Austin’s office market is fast, competitive and expensive
Austin’s current office market can be summed up in three words: fast, competitive and expensive. While absorption decreased and vacancy went up slightly in the second quarter, the market has been extremely busy in comparison to past summer slowdowns. Rates and operating expenses have continued to trend upward, primarily due to skyrocketing taxes. We are seeing competition for prime spaces in almost every submarket in the city. We are setting rental rate records in the CBD ($45+ operating expenses), Eastside properties continue to mimic the CBD’s upward rate trends (including the obligation to pay for parking at most new developments) and Class A suburban properties are commanding record rental rates as well. “Fast” can be a bit misleading, but tenants are being forced to move on properties very quickly in order to separate themselves from competition. Deal pace has simultaneously slowed down as Landlords take their time to negotiate and document the deal the way they want it.
While small and medium sized office users are feeling the pain of higher rents and operating expenses, the competition for space isn’t as significant. There are plenty of options available, but Landlords continue to push for longer lease terms (which are often necessary to cover increasing construction/improvement expenses). With increasing rents, Austin follows the national trend of trying to fit a lot of people in a small space. In the CBD, the average tech tenant now targets 5.5 people per 1,000 SF, yet the average parking ratio is closer to 2.5 per 1,000 SF. It’s important to do your homework and consider the possible pitfalls associated with high density: Are you at risk of triggering a density clause? Can you park your employees? Will the air conditioning and electric capacity keep up in August? Also, all tenants need to pay close attention to continuously rising construction costs. Taking the time to think through construction and get preliminary bids can be the difference between a great process and a messy one.
If the rumor mill is correct, there are some more big deals coming down the pipeline. Our market has been waiting patiently for new product to come to market in order to provide some breathing room, but as we get closer to buildings being delivered (Domain, North, East) and beginning construction (CBD), we’re hearing about big corporate users preleasing space. We’ll give you a hint: Look at the big users that have been taking down space for the past 3 years and expect more of the same. We don’t think much of the space that is set to deliver over the next two years will deliver free and clear. As long as we don’t see a tech bust, we feel that the market is going to remain fast, competitive and expensive.
By The Numbers
*Rates inclusive of estimated operating expenses.