Activity has picked up tremendously over the past quarter, with a continued emphasis on newer product in the city core. There has been a feeding frenzy for...
Key Takeaways
- Entry of new Subleases are slowing, and we are starting to see great demand and activity for core subleases (CBD, East, Central, and South).
- Rates in the core continue to rise, while suburban locations remain stagnant.
- Construction remains expensive and timelines are again extending due to design capacity, permit process, and supply constraints on materials.
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Boots On The Ground
Activity has picked up tremendously over the past quarter, with a continued emphasis on newer product in the city core. There has been a feeding frenzy for Class A product in the CBD, South Central and East areas of Austin, which has resulted in increasing rental rates in those areas. While much of this is due to out-of-town tech users entering or expanding in the market (Tiktok, Snapchat, Miro, etc.) Austin tech companies are also joining the mix. Subleases have garnered a ton of attention, and many have been subleased or are currently at documentation. We believe the primary reasons for this are (i) The ability to avoid a 9-12 month design and construction process, and (ii) Tremendous cost savings associated with construction and furniture vs. traditional spaces. We believe this success will lead to more traditional landlords, either white boxing or spec’ing out tired spaces for marketability. This activity has also been the catalyst for multiple new downtown projects breaking ground, ranging from 100K to over 700K RSF. Most of these buildings won’t deliver until 2024/2025 therefore conditions should remain somewhat favorable for Landlords in the short term.
Many suburban markets remained depressed resulting in higher vacancy and lower effective rates, but activity is picking up. At some point many companies will be forced to consider product alternative to the core, due to pricing, parking or availability, which will likely be the catalyst for a resurgence of suburban markets.
Market Indicators
Historic Comparison
Unemployment Rate
The Market, at a Glance
Austin remains one of the top performing markets in the country in just about every product type. Our updated “office deals in the market” list is extraordinarily robust. If half of those companies lease space, we’re in for a couple big-performing quarters. Industrial remains on fire, with most users having to take down space before its built. Capital markets transactions in general are improving but still not to a typical level. Forward selling (the concept of selling an approved project prior to breaking ground) is still active on industrial product, however pricing has moved down slightly due to increased cost of capital. Demand for leased product is still pushing very low cap rates, however.
Future Forecast
We’re tempted to copy and paste last quarter’s commentary, “It’s going to stay busy”. We believe demand is going to continue to increase. That may not be reflected in the immediate forthcoming vacancy rates due to new product being classified as delivered, however that’s to be expected. Average rates are likely to remain somewhat flat (core rates going up, but suburban markets remaining flat or in some instances, slightly decreasing). Sublease vacancy is likely to immediately trend down due to current “at sublease” deals, but then potentially go up as we are aware of multiple mid/large opportunities coming to the market in the 25K-80K RSF range. However, we’d consider the majority of these spaces as prime opportunities which will likely get subleased reasonably quickly.
Sublease Environment
Return to Work
As traffic accurately indicates, companies are beginning to reoccupy offices at a rapid pace. Austin occupancy levels began spiking in March and we’ve seen multiple reports stating that Austin leads the nation in employees returning to the office. Professional services lead the pack, however, tech is slowly beginning to join the trend. Approximately half of the subleases on the market are based on those companies determining that they will never fully reoccupy and prefer a flex model moving forward. We are also seeing many clients leasing space and finishing them out for flex work, which often includes more meeting and lounge space combined with less dense stationary seating.
Direct Lease Rates
Overall, rates continue to rise primarily bolstered by new Class A product delivering to the market. This is typical as new buildings range from asking rates of $36.00-$43.00 NNN in suburban submarkets while closer to $46.00-$50.00 NNN in the CBD and surrounding. The asking price delta is partially based on demand, however construction pricing has a definitive impact. Higher land prices combined with more expensive construction (i.e. below grade parking can run $40K per space to build) forces higher rates. Class B buildings, along with most suburban buildings (other than the Domain) have remained somewhat flat in terms of asking rates.
Notable Completions
