As the US economy recovers from the COVID-19 pandemic, the Austin market is beginning to show signs of life.
- Citywide leasing activity return to normalcy: more transactions completed during Q1 2021 vs. the last 12 months
- 300 Colorado delivers – 100% pre-leased by Parsley Energy, however, entirety of building available for sublease
- COVID vaccine coupled with Proposition B “Homeless Camping Ban” likely to impact market favorably
Boots On The Ground
As the US economy recovers from the COVID-19 pandemic, the Austin market is beginning to show signs of life. Our team continues to see heavy demand for both industrial and investment products, however, rebounding office activity remains the highlight of the quarter. Over the past 60 days, office property tours have increased three-fold, long postponed leases have been inked and discussions with C-Suite executives considering a move to the city have swelled. Additionally, many Austin companies will likely start reoccupying their offices this summer/fall, a clear indication that the market is correcting more quickly than initially expected.
The Market, at a Glance
As Austin began to wake up from the winter slumber and employees began to peek behind the curtains of their home office, Winter Storm Uri swept through Texas in mid-February and put a freeze on leasing and sales activity for almost two weeks as millions of Texans battled through the aftermath of unfamiliar weather. As evident by the Bluebonnets blooming though, Texas remained resilient and pushed through to a warmer (and vaccinated) environment, where Austin continues to remain toward the top of the list for institutional investments, office expansions and headquarter relocations.
More than 10 companies announced the opening of an office or headquarters relocation in Austin in Q1 of 2021, with a dozen other investment and development firms acquiring a real estate asset in the greater Austin area. F45 Training and Tishman Speyer are two notable new tenants and investors in Austin. The Australian-based fitness franchise F45 signed a 44,000 SF, 8-year lease in South Austin’s Penn Field offices, and New York-based Tishman Speyer made their first Austin purchase with the acquisition of the Foundry I, a 76,000 SF office project on the Eastside. In addition to Austin’s new residents, some of our local and established groups stretched out for some elbowroom as well. Vinson & Elkins made a pivotal move and leased 50,000 SF in the Indeed Tower downtown, breaking away from their previous suburban location, and Texas Municipal Retirement System signed a 47,000 SF lease at The Grove, an Endeavor project in Central Austin. While Q1 saw more completed transactions than any other quarter in the past year, overall numbers are still lagging behind this activity with negative absorption rates and an increasing supply of sublease space, though most of our sublease space this quarter can be attributed to Parsley Energy (369,000 SF, 300 Colorado) and Spiceworks (49,000 SF, 3600 San Clemente).
Developers and buyers continue to be bullish on Austin, and it is hard to disagree otherwise. Even with the option to work from home likely to be a standard offering by employers moving forward, the bigger focus in Austin is not when employees are headed back into the office, but rather who is moving here next. The Austin Chamber of Commerce is tracking a record number of active prospects for incentive-worthy relocations and the residential real estate market is experiencing a supply-and-demand issue, to say the least. Those are two good indicators that Austin still has some growing to do, which means pricing is likely to do the same.
Direct Lease Rates
A citywide asking rate of $45.60/SF comes in a slight step above Q4 2020’s rate of $44.74/SF, largely due to rising OpEx expenses. Although rental rates have remained steady Quarter over quarter, Landlords aren’t hesitant to use flexible concession packages and reduced lease-terms in order to secure tenants. An influx of newly constructed space with significant availability (as of Q1 2021), projects under construction are ±40% leased) will pressure building owners even further, however, a revitalization of leasing activity should allow rates to remain steady during the remainder of 2021.
Supply & Absorption
Pandemic challenges forced many to shutter their doors during the past year, and several brand-name institutions (Google, Indeed, Facebook, etc.) found themselves potentially over-committed on projects not yet under construction. As a result. sublease space of +3.0M SF flooded into the market, causing consecutive quarters of negative absorption (Q1 2020 absorption of -630K SF). With the introduction of a COVID vaccine, however, Austin can expect a rebound in leasing activity and an upwards trend in absorption levels, which should help relieve the pressure from future development projects (+5.8M SF under construction). Furthermore, Tesla’s Gigafactory served as a de facto “Vote of Confidence”, spurring additional commercial interest in the city.