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Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Parmer McCallen Pass

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The vacancy rate for office space in the Austin metro has remained below 10.0% for 20 consecutive quarters, or Q3 2014. The record-breaking levels of new construction pushed the vacancy rate up slightly in the previous quarter, but subsequently the vacancy rate tightened to 8.1% during Q2 2019, down 110 basis points quarter-over-quarter.


EXECUTIVE SUMMARY

Vacancy remains under 10.0%

The vacancy rate for office space in the Austin metro has remained below 10.0% for 20 consecutive quarters, or Q3 2014. The record-breaking levels of new construction pushed the vacancy rate up slightly in the previous quarter, but subsequently the vacancy rate tightened to 8.1% during Q2 2019, down 110 basis points quarter-over-quarter. Net absorption was 1.2 million sq. ft., the third-highest quarterly absorption amount ever recorded by NAI Partners. The highest quarterly amount of absorption occurred during the third quarter of 2015 at 1.6 million sq. ft. Space under construction as of the second quarter stood at 7.8 million sq. ft., with only 37.0% of that space available for lease. Full-service overall average asking rents are at $35.88 per sq. ft., Class A $39.90, Class B $31.36, and the highest average rate of $52.12 per sq. ft. for Class A space in the CBD.

Austin economy remains healthy

The Austin metro realized a 3.3% annualized increase in jobs during the three months ending in May. Growth was led by the construction and mining sector, which grew an annualized 27.5% (4,000 jobs). The information sector also experienced expansion with 9.7% growth (800 jobs). Austin’s unemployment rate dropped from 2.6% in April to 2.5% in May, the lowest recorded rate since December 1999. The state unemployment rate declined from 3.7% in April to 3.5% in May, whereas the U.S. remained at 3.6%. For the third year in a row, Austin is the No. 1 Best Place to Live in the U.S., based on the U.S. News & World Report: Best places to live in the U.S. in 2019. U.S. News ranked the 125 most populous metro areas offering the best combination of jobs, desirability, cost of living, and quality of life.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Supply and Demand graph

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Market Indicators table


MARKET OVERVIEW

Demand overtaking supply

In the last five years over 12.6 million sq. ft. has been delivered, expanding the Austin office market by 16.6%, totaling 87.9 million sq. ft. of inventory. There are 55 office projects covering a record-breaking 7.8 million sq. ft. of space under construction in the Greater Austin area. Developers are moving quickly to keep up with demand, which was over five times the amount of supply delivered during the second quarter. Positive influences on overall net absorption involve major move-ins during the second quarter, including 309,883 sq. ft. of space occupied by Indeed.com in the North/Domain submarket; 272,526 sq. ft. of space moved into by 3M in Parmer 3.3 at 13011 McCallen Pass in the Northeast submarket; and 115,043 sq. ft. of space absorbed by CSI Printing in Bergstrom Tech Center in the Southeast submarket. Tenants moving out of space include 70,215 sq. ft. vacated by Austin Regional Clinic at 6937 IH 25 N – American Founders Bldg. in the Northeast submarket; Work Well Win moving out of 50,000 sq. ft. in Eightfold at 3443 Ed Bluestein Blvd.-FHJ in the East submarket; and 44,634 sq. ft. emptied in Amber Oaks at 13620 Briarwick Dr. in the Far Northwest submarket. Across the Austin metro, Class A space comprised over 1.0 million sq. ft. of the positive net absorption (86.9%).

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Leasing Activity graph

Evolving East Austin

The federal Opportunity Zone program, designed to attract investment to economically distressed areas, is getting its first ground-up office development in East Austin. The 64,000-sq.-ft. creative office building with retail and restaurant space is located at 1141 Shady Lane in the ThinkEast master-planned community about four miles from downtown Austin. The program was created as part of the Tax Cuts and Jobs Act of 2017. Google recently announced its prelease of the entire 150,000-sq.-ft. Saltillo building between Fourth and Fifth streets, a sign of the ever-growing East Austin area. Google plans to move into the seven-story building at the beginning of 2020 that will include a Whole Foods Market grocery store.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Sales Volume graph

$13M HQ2 in Cedar Park

The city council has approved the development of a $13 million second headquarters for James Avery Craftsman Inc. in the Williamson County suburb of Cedar Park. The 35,000-sq.-ft. office building will be located at Scottsdale Crossing Technology Park off U.S. 183A and will support 102 jobs. It is reported that incentives for the jewelry manufacturer and retailer could total up to $525,500. Construction is scheduled to be completed by the end of July 2021. The jewelry chain was established about 60 miles northwest of San Antonio, in Kerrville. They have 80 stores in Texas, with a total of 88 stores nationwide. A corporate office for the company is located in North Austin in Tower of the Hills at 13809 Research Blvd supporting IT, human resources and regional retail staff. The small Austin office started out with five people in 2010 and has grown to almost 40 primarily information technology type employees.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Asking Rent graph

Investment sales activity

Real Capital Analytics data reports office sales volume for Q2 2019 in the Austin area at $1.3 billion, over six times the amount in Q2 2018 at $224.0 million. The primary capital composition for buyers in 2019 was made up of 51.0% REIT/listed investors, and 24.7% private. For sellers, the majority was 51.0% REIT/listed, and 28.8% institutional.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Construction graph

Priciest deal per square foot in Texas

Tier RIET Inc., Invesco Real Estate and Cielo Property Group sold Third+Shoal, a 29-story, 353,000-sq.-ft. office tower at 607 W. 3rd Street in the central business district to Credit Suisse. It is reported that the deal closed at around $313 million, which equates to more than $800 per sq. ft. and breaks the record for an office sale in Texas. The previous Texas record was set in April when a downtown Dallas office building, called 1900 Pearl, sold for about $700 per sq. ft., or $183 million to the State Teachers Retirement System of Ohio. If you take into account medical office buildings, which lean towards selling at higher premiums, the Memorial Hermann Medical Plaza at 6400 Fannin St. in Houston sold for $793 per sq. ft. in 2018, according to CoStar data. The high-profile office tower tenant roster includes Facebook, Bank of America, Merrill Lynch and Dickinson Wright.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Completions graph

Office rents continue to surpass all-time highs

In the second quarter of 2019, rents for Class A office space averaged $40.73 per sq. ft. per year (direct deals). That is the highest level on record, and up from $39.05 per sq. ft. this time last year—a 4.3% increase. These rates are full-service quoted rental rates that include the amount of the base rent and all operating expenses multiplied by the square footage of the space. The most common operating expenses are property taxes, utilities and janitorial, common area maintenance, and property insurance. There are many factors that can vary rental rates such as free rent, tenant improvement allowances, class of building and location. Asking rates for Class A space in the CBD are at an average of $52.12 per sq. ft., while recent data from a commercial real estate research source reports CBD Class A rates at $61.10. The differences include reported rates of  some of Austin’s premier Class A buildings in the CBD, such as the Frost Bank Tower at 401 Congress which is asking $78 per sq. ft. including operating expenses of $28 per sq. ft. Office rents are expected to continue to rise as job growth drives demand for office space in the Austin market, especially in the tech sector.

Austin Office Commercial Real Estate Market Quarterly Report Q2 2019 - Net Absorption graph


Leta Wauson
Director of Research
[email protected]
tel 713 275 9618

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