Austin's Office Market is Now a Magnet for National Investors

For Austin, it’s all about the strong combination of both outsized job growth and limited new development activity. On the jobs front, Austin gained 150,000 new residents over the past two years, according to the Census Bureau. In terms of construction starts, only three buildings were delivered to the market in the fourth quarter, and only 171,468 square feet of space was still under construction.

These factors contributed to the Austin office market ending the fourth quarter of 2012 with a vacancy rate of 10.1 percent, down from 11.3 percent in the third quarter, with net absorption totaling positive 824,646 square feet in the fourth quarter.

This year will see continued improvement in occupancy growth in Austin, though property performance will vary by submarket.

For example, in the Round Rock/Georgetown/Cedar Park area, where a substantial amount of space was delivered during the recession, vacancy will tighten but will remain above 30 percent. As a result, rents in the area will continue to languish nearly 20 percent below the mid-2008 peak. In contrast, vacancy in the CBD has already drifted below the pre-recession level, and effective rents have pushed beyond the prior peak.

In terms of improvement, the North Central submarket will be this year’s standout. Construction is under way on a $304 million build-to-suit campus for Apple Inc., which could bring 3,600 new jobs to the area. Additionally, both Visa and General Motors have selected existing vacant buildings, totaling a combined 500,000 square feet, to house their own high-tech operations.

Downtown Austin will definitely outperform other submarkets again in 2013, as the addition of roughly 50,000 residents to the metro drives job creation in the professional and business services sector. In all, Travis County has more than $1 billion of major downtown development projects on the drawing boards.

Last year, Facebook chose a downtown office building at 300 W. Sixth St. for its 60,000-square-foot Austin office, which is the company’s first office outside its headquarters in Palo Alto, Calif. Another major high-tech firm, Cirrus Logic, moved into its new 135,000-square-foot downtown Austin headquarters at West Sixth Street last year, and is already looking at adding another 20,000 square feet.

Approximately 80 percent of downtown’s Class A office space is expected to come up for renewal between 2012 and 2015, and developers are jumping in with new projects that could entice larger space users. Atlanta-based Cousins Properties announced a 30-story, 390,000-square-foot office building at Third and Colorado streets last year. It would be the first new office tower in downtown Austin since Cousins opened its own 33-story, 525,000-square-foot Frost Bank Tower in December 2003.

Austin is unique in that the local market exhibits many of the same characteristics as its larger brethren, including vibrant and growing technology, government and education industries. It also features fairly high barriers to entry. When it comes to new supply, the local construction cycle can span two-plus years for a ground-up office building, discouraging purely speculative projects.

While the metro’s lower-risk profile and bright outlook often support premium prices for local office investments, these factors can also curb owners’ motivation to sell. The resulting shortage of for-sale inventory has pushed cap rates for Class A assets in core locations to around 6 percent, while performing Class B deals sell in the 7.25 to 7.5 percent range.

Though it is still considered a secondary market, sales will rise this year as institutional investors, REITs and investment funds look to the metro for its strong growth prospects and relatively limited supply-side risks. In fact, the list of downtown office buildings not for sale would be a short one.

— J. Michael Watson, regional manager of the Central Texas office of Marcus & Millichap Real Estate Investment Services