The Austin Office development pipeline has reached the second-highest level of all-time at 7.9 million.

EXECUTIVE SUMMARY

Vacancy rate at 15.8%
The overall vacancy rate in the Austin office market was up 70 basis points quarter-over-quarter from 15.1% and up 180 basis points year-over-year from 13.8%. The vacancy rate for Class A properties is 23.8%. In Q4 2022, overall net absorption went into the red at negative 150,177 sq. ft., bringing the year-to-date amount to positive 1.6 million sq. ft. Of the 8 million sq. ft. currently, under construction, 47% of that space is available. The overall Austin average asking full-service rent is at $40.95 per sq. ft.—up from last year’s $40.40 per sq. ft.—while the asking price for Class A space in the Central Business District is averaging $61.40 per sq. ft.

Austin Economic Indicators
In November, Austin’s economy continued to grow as employment increased and the unemployment rate fell. At the same time, Austin’s housing market continued to cool down due to rising mortgage rates that caused both housing sales and median prices to decline. Austin’s unemployment rate fell further to 2.8% in November. This was lower than the state’s jobless rate of 4.0% and the nation’s 3.7% rate. Austin employment grew by an annualized 5.4%, or by 40,854 net jobs in November. Growth was led by leisure and hospitality (42.1%, or 4,229 jobs), and health and education services (14.3%, or 1,605 jobs). Two sectors experienced declines in the past month: professional and business services (8.1%, or 1,889 jobs), and construction (7.2%, or 461 jobs). As of November, Austin payrolls grew 5.1% year over year.

AUSTIN OFFICE MARKET OVERVIEW

Austin office space availability increases
Overall space availability, which includes current, sublease, and future vacancy, is at 21.1%. The South submarket ended 2022 with an availability rate of 31.4%, followed by the Northwest at a 26.7% availability rate and the Southwest at 24.5%. The difference between this figure and the vacancy rate reflects expected future move-outs. Q4 2022 marks the third consecutive quarter that delivered supply (660,000 sq. ft.) outpaced demand (represented by net absorption at negative 105,000 sq. ft.). With current projects under construction at 8 million sq. ft., demand will have to significantly increase for the high availability rate to have an opportunity to decrease. Also, increasing remote work could slow the market’s growth moving forward. Austin has many smaller tech companies that could decide to remain remote for the longer haul, altering the required space in the future.

Net absorption
Net absorption in the Austin office market dropped into the red during Q4 2022, although total net absorption for the year was in positive territory at 1.6 million sq. ft. Class A represented positive 1.8 million sq. ft. and Class B negative 212,000 sq. ft. The submarkets leading positive net absorption year-to-date in 2022 are the Southeast at 713,000 sq. ft., followed by the CBD at 710,000 sq. ft., and coming in third, the Northwest submarket at 460,000 sq. ft.

Construction activity remains high
Construction levels in Austin are among the highest in the nation. 8 million sq. ft. is underway (53% preleased)—representing 7.5% of inventory—on top of the 4.1 million sq. ft. delivered (72% preleased) in 2022. There is 2.6 million sq. ft. of proposed projects in 2023 that have been announced, although they have yet to break ground. The amount of construction underway and in the pipeline is easily comprehendible, as the Austin office market remains one of the most dynamic in the country. New York-based Related Companies is planning a 15-story office tower called One Ladybird Lake. It will be at 208 Barton Springs Road on the current site of the Hyatt Regency Austin’s parking lot in the CBD. Construction is scheduled to begin in Q4 2023, with completion slated for late 2025.

Investment sales trends
Real Capital Analytics data reports quarterly sales volume for Q4 2022 in the Austin metro area at $158 million, down significantly from last year when Kilroy Realty closed the deal on Indeed Tower for $580 million. The primary capital composition for buyers so far in 2022 was made up of 53% private investors and 32% institutional. For sellers, the majority were 67% private investors, 22% institutional, and 10% REIT/listed. One of Austin’s most notable office transactions in in the second half of 2022 was Beacon Capital Partners purchasing The Foundry from Tishman Speyer. The Foundry in East Austin consists of two buildings totaling 240,000 sq. ft. The asset, 96% leased at the time of sale, was sold for an undisclosed price.

Leasing activity
The volume of signed lease transactions during 2022—which is comprised of both new leases and renewals—was 6.8 million sq. ft. compared to the previous year’s 8.9 million sq. ft. Significant transactions that were signed in 2022 include TRS signing a lease for 235,000 sq. ft. in Mueller Business District – Bravo in East Austin; Whole Foods Market headquarters subleasing 188,111 sq. ft. at 525 N. Lamar Blvd. in the CBD; Teacher Retirement System of Texas inking a deal for 158,163 sq. ft. in Mueller Business District – Alpha in East Austin; and TikTok subleasing 126,429 sq. ft. at 300 Colorado Street in the CBD.

Rent growth continues to grow
Austin’s overall full-service average rates are at $40.95 per sq. ft., up 1.4% from this time last year at $40.40 and up 1.7% quarter over quarter from $40.25. Overall asking rates for Class A space is $46.14, and Class B is $33.49 per sq. ft. The asking rate is what is officially quoted for any given building and will differ from the ‘bottom line’ actual rental after negotiations, known as the effective rate. Over the long term, the outlook for rent growth in Austin should be optimistic. In marginal terms, rent has surpassed most major markets across the U.S. to become the fourth most expensive in the country, according to CoStar. While the near-term outlook may contain more downside risk, the performance over the past decade should leave little doubt that the market can sustain above-average rent growth over the long term.

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