Up nearly 50%, Austin Office leasing activity on the rebound in Q2.

EXECUTIVE SUMMARY

Q2 In Review
By the end of Q2 2023, the overall vacancy rate in the Austin office market rose 100 basis points quarter-over-quarter, from 16.2% to 17.2%. Net absorption decreased further quarter-over-quarter from -605,451 sq. ft. in Q1 2023 to -691,168 sq. ft. in Q2 2023. By next year, net absorption is expected to return to positive territory, as large move-ins such as Amazon (332,865 sq. ft.) and Texas Retirement System of Texas (235,000 sq. ft.) fill office space in January 2024 and March 2024, respectively. On the quarter, construction is at 6.8 million sq. ft. with the CBD accounting for 2.3 million sq. ft.—35% of all space under development. Deliveries decreased 67% from 1.2 million sq. ft. to 415,647 sq. ft. in Q2 2023. Asking rents continue to trend upward quarter-over-quarter from $40.95 per sq. ft. in Q1 2023 to $41.49 per sq. ft. in Q2 2023.

Austin Economic Update
The Austin unemployment rate increased to 3.5% in May 2023, slightly up from 3.2% in April 2023. The metro’s jobless rate was lower than both the nation’s rate (3.7%) and the state’s rate (4.1%). Construction and mining (1,670 jobs, 28%) and financial services (1,091 jobs, 17.6%) saw the most growth, while information (411 jobs, 8.8%) experienced the largest decline among the sectors. Although wages decreased by an annualized 2.1% in May 2023, hourly earnings ($33.46) were still above the nation’s average ($33.32) and the state’s average ($31.21).

AUSTIN OFFICE MARKET OVERVIEW

Leasing Activity Increases 48% Quarter-over-Quarter
The volume of signed lease transactions during the second quarter—comprised of new leases and renewals—was 1.1 million sq. ft., up 48% from the previous quarter’s 769,351 sq. ft. The recent increase can be attributed to one of the largest leases recently signed in Austin within the past year. IBM, a longstanding information technology firm, inked a deal for a 320,000-sq.-ft. lease occupying almost two full towers within The Domain in May 2023. IBM plans to be fully moved into the towers by 2027.

Vacancy Rate Increases To 17.2%
The overall vacancy rate in the Austin office market is 17.2%, up 100 basis points from 16.2% in Q1 2023. Class A and Class B properties have vacancy rates of 19.4% and 15.9%, respectively. Class A submarkets with the greatest year-over-year increases in vacancy rates include: South (16.2% to 21.2%), CBD (22.1% to 24.5%), and Southeast (22.8% to 24.0%). Class B submarkets with the greatest year-over-year increases include Northeast (14.5% to 17.2%), Central (14.8% to 16.5%), and Southwest (14.5% to 15.4%). Many big tech companies in Austin are downsizing or putting lots of space up for sublease, thereby increasing the vacancy rate in recent months. For example, Accenture announced that it was laying off more than 200 employees in June 2023, and Home Depot put a 300,000-sq.-ft. office building on 13011 McCallen Pass up for sublease in May 2023.

Investment Sales Trends
Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume for 2023 at $439 million in Austin’s office market. With 146 deals completed thus far in 2023, the average transaction
price currently stands at $241 per sq. ft. with an average cap rate at 5.5%. By year-end of 2022, the cumulative 12-month sales volume was $659 million, and 397 deals were completed with an average transaction price of $517 per sq. ft. and an average cap rate of 6.2%. a notable acquisition within Q2 2023 included Cap Metro, a regional public transportation provider, closing on a three-building, 182,716-sq.-ft. office facility at East Fifth and Tillery Street for $87 million in June 2023, and Hippo, an insurance provider, purchasing a 48,000-sq.- ft. office building at 701 East Fifth Street for $26 million in April 2023.

Negative Absorption in Q2 2023
Net absorption—move-ins minus move-outs—decreased further quarter-over-quarter from -605,451 sq. ft. in Q1 2023 to -691,168 sq. ft. in Q2 2023. Year-to-date, net absorption is at -1,296,619 sq. ft. Despite the decrease, large move-ins in the coming quarters are expected to prop up net absorption levels in the year ahead. Amazon will occupy 332,865 sq. ft. of office space at 2904 Palm Way (Domain 9) in January 2024, and Teacher Retirement System of Texas (TRS) will fill 235,000 sq. ft. of office space at 46555 Mueller Boulevard (Mueller Business District) in March 2024.

6.8 Million Sq. Ft. In The Pipeline
Office construction is at 6.8 million sq. ft. across 35 buildings, with 3.6 million sq. ft. (54%) available for lease. The CBD submarket leads construction with 2.3 million sq. ft.—35% of all space under development—followed by the East submarket with 1.8 million sq. ft. (28%). New construction starting in Q2 2023 included a 257,000-sq.-ft. office space at 5300 Riata Park Court in May 2023. Deliveries decreased 67% from 1.2 million sq. ft. in Q1 2023 to 415,647 sq. ft. in Q2 2023. Despite the decrease, year-to-date deliveries thus far in 2023 totaled 1.6 million sq. ft., which is 35% higher than the year-to-date deliveries (1.2 million sq. ft.) this time last year.

Rent Growth Trends Upward
The Austin overall full-service average rate stands at $41.49 per sq. ft., up slightly from the previous quarter’s and the previous year’s $40.95 per sq. ft. and $40.84 per. sq. ft., respectively. Asking rates for overall Class A and Class B space are at $46.61 per sq. ft. and $33.97 per sq. ft., respectively. On the quarter, submarkets with the highest asking rates include: CBD at $59.05 per sq. ft., followed by North Domain at $44.07 per sq. ft.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618