least familiar with Austin and many know a great deal about the city and its growth. So well published has our meteoric rise been from a small government city 30 years ago, to approaching tier one status as a technology hub, I guess I should not be surprised. Recently, more questions are surfacing about where I see Austin in the future and is it due for a setback?
It’s not hard to find locals that think the Austin they knew is already a relic of the past. Gone are the empty freeways at rush hour, and their favorite music venue has recently closed, so to them Austin will never be the same. News Flash: every city evolves. They all change and morph as technology, jobs and the people that define the city change. Even though I wish traffic was better, I believe Austin has a great future ahead.
Demographers believe that Austin will top 3 million people in the SMSA by 2027, led by enormous growth in cutting-edge S.T.E.M. jobs that will shape our country’s future. The unfounded fear that somehow Austin is poised for a major setback seems hard to imagine, despite large development plans currently underway. Employers go where they can find talent and if the talent is not there currently, can they attract it? According to the Austin Chamber of Commerce, Austin has one of the highest percentages of relocating employees whose company is moving to Austin, sometimes it is 70% or above, which is a rare number in their experience. Additionally, with approximately 145 people moving to Austin every day, clearly it can attract talent as well as relocate it.
Employers want a well-educated workforce, 49.8% of Austin’s workforce has a bachelor’s degree or higher and is a city with the pull to continue to attract similar talent in the future.
Historically, Austin’s major tech employers have included the likes of Dell, AMD, Cirrus Logic, Samsung and Motorola; however, in the last few years the expansions from Google, Facebook, Amazon/Whole Foods, Oracle, Apple and Indeed have changed the landscape in Austin for the foreseeable future. All six groups have placed major bets on Austin totaling over 5,000,000 square feet of space leased indicating that this Austin run is not over and may not even be in the final innings of the game. Yes, Austin will experience growing pains, but the investment in our city paints a pretty nice picture of the future. Even if it will not be the same as it was.
Austin Office Overview
In the third quarter of 2019, Austin’s office market reported 1,117,048 SF of negative net absorption. The majority of the negative absorption occurred in Class A buildings with a total of 1,250,402 SF of negative net absorption. Class B buildings in Austin posted 180,024 SF of positive net absorption, while Class C properties posted 46,670 SF of negative net absorption.
Currently, 5,746,652 SF of office space is under construction and 2,613,396 SF of that is pre-leased. The fourth quarter of 2019 is expected to see 1,225,777 SF of deliveries and 824,576 SF of that is pre-leased. One of the buildings set to deliver in the fourth quarter of 2019 is Domain 12. The entire 320,102 SF building was 100% leased by Facebook in September 2018.
The Foundry in the East submarket was the largest building to deliver in the third quarter. This 75,369 SF building delivered in August and is 89.1% leased. One of the tenants that pre-leased at The Foundry is DPR Construction, leasing 28,000 square feet. The final quarter of 2019 is expected to see eighteen new buildings come online.
The citywide average rental rate decreased over the quarter from $35.72 per SF in Q2 2019 to $35.38 per SF in Q3 2019. Class A rental rates in Austin’s CBD slid by 6.2% over the quarter to $49.47 per SF up from $52.78 per SF in the second quarter of 2019. The overall suburban Class A rental rate also fell, from $37.97 per SF to $37.83 per SF, over the quarter.
In September, PwC and Urban Land Institute announced that Austin has been ranked the best market for real estate investment in 2020. Austin ranked first in front of Raleigh-Durham, Nashville, Charlotte, Boston and even beat out the current number one market, Dallas/Fort Worth. According to the study from PwC and the Urban Land Institute, Austin will be a solid “buy” market for industrial, office and multifamily properties. The report also noted that the population growth rate of Austin is three times the population growth rate of the United States.
Vacancy & Availability
Austin’s citywide vacancy rate increased from 9.3% in the second quarter of 2019 to 11.5% in the third quarter of 2019. The Southeast submarket’s Class A vacancy rate reported that more than 355,000 square feet became available in the third quarter, which is why they had the largest jump in vacancy moving from 7.6% in Q2 2019 to 34.6% in Q3 2019. This could be caused in part by 40,000 square feet being vacated at 5202 East Ben White Boulevard.
The largest decline in vacancy happened in the Class B Northeast submarket, where the rate decreased from 28.4% to 23.1%, which is due to over 57,000 square feet being taken off the market.
Overall suburban vacancy increased quarter over quarter from 9.3% in Q2 2019 to 11.5% in Q3 2019, while the CBD’s vacancy rate rose marginally over the quarter from 5.7% to 5.8%.
Absorption & Demand
Austin’s office market posted 1,117,048 square feet of negative net absorption in Q3 2019. Only six submarkets experienced positive absorption over the quarter, including Cedar Park, East, Far Northwest, Northeast, South and Southwest.
A majority of the negative net absorption over the quarter occurred in the Class A Northwest submarket, totaling 1,218,514 square feet of negative absorption. In August, a 30,870 square foot sublease space was put on the market at Riata Corporate Park 7 and was part of the reason the submarket’s net absorption number dropped quite a bit. In all, 249,809 square feet became available in the Class A Northwest submarket.
The Southwest submarket helped bring the absorption number closer to zero with 76,343 square feet of positive net absorption. The majority of the absorption in the Southwest submarket happened in Class A space and can be partially attributed to Aeglea BioTherapeutics, Inc moving into their 30,026 square feet space at Las Cimas III (805 Las Cimas Parkway).
The Austin market recorded thirty-eight leases over 10,000 square feet signed in the third quarter with some big block leases leading the way. Austin Municipal Court signed their 131,362 square foot lease at the Bergstrom Tech Center (6800 Burleson Road), while Abbott Laboratories inked their 130,152 square foot space in Seven Oaks West (8701 FM 2244).
According to CoStar, our data provider, Austin’s citywide average rental rate decreased 0.95% over the quarter from $35.72 per SF to $35.38 per SF.
The highest rates across the Austin office market in the third quarter were in East Class A buildings where net rental rates averaged $50.02 per SF. Rental rates were also high in the CBD and South submarkets where Class A rental rates reached $49.47 per SF and $42.96 per SF, respectively. Citywide Class B rental rates rose slightly in Q3 2019 to $31.54 per SF from $31.23 per SF in Q2 2019. CBD Class B rental rates increased by 2.45% over the quarter from $48.15 per SF to $49.33 per SF in Q3 2019.