Office Market in Austin CBD Shows No Signs of Slowing Down

The differences in the Austin skyline from 2010 to 2017.

The differences in the Austin skyline from 2010 to 2017.

The story of the office market in Austin’s central business district (CBD) begins in 2008. With the national economic downturn just beginning, a new, 44-story high-rise residential building had  just been completed and the millennial generation was slowly starting to enter the workforce.

At that time, the total inventory of office product in Austin’s CBD was approximately 8.44 million square feet. These properties posted a vacancy rate of about 12.9 percent.

Several major factors would soon come to play a role in transforming the submarket from professional and typical into tech-savvy and hip. First, Facebook arrived in Austin in 2010, bringing with it an ethos of, “it’s not a job, it’s an adventure.” The social media giant quickly took 20,000 square feet at 300 W. 6th St., its largest office outside its Silicon Valley headquarters.

Mike Kennedy, Avison Young

Mike Kennedy, Avison Young

Additional moves were precipitated in part by an increase in personal income taxes in California, which put the highest earners in the state at a combined state and federal income tax rate of 51.9 percent, among the highest in the nation.

In addition, the age demographics of the 2010 U.S. population indicated that there were 13 percent more persons aged 18 to 24 in 2010 than there were in 2000. At that time, Texas had a median age of 33.6, making it one of only three states with a median age below 35 years.

Tech firms soon realized that workers in their early- to mid-20s, which they competed among themselves to attract, were residing throughout Texas, particularly in Austin in the form of recent graduates from the University of Texas.

This realization encouraged virtually every California-based tech company to put together an “Austin strategy,” whether that meant breaking into the Texas capital’s office market for the first time or simply expanding the existing footprint within it.

Soon thereafter, Austin’s CBD began adding significant residential development. In addition, in a true display of growth, the area saw its population of downtown residents rise from about 4,000 in 2000 to the 15,000 or so people who currently call it home. The current population of downtown residents is expected to double over the next 20 years.

The Current Market

By 2020, millennials — those indvividuals born roughly between 1980 and 1995 — will comprise approximately 46 percent of the total American workforce.

This imminent infusion of millennials into the workforce means that all industries — not just tech — that are already facing stiff competition for talented workers can expect that trend to continue.

Surrounding amenities play an increasingly important role in that competition. Close proximity to a lifestyle that is urban — or feels urban — as well as one that is walk-able and transit-friendly has become paramount. Austin’s CBD offers that in spades, from amenity-rich daytime destinations to a plethora of evening activities.

Facebook recognized this trend early; the company now occupies 210,000 square feet in the original building that housed its 20,000-square-foot space in 2010. In addition, the California-based firm recently preleased an additional 230,000 square feet of office space at Third + Shoal, a building expected to be delivered during the fourth quarter.

Google, which actually arrived in Austin’s CBD before Facebook, initially moved north to the suburbs before returning to the CBD and taking space at 500 W. 2nd St., which was delivered during the second quarter of 2017. The global tech company now leases approximately 300,000 square feet at the property, which equates to about 60 percent of the building’s net rentable space.

Colorado Tower, a 373,000-square-foot office tower developed by Cousins Properties, also represents the submarket’s strong absorption. The building, which marked the first major office tower built in the CBD in 10 years, was 95 percent preleased when it opened during the first quarter of 2015.

WeWork, the pioneering company behind coworking and collaborative office space, as well as other companies that provide a similar service, have also settled in Austin’s CBD. Local sources estimate that these firms now occupy between 1 and 1.5 percent of the total CBD market inventory, with more expected to come.

As a result of all this demand, rental rates have risen by as much as 78 percent since 2011, while sales prices have leapt as high as $665 per square foot. With a current vacancy rate of 7.8 percent, sustained demand and a limited number of sites conducive to developing a major tower (due to land prices), other submarkets are seeing heavier development activity. These include the area near downtown, east of Interstate 35 and the neighborhood south of Lady Bird Lake.

2018 and Beyond

According to CoStar Group, Austin’s CBD will have more than 2.6 million square feet of office product under construction through 2020. This represents a 26 percent increase over the existing inventory, which totals approximately 10.2 million square feet.

In addition, as the metro’s downtown area continues to expand in all directions, development of office product should continue to follow that of residential and retail properties, particularly in the South Shore Waterfront District. This area has rapidly become a hotbed for construction of mixed-use properties, with Stream Realty Partners recently developing a 185,000-square-foot building and Generational Equities recently completing 801 Barton Springs.

In summation, with the current low vacancy and healthy demand for space, it looks as if the Austin office market will continue its success story in the coming years. In particular, the ensuing expansion of firms to the East submarket, Northeast Medical Innovation District, Northwest Capital District and South Central Waterfront District, will all add a halo to the brightest downtown area in Texas.

— By Mike Kennedy, principal, Avison Young. This article first appeared in the February 2018 issue of Texas Real Estate Business magazine.

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