Positive absorption persists amid surging new office spaces

EXECUTIVE SUMMARY

Q4 In Review
By the end of Q1 2024, the overall vacancy rate in the Austin office market rose 250 basis points year-over-year, from 16.5% to 19%. Despite two quarters of positive net absorption, the total vacancy rate increased primarily because new construction deliveries outpaced net absorption by a wide margin. This increase in the total vacancy rate has put downward pressure on asking rates, which have decreased over the past year by 2.7%. Like many markets across the country, Class A properties, particularly newer properties, have strongly outperformed Class B properties. In the first quarter, Class A properties recorded 150,144 sq. ft. of positive net absorption, while Class B properties recorded a negative 111,183 sq. ft.

Austin Economic Update
According to the latest release of Austin’s Economic Indicators, Austin’s unemployment rate rose to 3.5%, remaining below the state’s and the nation’s rate of 3.9%. In February, the local labor force increased an annualized 8.8%, while the state’s increased 2.1% and the nation’s fell 0.1%. Austin employment increased 9.5% in February after decreasing 1.0% in January. Sectors with the most growth were professional and business services (4,811 jobs), government (3,119 jobs), and leisure and hospitality (1,382 jobs). Sectors that saw a decline included trade, transportation and utilities (-952 jobs) and manufacturing (-112 jobs). Year to date, Austin has seen 4.1% employment growth, below the state’s 4.3% but above the nation’s 2.1%.

AUSTIN OFFICE MARKET OVERVIEW

Net Absorption Flat for the Quarter
Net absorption—move-ins minus move-outs—was positive but relatively flat at 38,961 sq. ft., this is down from last quarter’s 439,401 sq. ft. but a big improvement from a year ago, when net absorption was a negative 668,048 sq. ft. On a submarket level, the South and North/Domain submarkets had the strongest levels of demand, with 153,824 sq. ft. and 90,516 sq. ft. of net absorption in the first quarter, respectively. Notable move-ins in the first quarter include Apple taking 81,360 sq. ft. at Las Cimas I; Dun & Bradstreet taking 36,248 sq. ft. at Domain Gateway; and National Veterinary Associates taking 30,636 sq. ft. of sublease space at Bouldin Creek South.

North/Domain and Central Submarkets Lead Deliveries
Deliveries are at 496,669 sq. ft., up from last quarter but down by 56% from one year ago when 1.1 million sq. ft. was delivered. There were two significant deliveries in the first quarter of 2024, Uptown ATX, a 363,000-sq.-ft. office project in North/Domain and 7001 Burnet, a 100,000-sq.-ft. building in the Central submarket. Of the office projects delivered in the first quarter, only a minimal amount was pre-leased (15%). The under-construction pipeline has been trending down over recent quarters (down 12% over the past year) but with almost 6.4 million sq. ft. still underway, net absorption will need to increase significantly to keep the total vacancy rate from rising further throughout 2024/2025.

Vacancy Rate at 19%
The overall vacancy rate in Austin’s office market is at 19%. Quarter-over-quarter, the vacancy rate increased 120 basis points from 17.8%. Year-over-year, the vacancy rate increased 250 basis points from 16.5%. Class A and Class B space have vacancy rates at 20.5% and 16.8%, respectively. The Northeast, South and CBD submarkets currently have the highest vacancy rates at 31.6%, 23.2% and 22.6%, respectively. Only one submarket is not in the double digits, Georgetown/Round Rock remains healthy with a 5.9% total vacancy rate.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q1 2024 at $272 million. Over the past year, 57 office properties have been sold at an average $336 price per sq. ft. and an average cap rate of 7.1%. Recent sales include, the City of Austin buying 2400 Grove as part of a redevelopment project; Teacher’s Retirement System of Texas buying the newly constructed 245,000-sq.-ft. Bravo building in the Mueller Business District; and HPI buying Barton Oaks Plaza II and III, two 118,650-sq.-ft. multi-tenant office properties that were sold by Invesco.

Leasing Down Trending Down Quarterly and Year-Over-Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 1.1 million sq. ft. — down 3.8% over the past quarter and down 7.2% year-over-year. Notable new leases signed for the quarter include IBM signing a lease for 50,000 sq. ft. at Parmer 3.2; Quantic Wenzel signing a lease for 45,308 sq. ft. at Kramer 1; and Tecovas signing a 28,981 sq. ft. sublease deal at 901 E 6th St.

Rates Dipped as Sublease Space and Higher Vacancy Weighed on the Market
Austin’s full-service average rent stands at $39.74 sq. ft., down quarter-over-quarter and year-over-year by 4.1% and 2.7%, respectively. Asking rents for Class A and Class B space are $45.31 per sq. ft. and $31.88 per sq. ft., respectively. On the quarter, submarkets with highest asking rents include CBD ($54.69 per sq. ft.), North Domain ($42.41 per sq. ft.), and Southeast ($40.63 per sq. ft.). The Northeast submarket logged the lowest asking rent at $28.18 per sq. ft.). Partners is forecasting that average asking rates will decrease by roughly 3% throughout the remainder of 2024.

Steve Triolet
Senior Vice President, Research and Market Forecasting
tel 214 223 4008
[email protected]