Austin’s office market is still trending towards higher rent and lower vacancy
Absorption levels in the Austin office market rose in Q3 after experiencing negative absorption the first two quarters of the year. While absorption increased, vacancy continues to remain low at 11.5%, which has led to yet another steady increase in rates. Operating expenses have also trended up slightly (taxes, utilities).
While the market remains hot overall, transaction activity is a little low in comparison to years past, with much of the market activity being attributed to large companies taking big chunks of space. For example, Facebook gobbled up another 320,000 square feet at Esperanza Crossing at The Domain. The Domain continues to remain a desirable location for big users outside of the CBD. There is competition for every new Domain building as Fortune 500 companies jockey for position. TIER REIT has plans to build three additional buildings on site and Brandywine’s 66 acre multi-use site looks like it may get the development green light from the city in the near future, which would open up the North/Domain submarket to professional services companies currently unable to compete in the race for space amongst tech giants.
Like the Domain, the East submarket continued its explosive growth in Q3, with HEB/Favor and Google leading the charge taking down large swaths of space. Most of the new buildings on the east side have significant competition for space before construction finalizes. The East submarket is under-built and with almost all of the new development being pre-leased, we expect to see more new construction that is sure to bring higher rental rates and an increased scrutiny on parking. Commercial sales were down significantly in the third quarter. Owner/users aren’t selling because they have nowhere to go and the combination of depressed cap rates with rising interest rates have otherwise slowed sales. We are still tracking two very large suburban investment transactions that will close in Q4.
Overall, Austin’s office market had a very solid quarter. While the numbers aren’t as red hot as we’ve seen over the past few years, the economy remains much stronger than the national average and the basics of supply and demand continue to ring true in our underbuilt and highly desired market.
Despite the increased expense of real estate in Austin, developers remain optimistic as another 200,000 square feet of new construction kicked off in Q3, bringing the total amount of new development to 3.98 million square feet. Incredibly, nearly 2 million square feet of new development has been pre-leased, with the gamble to speculatively build paying off for developers. We foresee a strong Q4 to round out another year of explosive growth.