The ravaging effects of the pandemic on the commercial real estate market have subsided for the time being in the Lone Star State...
- Dwindling subleases and an increase in leasing activity signal the start of a return to a healthy office market – we expect further improvement in the third and fourth quarters of 2021
- Quarterly absorption of 87,674 SF marks the first positive swing since the onset of the COVID-19 pandemic
- Continued corporate expansions/relocations likely spur further domestic and international investment in Austin commercial real estate
Boots On The Ground
The ravaging effects of the pandemic on the commercial real estate market have subsided for the time being in the Lone Star State, with Austin well positioned to take the lead in economic recovery. Three months ago, our 21’Q1 Office Insight announced a revitalization in the city’s leasing market – this rebound has continued as deal velocity accelerated through 21’Q2, leading to 87,674 SF of positive absorption. Much of this is attributable to (1) the declining sublease market, and (2) companies deciding to execute leases earlier than originally planned now that physical occupancy is feasible (e.g., widespread vaccinations). Although these factors bode well for the commercial office market, an uptick of vacancy to 19.4% was recorded due to the ±1.5M SF of new space that was delivered over the quarter, of which 51% was pre-leased. A large portion of these buildings were Class A which, when coupled with ever-increasing operating expenses, led to a slight bump in overall asking rates to an average of $46.06 (from $45.60 in 21’Q1).
The Market, at a Glance
As Austin commercial real estate continues to take strides forward, many of the subleases that proliferated in the market during the height of COVID-19 have started to dissipate at a rapid pace as a number of companies pulled their spaces in order to re-occupy. Mounting relocations/expansions from other markets have gobbled up significant portions of the remaining attractive sublease options (F45 Training, Canva, Rev and a host of other players have demonstrated this trend in just the last few months). Furthermore, with the introduction of vaccinations, many companies who were awaiting post-pandemic clarity have decided to pull the trigger in 21’Q2 rather than biding their time. It is important to note, however, that this activity has been concentrated mostly in move-in-ready space on short term leases (three years or under). This is potentially attributable to two factors: (1) companies need to make real estate decisions as employees begin phasing back into the office, and (2) there remains some hesitancy as to how the workplace will look in the immediate and long-term, driving the need for shorter-term length. As a result, tenant appetite for large build-outs on long term leases (five years or more) is very low, forcing many landlords currently sitting on delivered product or to build out specs suites and negotiate shorter-term leases in order to compete. While this type of user activity is disadvantageous for landlords in the near term, the eroding subleases will likely improve the market towards the end of the year.
Austin continues to attract investments, both domestic and internationally (the city recently ranked as the top target for international investment according to the AFIRE International Investor Survey) – this interest will likely continue to improve as additional corporate giants (e.g. Amazon, Tesla, Facebook) continue to establish and grow their presence in the Texas Capital. Kilroy’s recent entry into the market through its $580M acquisition of Indeed Tower typifies this investor attraction. We generally expect vacancy levels to diminish, pricing to rise and absorption levels to further increase through the latter half of 2021.
Direct Lease Rates
21’Q2 average citywide asking rate of $46.06/SF slightly exceeds the previous quarter’s rate of $45.60/SF, a bump that could likely be attributed to an abundance of recently completed Class-A space in conjunction with growing operating expenses. As high-quality projects continue to deliver while leasing velocity intensifies, we can expect citywide rates to keep climbing.
Supply & Absorption
The Austin economy is in a stage of revitalization, as evidenced by fading sublease availability and accelerated deal velocity. New deliveries of 1,459,544 SF eclipsed 21’Q1 by a narrow margin, resulting in a slight uptick in vacancy. Absorption of 87,674 SF was recorded in 21’Q2, marking the first quarter in more than a year in which positive levels were recorded; mounting confidence in physical re-occupancy, coupled with a robust relocation & expansion trend, will likely stimulate a continued upwards trend in absorption. This is a welcome shift for developers, who are scheduled to complete 7,760,629 SF of new construction during the next few years.