Austin Office vacancy rate increases due to a combination of new construction and muted demand; however, overall asking rates still increased slightly for the quarter.

EXECUTIVE SUMMARY

Q2 In Review
Austin’s office market experienced a challenging Q2 2024, marked by negative net absorption, declining leasing activity, and rising vacancy rates. New supply, exacerbated by sluggish demand due to recent tech layoffs, continues to pressure the market. While sublease space is decreasing, it remains a significant burden weighing on market fundamentals. Despite these headwinds, rental rates increased slightly for the quarter, and investment sales, though subdued, saw some notable transactions.

Austin Economic Update
According to the latest release of Austin’s Economic Indicators, Austin’s unemployment rate stayed at 3.4% in May, remaining below the state’s and nation’s rates of 4.0%. In May, the local labor force increased an annualized 2.3%, while the state’s increased 2.9%, and the nation’s fell 1.8%. Austin employment grew 2.9% in May after increasing 3.4% in April. The sectors with the most growth were leisure and hospitality (1,916 jobs) and trade, transportation and utilities (974 jobs). Sectors that saw a decline included professional and business services (-1,198 jobs) and information (-429 jobs). Year to date, Austin employment growth was 2.2%, below the state’s 2.8% gains and above the nation’s 1.9% increase.

AUSTIN OFFICE MARKET OVERVIEW

Net Absorption Slightly Negative in Q2 2024
Net absorption—move-ins minus move-outs—was a negative 64,718 sq. ft. for the quarter. Both Class A and Class B properties struggled in the second quarter, recording a negative 23,290 sq. ft. and a negative 41,428 sq. ft., respectively. Notable move-ins for the quarter include IBM moving into 50,000 sq. ft. at Parmer 3.2, National Veterinary Associates subleasing 30,646 sq. ft. at Bouldin Creek South and Dun & Bradstreet moving into 36,248 sq. ft. of sublease space at Domain Gateway.

Construction Pipeline Decreasing, but Still Above the Norm
Deliveries were at 138,161 sq. ft for the quarter, this is down significantly from 500,000 delivered in Q1 2024 and 668,009 sq. ft. in Q2 2023. Still, new deliveries still outpaced demand, pushing the vacancy rate higher. With the construction pipeline still at almost 5.3 million sq. ft. the vacancy is expected to increase over the next few quarters as new supply has been outpacing demand. Given the recent layoff announcements from several large tech companies in Austin, demand is unlikely to keep up with the new supply in the short term.

Leasing Activity Muted So Far in 2024
Quarterly leasing velocity—comprised of new leases and renewals—stood at 943,107 sq. ft.—down 14% from the last quarter. Notable large new leases signed include that Studio by Tishman Speyer is scheduled to move into 20,000 sq. ft. in early 2025 at ATX Tower.

Vacancy Rate at 20.2%
The overall vacancy rate in Austin’s office market is at 20.2%. The total vacancy rate has been trending higher due to a combination of new spec construction with minimal leasing and companies continuing to downsize their footprints when leases have expired. On the sublease front, which has been a drag on the market, there has been a significant decrease in leasing activity and some rolling over to direct vacant space. Sublease space available is at 5.2 million sq. ft., this is down from the 5.8 million sq. ft. in late 2023.

Investment Sales Trends Remain Subdued
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 at $148 million. For the past year, 57 office properties were sold with an average $289 price per sq. ft. and an average cap rate of 7.2%. Notable recent transactions include Invesco selling the two building (237,300 sq. ft.) office portfolio, Barton Oaks II & III. HPI was the buyer, they plan to make some cosmetic upgrades to the buildings which had 85% occupancy at the time of sale. Also, Shorenstein Properties sold the second office property in the Mueller Business District, which is known as the Bravo building. Teacher’s Retirement System of Texas purchased the 245,000 sq. ft. office property which they 100% occupy.

Rent Growth Slightly Up for the Quarter
Austin’s full-service average rent stands at $41.64 per sq. ft., which is up 4.8% from the previous quarter’s $39.74 per sq. ft. Asking rents for Class A and Class B space are at $47.52 per sq. ft. and $31.73 per sq. ft., respectively. Despite limited demand over the past few quarters, Class A rates went up in the past quarter, while Class B rates saw a slight decline.

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