Austin Office Market Q2 2018

Austin Office Market Q2 2018

Austin’s office market for Q2 2018 remained flat for the first half of the year compared with 2017. Although, occupancy has not changed much the vacancy rates have moved upwards  overall at around 10%.  We are seeing a slowing of occupancy taking place and more sub-leasing activity, this tends to be a sign of a consolidation or a slowing of activity.  Vacancy rates can be skewed however due to new deliveries of inventory which encompasses 6 new office building properties being delivered.  Also new construction shall provide an additional 800,000SF of office space coming on the market.

Austin Office Market Operational Costs

In addition to increasing lease rates, operational costs are on the increase as well. Overall operational costs have increased $0.44 cents per square foot to an average over $10 per square foot per year for office properties.  NNN asking rates increased overall $0.41 cents per square foot from the 1st quarter to the 2nd quarter of 2018.  Annual gross rates overall are at a historical high of $35.84 per square foot per year. Job grown has expanded at 3% annualized in Q2 2018.  Asking rents comparisons over the past 3 years are as follows:

2015 $31.81  

2016 $34.83

2017 $34.39

2018 $35.84

Austin Office Market | Q4 2017

Austin Office Market | Q4 2017 | Summary Report

2017 was a strong year overall for the Austin office market , although the last quarter was met with negative occupancy (absorption). Vacancy rates were at a 16 year low for the Austin office market as well.  New development is an additional 600,000SF of space with over 2M square feet of new office space available.  During the last quarter occupancy was slower  compared to the previous 3 quarters. The majority of leases were with technology companies at over 30% of the leases done , next were financial services.  OPEX costs rose approx 86 cents per square foot which translates to an Austin average of over $9.50 per square foot. 

Offsetting operational cost increases | Austin Office Market Q4 2017

Landlords were seen lowering their base lease rates to an average of approx $24.00 down from $25 in Q3 to offset the higher operating expenses. Citywide however the full service gross rate rose approx $0.07 per sf compared with the previous quarter.  Unemployment in Austin has fallen to 2.6% which is the lowest since the 90’s. Vacancy rates are as follows for the last quarter of 2017:

  •  CBD 7.9%
  •  Northwest 8.6
  •  Far NW 6.0
  • North Central 7.7                                               Austin , TX Lease Terminology      
  • Round Rock 8.3
  •  East 7.4
  •  South 12
  • Southwest 11

Sublease activity has increased as well over the past 3 months, which can show consolidation or potential expansion into new spaces, however typically the sublease activity does not show expansion as much as it does consolidations.  We do expect the office market to somewhat flat despite some marketing forecasts of it being busy, as an example we have seen sublease listings last for 6 months with no takers.

Austin Office Market Q2 2017

Austin Office Market Update Q 2 2017

There are always differing opinions as wide as there are people in the CRE market , brokers, agents and owners. Austin has been on a very long run approximately 8 years and some say this cannot sustain itself and some say it will continue. Truthfully, nobody really knows the answer. If we take historical into account every long up-cycle has an eventual down cycle and vice versa that is the law of the universe.

So where is the Austin office market for Q2 2017? Currently, the news for the most demand seems to be Downtown Austin and the East Side. This sub-market is expected to be the leader as far as momentum however, lease rates are expected not to change too much. There are properties to be delivered in 2017 that will hold the lease rates in check unless the spaces are pre-leased at a fast rate then the formula would change.
Nine office buildings has been completed in Q2 2017 in Downtown Austin with an 80% pre-leased occupancy. Citywide leasing averages increased approx $0.28 cents per sf per yr to $34.02 as an average for the downtown Austin office market.

Among the best tech cities to live in, Austin still came in at number 1 against cities like San Francisco, New York, Boston and Seattle. As long as the media touts Austin as a number one city, the population growth will most likely continue regardless of growing traffic congestion and higher taxes and expensive housing relative to the rest of the state.

Suburban Office Market
The suburban market vacancy rates are a bit higher approx +3% and demand remains somewhat steady, however we are seeing a lot more sublease listings coming onto the market which shows consolidations, changes to locations preferences or slow-downs in Austin office demand. Class A Office space is still leasing at a flat to slight increases.

Austin Office Space Market | Q1 2017

Austin Office Space Market for Q1 2017

The one word that can describe the Austin office space market is “new construction underway” for the first quarter of 2017, 1M SF of new space has been delivered to the Austin market. In addition to the 1M SF , approx 1.7M SF is expected and is currently under construction. Sub-markets with the most new construction activity consist of Downtown Austin, Northwest Austin and Southwest Austin.  Although there is new construction the occupancy rate has slowed somewhat. Vacancy rates ticked up to 9.7% from 9.2% in the previous quarter.  Near term forecasts for positive momentum are in place still due to new population growth and employment activity.  With the softening of occupancy and office lease rates may be more adjustable in the tenant’s favor, however they may not be at a significant discount. Shire Commercial is starting to see more sub-lease activity which is a gauge of what the overall market may be doing. 

 

Lease rates for Austin office space came down to $33.89 versus $34.89 in the last quarter which was a record high. 

Tenant improvements

 

Potential More of the Same to Slightly Downward?

 

The commercial real estate market for Austin office space has been on an up-swing for sometime and just like all things that ebb and flow , so does commercial real estate. Shire Commercial tracks Austin office space consistently and does see room for movement a bit more towards the tenant’s favor eventually.

Austin Office Market |Q2 2016

Austin Office Market | Q2 2016

Austin’s office market has been up on the upswing since 2012. However,  Austin’s office market is now experiencing negative occupancy. The actual figures are approx -24,000SF of negative occupancy in Q2 2016.  Lease rates have had small changes for the most part in low vacancy sub-markets such as Downtown Austin.

Here is a quick review,  lease rates for offices in Austin did not move much , only up +.9% to $34.65 psf per yr. The largest move was in Class A office space in the downtown area are coming in at an increase at approximately 2.7% to a whopping $47.31 psf per yr. Suburban Class A office lease rates only moved up on average $0.03 cents per sf per yr to $35.74 psf per year.  Current vacancy is coming in overall at 12% which is up from the last quarter by 1% point.

Indicators for Q2 2016

Indicators are as follows:

Vacancy down, Occupancy down, New Construction down , Under Construction down

Offices for Sale Overview Q2 2016

The current trend for Austin offices for sale is showing an increase in sales asking prices of 8% , compared to last years asking prices there is a +31% increase in asking prices, coming in at averages of $237 per square foot.Austin office market Q2 2016