After a challenging year in 2020, and a roller coaster ride to this point in 2021, the future of the Austin market looks very bright.
Key Takeaways
- Vacancy rate decreased slightly in the third quarter
- Quarterly absorption of 689,622 SF marks another positive swing since the onset of the Covid-19 pandemic
- Continued corporate expansions/relocations have spurred further domestic and international investment in Austin commercial real estate
Boots On The Ground
After a challenging year in 2020, and a roller coaster ride to this point in 2021, the future of the Austin market looks very bright. Given the dozens of Fortune 100 companies that have set up regional and primary headquarters in the ATX, it has become abundantly clear that Austin has cemented itself as a hub for “live, work and play.” Over the last quarter, we have seen some of the highest demand for office space since pre-Covid levels; and all indications point to that acceleration continuing for the foreseeable future. Austin has become arguably one of the top 3 most dynamic real estate markets in the country. Land is trading at all-time records. Industrial supply is at one of its all-time lowest levels, specifically for larger blocks; and new construction is being leased at a pace previously unseen. Texas is open for business, and we don’t see that changing anytime soon.
The Market, at a Glance
Office tour activity generally improved in the third quarter; most notably the size of prospect requirements increased. We are now seeing more tours with larger users that seem to be real requirements ready to commit to leases. We recently compiled a list that included over 12 unique 100+ sf office users touring properties throughout the city. The length of desired lease term is still below the historical average as many prospects look for shorter team deals in order to provide flexibility due to unknowns in the return to the office. Construction pricing has started to increase due to lack of subs combined with higher demand, and construction timelines have elongated due to a slowdown on permitting combined with supply chain challenges. We expect overall market conditions to improve as the Q3 spike in Covid cases subsides and companies can once again start to think about a return to the office.
Future Forecast
Barring any major setbacks on a national level, or a resurgence of Covid, we feel the Austin buzz will continue for the foreseeable future. Companies that have been slowly having conversations with Landlords for the past twelve months are quickly turning into more normalized tours, negotiations, and executed leases. The sheer number of significant requirements considering new locations and expansion in Austin are such that if only a reasonable portion of those deals make, it will continue to strengthen the market. We expect office rates to remain mostly flat overall with continued increases in prime/in-demand locations, and we expect for pricing on capital markets (building sales) to remain high due to lack of quality product on the market and flight to the asset class.
Sublease Environment
Direct Lease Rates
The 21’Q3 average citywide asking rate of $46.16/SF slightly exceeds the previous quarter’s rate of $46.06/SF, a bump that continues to be attributed to an abundance of recently completed Class-A office space in conjunction with growing operating expenses. With more and more high-quality product hitting the market, combined with a continuation of increasing demand by occupiers, it’s more likely that rates continue to trend higher.
Supply & Absorption
The Austin economy continues its upward swing, as less subleases hit the market and pent-up demand has driven more significant executed leases. New deliveries in Q3 were 300,402 SF. Absorption of 689,622 SF was recorded in 21’Q3, marking the third quarter with positive levels; an extreme uptick in hires by high-tech tenants during Covid, coupled with a continued robust relocation & expansion trend, will likely stimulate a continued upwards trend in absorption. These trends are creating some cautiously optimistic views by developers, who are scheduled to complete 4,450,101 SF of new construction over the next few years.
Noteable Completions
