Austin Office Market’s Central Business District: Past, Present and Future
In 1987, Austin was a relatively quiet market where the major industries were higher education and state government, along with some large technology companies like IBM. Fast forward to 2019 where Austin continues to make national headlines, receiving high accolades as a top place to live and a leading city for millennial growth.
This transformation — coupled with an increasing number of companies choosing to move or expand in Austin — begs the question: Why Austin? How did the Texas capital go from a fairly sleepy town to one of the hottest markets in the country? What really accounts for this seismic shift and what does the future hold?
The Office Boom Begins
In 2004, after the dot-com bust hit Austin, a group of private business leaders felt compelled to take the destiny of the city into their own hands with the creation of Opportunity Austin within the Greater Austin Chamber of Commerce.
Opportunity Austin was launched with the goal of creating 72,000 regional jobs and increasing regional payrolls by $2.9 billion within five years. To do this, the regional business community invested $14.4 million in the program. These funds allowed the Austin Chamber to increase initiatives for corporate recruitment and job retention, and it worked!
By 2010, the city was starting to see signs that job growth was on track with large corporate expansions from blue-chip companies like Home Depot, GM, Google, Facebook and Apple. With these large company expansions, smaller firms began to follow, contributing to Austin’s growth. These improvements laid the groundwork for a sharp rise in demand for quality office product, primarily in the rapidly expanding Central Business District (CBD).
By 2010, with Austin beginning to see an increase in local tech users and the impact of Opportunity Austin, the city’s office market had grown to approximately 40.6 million square feet, with a decreasing vacancy rate and steadily increasing rental rates.
The 2019 Market
As opposed to the late ‘80s when Austin’s primary industries were higher education and state government, with a smaller tech presence, Austin is now recognized on an international scale as a booming tech hub. In addition to tech, Austin is emerging as a biotech market due to the Dell Medical School. The city also saw a massive startup boom beginning in 2015.
Regardless of the industry, new office users in Austin are seeking many of the same things: walkability, easy access to city amenities and direct lines to major thoroughfares such as Interstate 35 and Mopac Expressway. These factors typically point users in the direction of the CBD.
Since 2010, Austin’s office inventory has grown by about 20 percent to 50 million square feet, with approximately another 5 million square feet under construction. In fact, there are four office buildings currently under construction in Austin’s CBD: SXSW Center, Block 71, 300 Colorado and Block 185. Although these buildings have not been delivered, they are already 83 percent preleased. Due to low vacancy rates and high demand for CBD office space, Austin has become a preleasing market.
With little current availability and buildings delivering to the market almost fully leased, downtown Austin is currently seeing a historically tight vacancy rate of 5 percent for Class A product. High demand and low vacancy have caused rents to rise to historic range of $46 to $48 per square foot net with $26 to $28 per square foot in operating expenses.
Those that cannot find space in the CBD — either due to a lack of availability or budgets — are looking to adjacent fringe markets. Austin’s East Side is seeing a huge influx of office development, with over 700,000 square feet of space set to be delivered between now and 2020, with most of it already spoken for. In addition, just south of the Colorado River, there is a flurry of new development along South Lamar, South First and South Congress.
With no end in sight to Austin’s dynamic growth, what does the future hold for Austin’s office market?
Austin’s Office Future
What will Austin look like in the next 10 to 12 years? With a projected population of over 3 million people by 2030, according to the Austin Chamber, how will it grow? These are the questions on most Austinites’ minds as companies continue to seek out the city for new headquarters or similarly large office spaces.
Austin recently won a bid to become the headquarters for the U.S. Army Futures Command. This will house the Army’s entire modernization process under one roof. The organization cited the talent pool and culture as some of the top reasons for choosing Austin. This relocation, mixed with The University of Texas at Austin’s No. 9 overall engineering ranking, could serve to bring more defense contractors to Austin.
Additionally, the opening of Dell Medical School and UT’s ranking as the eighth-largest producer of new life science talent in the country have placed Austin firmly on the emerging market list for the life sciences industry, according to CBRE’s research. As the seventh-fastest growing high-tech market in the country, Austin’s life sciences sector is well positioned for continued growth.
When it comes to office real estate, Austin’s CBD is full. Any undeveloped land is almost guaranteed to have a proposed skyscraper waiting to be built on it. With the little land left, developers and owners are looking to build to the highest and maximize use.
Right now, there are approximately seven buildings proposed. If all of these projects come to fruition, the city would gain an additional 2.5 million square feet of new office space just in the CBD. These buildings, plus the ones already under construction, will continue to dramatically alter Austin’s skyline in the coming years.
With an extremely diverse economy, a low cost of living compared to other top markets and a wonderful quality of life, it is not surprising that companies continue to choose Austin as their new home. It will be exciting to see how the city’s landscape continues to grow and change over the coming years as Austin ventures into uncharted waters.
— By Erin Morales, senior vice president, CBRE; Katie Ekstrom, senior vice president, CBRE; and Caroline Stockard, associate, CBRE. This article first appeared in the March 2019 issue of Texas Real Estate Business magazine.