It’s a weird market. The majority of office buildings throughout the city still feel relatively under occupied (sub 40% in the suburbs and sub 25% in the CBD), yet leasing activity is robust.
- Vacancy increased slightly, but this is primarily due to new deliveries.
- Leasing activity was very strong in Q4 21, with multiple large transactions resulting in another quarter of positive absorption.
- Construction pricing has continued to increase due to heavy activity, lack of subs, and pricing and availability of materials
Boots On The Ground
It’s a weird market. The majority of office buildings throughout the city still feel relatively under occupied (sub 40% in the suburbs and sub 25% in the CBD), yet leasing activity is robust. No doubt this is primarily due to an incredible amount of inbound interest and demand from out of state companies; our office receives at least 2-3 calls per month for 40K-100K SF requirements who have short-listed Austin for expansion. Local tenants remain very active as well, with many considering upgrading to newer or Class A product. The competition for new space, especially in prime submarkets (CBD, East, South Central and North/ Domain) is amazing. It’s likely that multiple buildings in the CBD that have delivered recently, but have significant vacancy, will be fully leased up within the next few months; at record rates and for an average lease term of 9 years. Construction pricing remains the biggest problem for every transaction. Cost per square foot guidelines for improvements that have been valid for years have been thrown out the window. While construction pricing trended down for a short period of time during Covid-19 due to general contractors cutting profits to keep their people busy, pricing has increased drastically in the past 10 months due to increased work, lack of subs, and materials pricing. We are regularly seeing construction pricing 20% higher than it was before the pandemic. Construction timing also remains a hurdle as designers are at capacity and the City of Austin is still very spotty on permit process and timing.
The Market, at a Glance
Austin continues to outperform competing markets nationwide. Leasing velocity is strong and rental rates continue to set records. Most medium and large companies, both tech and professional services, have thus far held their space throughout the city. When this is combined with a continued influx of inbound companies, primarily tech related, it makes for a very competitive market. Activity picked up tremendously in the past 6 months with a substantial number of transactions completed (589K SF, 125K SF and multiple 20K-40K SF deals in the past 30 days alone). There are over 8 unique deals in Austin currently negotiating on 100k+ SF deals citywide (mostly Class A office) and multiple campus users in the market considering 150K-300K SF. It’s a hot market
We expect demand to remain steady, which should result in an overall decrease in vacancy and likely increase in asking rates. We expect a few select suburban submarkets to suffer until more until normalized office use occurs, but new product in prime locations should see continued heavy demand. Internally, we expect a slight increase in subleases in the coming quarter as we are tracking likely entry of around 110K SF of sublease space in the South Central submarket, and around 50K SF in the far West submarket. Construction will remain expensive and slow in the coming quarters
Supply & Absorption
The combination of robust leasing activity combined with declining sublease space has once again resulted in positive absorption for the quarter. We expected to see new deliveries have a negative impact on absorption, but full building users (Meta, which leased almost 600K SF downtown and Amazon which leased an entire building in the Domain) have stepped in to save the day. Development remains strong in areas just outside of the CBD (East, South Central) which should bring additional needed product to the core. Most of the next-generation flagship buildings in the Domain and the CBD will likely deliver late 2023 through 2025, so currently leasing velocity should provide a reasonably tight market until then.
Direct Lease Rates
Average lease rates have continued to increase, which is exacerbated by the continued increase in overall operating expenses throughout the city. Suburban rates have for the most part remained flat, and in some areas decreased, but the combination of rising rates in the CBD combined with very high rates for any new product coming to the market have more than made up for those areas. We’re now starting to see some of these higher rates get to leases without the huge incentive packages that marked most deals in 2020 and early 2021.