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Austin, San Antonio Office Markets Move Closer While Retaining Distinct Drivers

The Domain submarket of Austin continues to be a magnet for office users. To meet demand, Dallas-based Stonelake Capital Partners is developing a 24-story tower in this submarket.

The phenomenal growth taking place in Austin and San Antonio has shown little sign of slowing over the past several years. These two mid-size Texas cities are developing quickly and continue to undergo rapid change. Both are ranked in the top 10 fastest-growing metro areas in the country and both have unemployment levels at near-record lows.

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The industries driving the economy in these two central Texas cities are quite different. Each has strong tourism sectors, but that is where the similarities end.

Parker McCollum, Cushman & Wakefield

In Austin, the tech industry, government, life sciences and creative arts are keeping the market extremely active. Defense, healthcare, oil and gas and the burgeoning markets of cybersecurity and biotech are driving absorption in San Antonio.

New tenants are coming to San Antonio to take advantage of lower costs and an abundant workforce — a positive trend that reflects strong fundamentals and viability. As for Austin, Fortune 500 companies continue to pour into the city not only to capitalize on the lower cost of doing business in Texas, but also to recruit and lure a highly educated workforce.

Austin’s third-consecutive gold medal ranking as the “Best Place to Live” by U.S. News & World Report makes the city an easy sell to both employers and employees. That growth is evident and should continue for years to come.

The Numbers

Austin stands out as the clear leader when it comes to demand for office space. Existing office space inventory in the Texas capital is approximately 53 million square feet as compared to 31 million square feet in San Antonio. Annual full-service average office rents in Austin are also substantially higher at $38.86 per square foot as of the third quarter, compared to San Antonio’s $23.21 per square foot. Both have seen steady increases in rates year-over-year as the economy has recovered from the Great Recession.

Austin continues to draw major tech companies to its central business district (CBD). Global tech giants such as Google, Facebook, Cirrus Logic and others are filling up top-tier space at a breakneck pace. In early 2019, Google preleased an entire 800,000-square-foot building before construction began, further proving the demand for downtown office space. In turn, Class A vacancy in the CBD is down to 5.6 percent with rents skyrocketing to a record high of $60.71 per square foot.

Both markets continue to have a healthy development pipeline, although Austin’s is more than four times that of San Antonio. About 5.7 million square feet of office product is currently under construction in Austin while San Antonio has 1.4 million square feet under construction.

Source: Cushman & Wakefield Research

Mixed-Use Remains Key

New Class A deliveries in downtown San Antonio have increased inventory levels — as well as rates — yet this market still does not have the allure Austin’s CBD carries. Top-tier space in downtown San Antonio  averages $35.12 per square foot with vacancy levels around 9.1 percent.

Redevelopment projects like the Pearl District, located at the site of the old Pearl Brewery just outside of the CBD, continue to gain ground in San Antonio. These trendy, high-end mixed-use developments are extremely desirable, with office rates here being north of $47 per square foot, considerably higher than the city and CBD averages.

Anyone who has spent enough time in Austin knows about The Domain. Known as Austin’s “second downtown,” this former IBM campus in the far northwest area has become the place to live, work and play. Like the Pearl District, The Domain is a mixed-use development with many high-end retail shops, multifamily units and a variety of entertainment options.

Several of the same tech giants filling up space in the CBD are doubling down on space in this micro-market. Players like Amazon, Google, Facebook, Indeed and VRBO continue to fill Domain office towers almost as quickly as they are built, pushing Class A rents here to near-CBD levels.

The Next Dallas-Fort Worth?

With all of this growth, many foresee an eventual “merging” of these two large metro areas. Similar to what has happened with Dallas-Fort Worth over the last several decades, the 74-mile corridor between Austin and San Antonio is quickly filling in.

Formerly made up of sleepy little towns like San Marcos, New Braunfels, Buda and others, this corridor is now one of the fastest-growing areas in the country. Development is rampant all along the Interstate 35 corridor and if growth projections hold steady, the two metro areas could become one within 20 years.

While Austin and San Antonio are unique in their own rights, they are becoming more and more strongly tied to one another through population and economic expansion.

By Parker McCollum, research analyst, Cushman & Wakefield. This article first appeared in the October 2019 issue of Texas Real Estate Business magazine. 

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