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
Q3 In Review
Austin’s office market is showing signs of resilience, highlighted by a strong 18% increase in leasing activity year over year. While overall vacancy remains elevated at 24.3%, the uptick in leasing reflects steady demand, particularly in Class A properties, which posted positive net absorption for the year so far, in contrast to continued challenges for Class B spaces. The construction pipeline activity is significantly down, with new deliveries declining by 70% for the quarter and construction underway has decreased 45% from last year. Rental rates held steady, with an average of $41.37 per sq. ft., reflecting the market’s current balance amid subdued new supply and selective tenant demand. This gradual stabilization suggests that Austin’s office sector is adjusting to the shifting office landscape with cautious optimism.
Austin Economic Update
According to the latest release of Austin’s Economic Indicators, Austin’s unemployment rate remained at 3.4% in August—below the state’s and nation’s rates of 4.1% and 4.2%, respectively. In August, the local labor force grew 2.0%, while the state’s increased 3.6%, and the nation’s grew 0.9%. Austin employment grew 4.7% in August after dropping 2.3% in July. Sectors that saw a decline included education and health services (-1,585 jobs) and information services (-134 jobs). Sectors with the most growth were professional and business services (2,741 jobs) and construction and mining (1,106 jobs). Year to date in August, Austin employment fell 0.3%, below the state’s and nation’s growth of 2.2% and 1.4%, respectively.
AUSTIN OFFICE MARKET OVERVIEW
Net Absorption Negative for the Quarter, but less than Past Two Quarters
Net absorption—move-ins minus move-outs—was negative 102,186 sq. ft. for the quarter. For the year so far, Class A has recorded positive 265,327 sq. ft., while Class B was negative 133,641 sq. ft. Notable recent move-ins include coworking company Industrious opening two new locations for a combined 52,000 sq. ft.; IBM moving into 50,000 sq. ft. of space 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, Deliveries almost Non-existent
Deliveries were very low at 36,000 sq. ft for the quarter, this is down significantly by almost 70% for the quarter and 90% from this time last year. The construction pipeline has been trending down as well with 2.7 million sq. ft. currently underway. This is down 45% over the past year when 4.9 million sq. ft. was in the pipeline.
Leasing Activity Picks Up, 18% Increase Year Over Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 1.5 million sq. ft.—this is up for both the quarter and year over year. Notable large new leases signed include IBM subleasing 320,095 sq. ft. of former Meta space at 11800 Alterra and Apple committing to take 203,940 sq. ft. at 6900 W Parmer Ln. Apple is scheduled to take occupancy in mid-2025. Also, Studio by Tishman Speyer is scheduled to move into 20,000 sq. ft. in early 2025 at ATX Tower.
Vacancy Rate at 24.3%
The overall vacancy rate in Austin’s office market is at 24.3%. 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 has been trending down and is at 5 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 $28.9 million. For the past year, 56 office properties were sold with an average $296 price per sq. ft. and an average cap rate of 7.1%. There has been a notable uptick in tenants opting to purchase some properties instead of leasing, including the City of Austin purchasing 712 Huntland Dr. The 103,000-sq.-ft. property was renovated in 2022, and the city’s Water division will occupy the property. Other recent transactions include Invesco selling the two building (237,300 sq. ft.) office portfolio, Barton Oaks II & III. HPI was the buyer, and 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 $41.37 per sq. ft., which was largely flat for the quarter and year, up 0.8% and 0.4%, respectively. Asking rents for Class A and Class B space are at $47.15 per sq. ft. and $31.32 per sq. ft., respectively. On the submarket level, the CBD and North/Domain have the highest rates at $56.73 and $43.27 per sq. ft., respectively.
Steve Triolet
Senior Vice President, Research and Market Forecasting
tel 214 223 4008
[email protected]
