As Core Rents Rise, Austin Office Market Welcomes Adaptive Reuse in Suburbs

by Taylor Williams

It’s no secret that Austin has exploded with jobs and people over the last 10 years, and evidence of the growth has perhaps been most visible in the asking rents for office space.

Rental rates in Austin’s most sought-after neighborhoods have essentially doubled since 2010, when major tech firms really began eyeing the state capital for its pro-business climate and supply of educated workers, as well as its high quality of living.

Today, we see full-service office rates well above $50 per square foot in the hottest submarkets. According to our data, the average full-service rent in downtown Austin typically ranges from $65 to $69 per square foot.  Submarkets like The Domain and East Austin command rates that typically average about $55 and $50 per square foot, respectively, on a full-service basis. These rates include operating expenses which can be between $15 to $25 per foot depending on location, mainly due to property tax increases found in these higher density areas of Austin.

Joe Simmons, AQUILA Commercial

While these rates appear to be a smaller issue for the tech giants that drive significant growth among office-using industries in Austin, the rapid rate of appreciation is unquestionably pricing out some users that also need to compete for talent.

The Solution

Faced with a clear need to boost the city’s supply of quality, yet affordable office product, developers in Austin began turning to adaptive reuse projects. Utilizing the physical features that some structures such as old warehouses possess — high ceilings, large and divisible floor plates, simple architecture that can be revised — developers saw them as excellent candidates for office conversion projects.

Initially, many of these projects were found in East Austin. Many of these adaptations include collaborative work areas, patios, coffee bars and fitness areas to attract talent. Most notably, the Upcycle building was a conversion of a 81,660-square-foot warehouse into creative office. The project was leased by H-E-B/Favor and recently sold to an undisclosed buyer.

However, as prices continue to rise in denser areas like East Austin, warehouse conversions have started to become less economically feasible than tearing them down and going up with mid-rises and high-rises. As supply of available conversion properties has decreased, an opportunity to look at other Austin submarkets started to make more financial sense for larger adaptive reuse projects.

Ultimately, this led to Preserve at 620 — a 223,000-square-foot Class A creative office adaptive reuse project in the Northwest Austin submarket that was fully completed at the end of 2019. The property, renovated by PacVentures Inc. and marketed by AQUILA, was originally constructed as a Super Walmart in 2006 and is located next to Balcones Canyonlands Preserve near the intersection of State Highway 620 and FM 2222. With high ceilings, a large flexible floor plate, tremendous parking, tons of natural light from 100+ skylights, a beautiful setting and a strong demographic location, it was a perfect fit for adaptive reuse.

Both PacVentures and AQUILA felt confident they could deliver a high-end ultra-modern lease product that did not exist in the suburban Austin market.  Few projects can offer amenities including a state-of-the-art fitness center, indoor/outdoor courtyards, activity areas, a pocket park and views at a full-service rental rate of approximately $35 per square foot.  Preserve at 620  offers a compelling value proposition relative to Austin’s central core and Domain area, and the project has already attracted two large tenants, IAS and Corning Optical Communications.

Adaptive reuse projects will continue to populate the market, both in the core and suburban markets, so long as they make economic sense to retrofit rather than scrape.

And as land prices skyrocket in the denser areas of town, the trend may continue to shift toward the suburbs where pricing is more reasonable and outdoor amenities and onsite food services can synthesize the benefits of an urban, walkable site.

That trend may not be isolated to adaptive reuse projects either. Outside of occupancy costs, a broader trend toward the suburbs may be growing as employees demand to be near affordable housing and good school districts. Couple this with the growing unpleasantness that is traffic in the urban core of Austin, and we’re beginning to see that mid-level managers who are starting families are no longer willing to make the commute into central Austin.

Because of this, we expect larger companies that have established offices in expensive submarkets to eventually expand their operations with additional offices in the suburbs.

— By Joe Simmons, senior vice president, AQUILA Commercial. This article first appeared in the February 2020 issue of Texas Real Estate Business magazine.

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