Tech companies continue growth in Austin’s office market
Boots On The Ground Commentary by David Bremer
Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin office market.
Austin’s market continues to expand at an unprecedented pace, led by significant corporate expansions and hiring coupled with significant organic growth. To Austin’s credit, it has largely been able to maintain it’s notable quality of life, with WalletHub recently naming Austin as the second-best city to live in. Austin was also noted as the number four city out of 100 major metropolitan areas for STEM capability (Science, Technology, Engineering and Math).
Technology companies continue to be the primary driver of Austin growth. The city now has eight tech companies (Apple, Dell, IBM, Google, Indeed, Samsung, NXP and Applied Materials) occupying or preparing to occupy over one million square feet. Others, such as Oracle and Facebook, will likely be approaching these sizes in the near future. A substantial amount of space is under construction and these tech giants show no signs of a slowdown, which means there will be a continued surge in hiring and more people on the highways. Location-wise, the majority of these high-growth companies will be in the CBD or in North Austin. When you take into account the likely additional expansion in far Northwest Austin by Apple and a few other companies close to taking down real estate (150K-450K SF) citywide, we have every reason to believe that the employee migration to Austin will continue.
The result of all of this demand has kept the market extremely tight and has continued to push rates upward. Medium and large companies are urged to start the real estate evaluation proces sometimes 2-3 years in advance in case they have to consider build-to-suits or pre-leases due to lack of availability. An active market also means very busy construction crews. Finish-out pricing has trended significantly upwards and is now one of the most important factors to evaluate when comparing options on the market. Parking is also near the top for items to discuss on the front end as higher rates result in a flight toward higher density.
Austin is set to deliver a huge amount of new office space in the next 3 years, but much of this space is pre-leased well in advance of delivery. Barring a significant national economic slowdown (elections, financial markets, etc.), we don’t see a reason why Austin would slow in the coming months or quarters. Occupancy levels are rising in the short term until some of the new projects start to deliver and we believe the cost of space will continue steadily increasing until the supply and demand evens out.
Tip: When looking at new product, operating expenses (primarily taxes) are quoted as artificially low. In the past, these expenses were generally modeled as a slow escalation over 2-3 years as the taxing authority caught up to full valuation. We feel there is likely to be a new trend of very fast tax/expense catch up, so make sure your broker is advising you smartly and conservatively on this front.
Austin Office Overview
In the second quarter of 2019, Austin’s office market reported 528,811 SF of positive net absorption. The majority of the positive absorption occurred in Class B buildings with a total of 430,300 SF of positive net absorption. Class B buildings in Austin posted 112,462 SF of positive net absorption, while Class C properties posted 13,951 SF of negative net absorption.
Currently, 5,290,054 SF of office space is under construction and 2,156,834 SF of that is pre-leased. The third quarter of 2019 is expected to see 883,094 SF of deliveries and 664,679 of that is pre-leased. One of the buildings set to deliver in the third quarter of 2019 is Offices at Saltillo, which was supposed to deliver in the second quarter. The entire 150,000 SF East-side building is already 100% leased to Google.
SXSW Center in the CBD submarket was the largest building to deliver in the second quarter. This 140,000 SF building delivered in May and is 94% leased by a few large tenants including SXSW and WeWork. The third quarter of 2019 is expected to see twelve new buildings come online.
The citywide average rental rate increased over the quarter from $35.55 per SF in Q1 2019 to $35.74 per SF in Q2 2019. Class A rental rates in Austin’s CBD increased by 3.6% over the quarter to $52.78 per SF up from $50.90 per SF in the first quarter of 2019. The overall suburban Class A rental rate also increased, from $37.67 per SF to $37.97 per SF, over the quarter.
In May, CNBC announced that Austin has been ranked one of the best big cities for starting a business. Austin ranked fourth behind Orlando (FL), Oklahoma City (OK) and Miami (FL). Austin beat out large cities like Atlanta and Denver and some other “tech” cities like Durham and Raleigh, North Carolina. The rankings were based on nineteen key metrics, including: job growth, share of collegeeducated population, office space affordability and corporate taxes. Cities with some of the largest populations, like New York, didn’t make the list because they tend to be some of the least affordable places to live.
Vacancy & Availability
Austin’s citywide vacancy rate decreased slightly from 10.3% in the first quarter of 2019 to 9.5% in the second quarter of 2019. The Southeast submarket’s Class C vacancy rate saw over 55,000 square feet come onto the market in the second quarter, which is why they had the largest jump in vacancy moving from 4.5% in Q1 2019 to 24.2% in Q2 2019.
The largest decline in vacancy happened in the Class A Southwest submarket, where the rate decreased from 12.6% to 10.2%, which is due to over 345,000 square feet being taken off the market.
Overall suburban vacancy decreased quarter over quarter from 11.4% in Q1 2019 to 10.3% in Q2 2019, while the CBD’s vacancy rate increased over the quarter from 5.6% to 6.0%.
Absorption & Demand
Austin’s office market posted 528,811 square feet of positive net absorption in Q2 2019. The only submarkets that experienced loss over the quarter were the Northeast submarket (74,550 square feet of negative absorption) and the CBD submarket (54,501 square feet of negative absorption).
A majority of the negative net absorption over the quarter occurred in the Class B Northeast submarket, totaling 74,650 square feet of negative absorption. In April, all of Promontory Point C (46,893 square feet) was put on the market brought the submarket’s net absorption number down quite a bit. In all, 89,695 square feet came to the Class B Northeast submarket.
The Northwest submarket helped push the absorption balance into positive numbers with 197,224 square feet of positive net absorption. The majority of the absorption in the Northwest submarket happened Class A space and can be attributed to Allergan moving into an estimated 43,000 square feet at Riata Corporate Park 2 (12301-B Riata Trace Parkway).
The Austin market recorded forty-eight signed leases in the second quarter with some big tenants leading the way. Visa signed their 133,823 square foot lease for Research Park Plaza Building I at 12401 Research Boulevard, while Apple is set to take even more space in the tech corridor by taking all of Parmer 3.4. The 115,000 square foot building was just completed late last year.
According to CoStar, our data provider, Austin’s citywide average rental rate increased 1.16% over the quarter from $35.33 per SF to $35.74 per SF. As expected, the highest rates across the Austin office market in the second quarter were in CBD Class A buildings where net rental rates averaged $52.78 per SF. Rental rates were also high in the East and South submarkets where Class A rental rates reached $49.27 per SF and $43.89 per SF, respectively. Citywide Class B rental rates rose slightly in Q2 2019 to $31.33 per SF from $30.80 per SF in Q1 2019. CBD Class B rental rates increased by 2.0% over the quarter from $47.17 per SF to $48.15 per SF in Q2 2019.