The decade ends with even more construction in Austin’s office market
Boots On The Ground Commentary by Ally Dorris | Associate | Austin
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.
As anticipated, based on the last five years’ worth of quarterly reports, the Austin commercial market closed out the decade firing on all cylinders. Q4 of 2019 was the cherry on top of another year of growth and development in the Texas capitol city. As venture capital funding hit a record high of $2.2 billion, construction continues and more cranes pop up all over the city, there is no sign of slowing down in this tech hub as we enter into the new age-20’s
This last quarter unveiled a lot of what is to come in the next cycle of developments, especially in downtown. Avid, local developer, Endeavor, acquired more prominent land near the CBD that is ripe for redevelopment. Purchases include a high-profile retail center at 6th Street and Lamar Boulevard that houses the well-known record store, Waterloo Records and one of ELM Restaurant Group’s popular eateries, 24 Diner, also included is the land that sits under Aussie’s and Zax Restaurant, both of which are in the heart of the South Central Waterfront. Cielo also made another splash in Austin’s development pool with the purchase of a 0.81-acre tract at 5th and Brazos. The tract, improved with 39 condominium units, was reportedly purchased for $55,000,000. Cielo’s press release indicated it could be built up to about 885,000 square feet.
As the acquisitions of Austin’s limited land continues, construction marches on with more ground breaking ceremonies taking place, including 701 Rio, the 120,000 SF office building that sits one block from the West 6th Entertainment District, as well as Aquila’s new east side project known as Eastlake at Tillery. Construction also began on the University of Texas’s highly anticipated Moody Center, a 10,000-seat arena which will be the new home for Longhorn basketball games and other major events.
While the loudest buzz is in downtown, Austin’s periphery is in the growth path as well. Amazon has proposed an extraordinary 3.8 million square foot distribution center in Pflugerville. On top of that, an additional 120 acres is rezoned for a mixed-use development in Pflugerville, deemed NorthPointe. Williamson County’s popularity has sky rocketed thanks to new developments on the horizon like the one billion dollar Apple campus. According to the Texas Demographic Center, the population of the North Austin/Round Rock metro will top 1.6 million by 2050, which would quadruple the number at the start of the decade, which was 422,679.
Austin Office Overview
In the fourth quarter of 2019, Austin’s office market reported 315,567 SF of negative net absorption. A large amount of the negative absorption occurred in Class B buildings with a total of 229,982 SF of negative net absorption. Class A buildings in Austin posted 59,537 SF of negative net absorption, while Class C properties recorded 26,048 SF of negative net absorption.
Currently, 7,159,195 SF of office space is under construction and 2,386,911 SF of that is pre-leased. The first quarter of 2020 is expected to record 2,155,243 SF of deliveries and 1,248,873 SF of that is pre-leased. One of the buildings set to deliver in the first quarter of 2020 is Domain 10. The entire 299,673 SF building is 100% leased with Amazon taking at least 252,267 SF.
Rollingwood Town Center III in the Southwest submarket was the largest building to deliver in the fourth quarter. This 128,000 SF building delivered in December and is 100% leased. One of the tenants that pre-leased at the newest Rollingwood building is Greystar, leasing 18,328 SF. The first quarter of 2020 is expected to see sixteen new buildings come online.
The citywide average rental rate increased over the quarter from $35.51 per SF in Q3 2019 to $35.84 per SF in Q4 2019. Class A rental rates in Austin’s CBD increased by 7.8% over the quarter to $53.33 per SF up from $49.47 per SF in the third quarter of 2019. The overall suburban Class A rental rate also increased, from
$37.83 per SF to $38.10 per SF, over the quarter.
In December, CompTIA announced that Austin has been ranked the number one Tech Town, moving up from number three in 2018. CompTIA’s index looks at tech job postings, wages, cost of living, projected job growth, etc to create the ranking. The report stated, “Austin’s reputation for ‘weirdness’ is among the many reasons newbie tech companies are choosing it as their home base, with the hope that the city’s progressive culture and out-of-the-box thinking will inspire innovation”. Austin ranked first in front of Raleigh (NC), San Jose (CA), Seattle (WA) and San Francisco (CA).
Vacancy & Availability
Austin’s citywide vacancy rate increased from 11.2% in the third quarter of 2019 to 11.9% in the fourth quarter of 2019. The North/Domain submarket’s Class C vacancy rate had the largest jump in vacancy moving from 0% in Q3 2019 to 34.3% in Q4 2019. This was caused entirely by 15,363 SF being vacated at the Epoch Building (2404 Rutland Drive).
The largest decline in vacancy happened in the Class B Far Northeast submarket, where the rate decreased from 22.5% to 15.7%, which is due to 23,770 SF at Tower of the Hills (13809 Research Boulevard) being taken off the market.
Overall suburban vacancy increased quarter over quarter from 12.5% in Q3 2019 to 13.2% in Q4 2019, and the CBD’s vacancy rate also rose over the quarter from 5.9% to 6.8%.
Absorption & Demand
Austin’s office market posted 315,567 SF of negative net absorption in Q4 2019. Only five submarkets experienced positive absorption over the quarter, including Central, East, Far Northeast, South and Southwest.
A large amount of the negative net absorption over the quarter occurred in the Class A Northwest submarket, totaling 454,460 SF of negative absorption. In December, Nokia put 39,117 SF of it’s space at Cisco Systems Office Park (12515 Research Blvd) on the market for sublease. An additional 22,292 SF was put on the sublease market at Stonebridge Plaza I (9606 N MoPac Expressway. In all, 249,699 SF became available in the Class A Northwest submarket.
The Southwest submarket helped bring the absorption number closer to zero with 129,470 SF of positive net absorption. The majority of the absorption in the Southwest submarket happened in Class A space and can be partially attributed to Advanced Micro Devices moving into its 25,938 SF space at 7171 Southwest Parkway (Building 3).
The Austin market recorded thirty-seven leases over 10,000 SF each in the fourth quarter with a large renewal leading the way. Farm Credit Bank of Texas signed a renewal for their 103,453 SF space at the Plaza on the Lake II (4801 Plaza on the Lake Drive), while the State of Texas inked a new deal for 48,079 SF in Promontory Point B (2420 Ridgepoint Drive)..
According to CoStar, our data provider, Austin’s citywide average rental rate increased 0.93% over the quarter from $35.51 per SF to $35.84 per SF.
The highest rental rates across the Austin office market in the fourth quarter were in CBD Class A buildings where net rental rates average $53.33 per SF. Rental rates were also high in the South submarket where Class A rental rates reached $46.17 per SF.
Citywide Class B rental rates rose marginally in Q4 2019 to $32.09 per SF from $31.30 per SF in Q3 2019. CBD Class B rental rates increased by 2.6% over the quarter from $49.33 per SF to $50.61 per SF in Q4 2019.