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Austin’s Office Market Goes Boomtown, San Antonio’s Continues Impressive Growth

by Taylor Williams

Compared to Houston and Dallas, the office markets of Austin and San Antonio have a hard time competing on sheer size alone. However, these two central Texas cities are undergoing rapid changes that are leaving longtime residents amazed at the constantly morphing skylines.

Both metros boast strong office markets that are growing with the entire Texas economy. But how do they match up in a head-to-head comparison?

Basic Numbers

At approximately 50 million square feet of office space, Austin holds a size advantage over San Antonio, which has about 30 million square feet. As of the second quarter 2018, annual full-service average office rents in Austin are also substantially higher at $36.54 per square foot compared to San Antonio’s $22.05 per square foot. Both markets have seen steady year-over-year increases in rates as the economy has recovered from the Great Recession.

Parker McCollum, Cushman & Wakefield

The familiar real estate mantra, “Location! Location! Location!” plays a big role in office rates and affordability in each market. Austin’s central business district (CBD) continues to draw major employers, including Google and Indeed, which combined occupy about 667,000 square feet of office space. This downtown migration has pushed vacancy in the CBD down to 10.1 percent, with rents skyrocketing to a record high of $52.37 per square foot.

Austin’s direct vacancy rate of 8.8 percent — with 4.4 million square feet available and a sublet vacancy rate of 2.4 percent with 1.2 million square feet available — contributes to office rents’ upward trajectory. Although not as low, San Antonio’s 13.2 percent direct vacancy rate with 4 million square feet on the market and only a 0.3 percent sublet vacancy rate is extremely robust and is adding to higher overall rates.

Both markets also have a healthy development pipeline, although Austin’s is more than three times that of San Antonio’s. The state capital has more than 3.8 million square feet of new space under construction, and more than 1 million square feet has already been delivered in the last 12 to 18 months. Compare that to 1.1 million square feet of new space under construction and more than 800 thousand square feet recently coming on line in San Antonio.

Mixed-Use Leads The Pack

Due to a surprisingly low inventory of Class A office buildings, downtown San Antonio does not have the allure of Austin’s CBD. The rates — $23.55 per square foot, only slightly higher than the city average — reflect this supply shortage. Instead, it’s the suburban submarkets leading the charge with the highest rates in San Antonio.

This is most evident in the Pearl District, site of the old Pearl Brewery just outside of the CBD that has been converted into a hip and high-end mixed-use development. Office rents at The Pearl currently average $47.50 per square foot, a considerable increase over the city average and dwarfing CBD rates. However, it bears mentioning that the CBD is experiencing renewed interest from developers due to its proximity to the lower Broadway corridor, which has seen accelerated growth.

Austin is also home to a suburban market that’s white-hot with rapid development and rising rents. Take The Domain, a mixed-use destination located in the far northwest part of the city and also known as Austin’s second downtown.

Like The Pearl, The Domain features many high-end retail shops, multifamily units and entertainment destinations. Major employers such as Amazon, Google, Facebook, Indeed and HomeAway are filling Domain office towers almost as quickly as they are built, pushing Class A rents to near-CBD levels at $49.86 per square foot.

Tenant Profiles

The industries spurring growth in the Austin and San Antonio office markets are as diverse as the cities themselves. In Austin, the tech industry, government, life sciences and creative arts are keeping the market extremely active. San Antonio is driven by medical, military, oil & gas and the burgeoning markets of cybersecurity and biotech.

New tenants are coming to San Antonio because of low costs and an educated workforce — a positive trend with strong fundamentals and viability. Austin, recently ranked as the No. 1 Boomtown in the U.S. by financial advising site magnifymoney.com, earned the title for attracting Fortune 500 companies and their smaller tech cousins.

Austin’s reputation as a vibrant, livable city is attracting new residents and employers at record levels and is a major contributor to a larger office market with higher rental rates. However, although not at the same levels as its neighbor to the north, San Antonio is also experiencing innovative and healthy growth, which is fueling respectable occupancy and rent rates that can rival Austin.

All combined, these stats illustrate two exciting commercial real estate markets on a continuous trend upward for the foreseeable future.

— By Parker McCollum, research analyst, Cushman & Wakefield. This article first appeared in the September 2018 issue of Texas Real Estate Business magazine. 

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