Austin’s office market ends 2018 with higher rental rates and higher absorption
Austin’s office market continues to be one of the hottest and most desired in the country. Q4 recorded positive net absorption for the second quarter in a row, which balances out the negative net absorption we saw in the first two quarters of the year and brought the year to date net absorption up to 29,762 SF. With absorption ticking up in Q4, vacancy rates continue to drop, settling at 11.5% market wide by the end of Q4 and causing average rents to rise slightly along with operating expenses (due to increasing building values/taxes).
A major highlight of Q4 was the announcement of Apple’s 3,000,000 SF campus in North Austin. The announcement will undoubtedly have a positive ripple effect on the Northwest Austin submarket and is evidence of the continued optimism in Austin’s thriving economy. To that end, we expect to see several other notable tech giants follow suit with commitments to large blocks of space. Almost every big block of space (on the ground and under construction) is currently trading paper with large corporate users. Recent experience shows that competition for these large blocks is tremendous. Regardless of credit and size, for our client’s best interest, we work multiple transactions for each need as the likelihood of getting pushed due to a bigger deal coming along is becoming a common occurrence.
Another notable development trend is the amount of new product set to break ground in the previously sparse South Austin submarket. There are currently several hundred thousand square feet of new office development set to break ground or currently under construction on South Congress alone, with a plethora of opportunity for more product in the area. Due to extremely high construction costs and demand to be near the core, but not in the core (parking), rates on these projects are starting to approach those in the CBD.
There is no current evidence for a market slowdown in 2019, as the Austin and Texas economy remained strong in Q4 with unemployment continuing to hover at historically low levels. Construction levels are at an all-time high in Austin, with many developers building spec and delivering 80% - 100% preleased. Austin’s growth continues to be diversified across an array of industries and features a healthy mix of organic growth as well as growth from out of state, primarily California.