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.
The office market has been incredibly slow. Subleases have flooded the market resulting in an increase of approximately 2.1M SF since the start of the pandemic (from 1.0M SF to approximately 3.1M SF). This is a 210% increase over 9 months. Many of these subleases are the result of medium and large-sized tech users gobbling up space to accommodate speculative growth when the market was hot, only to realize that in-office head count growth in 2021 or 2022 is unlikely. Other subleases are driven by changing energy markets (Parsley Energy alone placed 448K SF of sublease space on the market in the CBD). Lastly, many companies are placing their space on the market just to test the waters. If a company’s lease is rolling in 2022 and they aren’t confident the space will be utilized in 2021, why not give it a try? Finding a sublessee would allow them to cut cost until their expiration, at which time their needs (size, budget, configuration, etc.) will likely be different than today. Furthermore, if the company’s need for a physical presence changed beforehand, there are ample opportunities to re-enter the market under favorable terms. Regardless of the reasoning (though all point back to COVID-19), sublease opportunities are abundant city-wide and many sublessors are willing to get extremely aggressive to beat the competition.
Thus far, direct Landlords have held firm on marketed rates, however, this doesn’t tell the whole story. Landlords who 12 months ago were demanding 7-10 year terms with low concessions are now showing tremendous flexibility on 2-3 year lease terms with 10-15% rate reductions (some are asking for NDA’s to maintain the perception of a strong market). The pandemic coinciding with a large amount of speculative office development hitting the market has created some panic with these once-stern Landlords. Austin currently has 5.9M SF under construction with only around 45% of that space pre-leased. In the next 12 months, we’ll see sizable deliveries in the CBD, East and North / Domain area. These Landlords are aggressively battling for tenants and we’re seeing many offering huge concession packages to compete.
Future Forecast
We firmly believe concession packages will remain aggressive, direct rates will drop by close to 10% (some have already, but others will follow over the next 12 months), and subleases and new deliveries will continue to battle it out over the next few quarters. That being said, Austin is resilient and is already showing signs that it will recover from this mess at a rate that will outpace most markets. We are experiencing a huge increase in demand from companies relocating from the West Coast and Northeastern markets (tech, financial, venture capital, etc.) with a staggering number of small and medium companies relocating to service expanding companies like Tesla, Apple, Amazon, Facebook and BAE. California’s “wealth tax” is spurring many company owners to seriously consider relocating operations to a more tax-friendly state. An interesting trend we have been monitoring is the sheer number of transplants purchasing homes in Austin over the past 4 months. Some of these home buyers are high-level decision makers at companies headquartered outside of Texas, while many others are engineering and sales reps relocating due to their ability to work remotely. We believe both trends will drive new office demand as employees follow decision makers and as employees eventually prefer some form of a return to the physical office, even if only part-time.
We estimate Austin will stabilize in Q2 2021 and a slow rebound will begin in Q3 or Q4 2021.
By The Numbers - Austin's Office Market
Austin Economy Statistics
Direct Lease Rates
Austin’s citywide vacancy rate increased from 13.6% in the second quarter of 2020 to 15.2% in the third quarter. The West Central submarket’s Class A vacancy rate had the largest jump in vacancy moving from 5.0% in Q2 2020 to 23.1% in Q3. Since the West Central submarket is so small, a 9,382 SF being vacated at JLL Plaza (1703 West 5th Street) was a factor in the jump in vacancy.
The largest decline in vacancy was recorded in the Class A Cedar Park submarket, where the rate decreased from 26.9% to 15.4%.
Supply and Absorption
Citywide absorption levels came in at negative 555,000 SF, further illustrating Austin’s stagnant leasing environment. Large chunks of sublease space, coupled with incoming construction deliveries, will likely continue to push the city’s overall vacancy rate even higher.
Capital Markets
Commentary by Doug Rauls | Executive Vice President | Austin
Q4 2020 saw an increase in office sales compared to Q2 - Q3 of 2020. The overall sales activity is still down approximately 60% in Austin compared to 2019. This mirrors the national trend, where total November 2019 - November 2020 sales were down 57% compared to the same period in the prior year. In general, there are very few commercial properties over 20,000 SF available for sale in Austin. Many sellers are waiting until market conditions improve before listing their properties. Assuming a smooth rollout of the COVID-19 vaccine, we are expecting activity to increase in Q3 - Q4 2021 and into 2022 with a backlog of willing sellers waiting to list their properties under better market conditions.
Construction Pipeline
