Operating as our state’s political core and as the “live music capital of the world”, Austin’s real estate market is as distinctive as the people that make this city great. Austin is a one-of-a-kind place that’s unique to Texas and the entire country. It defies stereotypes with its progressive and fiercely entrepreneurial spirit, and continually gets top marks for its quality of life, pro-business culture and pro-environment views.
Adam Nims, Trammell Crow Co.
WalletHub recently ranked Austin as the 2015 best large city to live in and the data matches up — the city ranks second among 2015’s fastest-growing cities in the U.S., according to Forbes, behind Houston and ahead of Dallas-Fort Worth.
In the era of ‘Walker, Texas Ranger,’ Emmitt Smith and ‘the Dream Team,’ and the release of ‘Dazed and Confused,’ the tech boom of the 1990s drove the Austin office market. During that same time, Austin’s total population increased 35 percent and close to 1,750 companies employed over 110,000 people in technology-related jobs in Austin.
By the end of the 90s, Texas’ capital city was widely known as Silicon Hills, home to a critical mass of institutional technology knowledge and major tenants like Dell, IBM, Motorola and other software and gaming companies. Despite this tremendous growth, the majority of technology companies chose to locate in suburban areas and the central business district (CBD) saw very little construction activity in the 90s.
Austin’s concentration on the tech industry and lack of diversification rendered it vulnerable when the economic downturn struck the U.S. in the early 2000s. Austin endured widespread job losses and downsizings and, in an attempt to combat the financial setbacks, established Opportunity Austin in 2004.
2000s Comeback
The five-year, five-county initiative aimed to cultivate jobs and fortify active industries like software, digital media, wireless technologies and tourism, in conjunction with attracting new businesses such as auto, biomedical and logistics to diversify Austin’s fundamentals.
By 2004, Austin boasted a wide-ranging spread of corporations who made the city their home, including Whole Foods Market, Opus Healthcare and Progressive Corp.
The 2000s brought two substantial new office buildings, both conceived prior to the major technology downturn, to the CBD: 300 W. 6th, spanning 454,225 square feet; and Frost Bank, spanning 535,078 square feet, along with at least 10 renovations of older buildings.
This new construction, combined with the economic downturn, substantially impacted the CBD’s occupancy rates and average rental rates.
Following the downturn of the early 2000’s, the market experienced little to no absorption and a vacancy rate that peaked over 25 percent in 2005. However, strong suburban leasing offset the increase in vacancy in the CBD, allowing the overall market to exhibit more acceptable market statistics.
Austin once again was receiving accolades as an ideal location for companies to expand. Entrepreneur.com ranked it as the eighth best place for young companies and the ninth hottest large city for entrepreneurs.
Austin’s northwest and southwest submarkets accounted for the majority of absorption in 2005, continuing the trend of Austin’s largest technology tenants locating in suburban areas. Some of the more notable expansions were Samsung’s three-year, $500 million expansion to its memory chip fabrication facility, and Advanced Micro Devices’s decision to build an 860,000-square-foot campus consolidating the company’s 2,000 employees in southwest Austin.
By the end of the decade, downtown had more than quadrupled its housing stock — having become a preferred location for Austin residents, and Austin’s total population increased 18 percent. Facebook moved in to 300 W. Sixth St., and Town Lake was renamed Lady Bird Lake. The influx of new residents bolstered demand for other services and paved the way for a more vibrant retail, restaurant and entertainment scene in the CBD.
Austin’s total population has increased 14 percent since 2010. Over the past 20 years, the amount of office space in Austin’s CBD has increased 46 percent, and its vacancy is at a very healthy 7.8 percent. Austin, San Jose, Seattle, Orlando, Ft. Lauderdale and Phoenix are generating the strongest rates of new demand (net absorption) relative to the size of their respective markets, making conditions more competitive.
“There’s simply not enough supply for the demand. Of the 669,842 square feet under construction in the CBD at the end of the second quarter of 2015, 37.2 percent is pre-leased,” says John Gump, vice president with CBRE. “That’s a great indicator of the level of demand right now. On a monthly basis, we’re seeing record-breaking rental rate comparables in the CBD.”
Increasingly, tech companies are choosing the CBD because of the generational demands of its younger workforce and accessibility to their peers. As the competition to recruit and retain talent continues to heat up, employers consider the entire employee experience when selecting an office location. The CBD has a great combination of retail, restaurants, entertainment, living options and access to the natural amenities that make Austin so unique.
“Companies are drawn to the CBD’s vibrant urban mix of local restaurants, live music, improving retail along Second Street and proximity to Lady Bird Lake Hike and Bike Trail,” says Katie Ekstrom, first vice president with CBRE. “With the continued revitalization of downtown, amenities are an extension of the office space and walkability is a key feature for all ages.”
Sought-After Amenities
Like many other downtowns across the U.S., Austin is challenged by a limited number of sites available in the CBD. Developers looking for opportunities to build must imagine and explore every approach and design to successfully deliver a project, often undertaking a renovation or reconstruction to achieve this goal.
Features like large ground floor lobbies and granite exteriors, considered luxury in decades past, are now being replaced with active retail at the ground floor and exterior terraces available to tenants. For new product coming online, great views, high ceilings, top-of-the-line fitness facilities and built-in social spaces are some of the amenities and finishes that make an office building competitive.
“Large floor plates are in high demand due to the steady shift to open floor plans,” says Ekstrom. “Flexible workspace and an allowance for tenants to have denser footprints is becoming increasingly important. For example, [Trammell Crow Co.’s] 500 W. 2nd St. has a third stairwell, which increases occupancy capacity and allows for more flexible floor plates.”
500 W. 2nd Street, a 489,403-square-foot, Class A speculative office tower with 11,033 square feet of ground floor restaurant/retail space, is downtown Austin’s newest office tower and a model for the next generation of office space.
In partnership with the City of Austin, the project — scheduled to be complete early 2017 — is designed to bring a new vibrancy to Austin’s CBD and the Second Street District. The tower will offer some of the largest floor plates in downtown Austin, averaging 32,500 square feet, plus seven outdoor terraces on six different levels, a fitness center and a 14th floor flexible conference center and great room overlooking Lady Bird Lake.
In addition, 500 W. 2nd Street furthers its efforts to be a competitive location for tenants by featuring Austin’s first elevator destination control system, optimized for people flow and designed to save vertical transportation time by adding efficiency. The development team is seeking LEED Gold certification and an Austin Energy Green Building 2-Star rating.
Keeping Sense of Place
Looking forward, we expect to see a continuation in the migration back to Austin’s CBD. With total downtown vacancy averaging 10.2 percent, the city’s office vacancy is the tightest amongst state major metros. There are three projects under construction in the CBD totaling 669,842 square feet, and demand appears to be high for those buildings.
As a further tailwind, Austin leads national and state levels in unemployment at 3.1 percent and both job and population growth remains strong in the area. As mentioned in PWC/ULI’s ‘Emerging Market Trends’ the one concern expressed by many market participants is the lack of infrastructure investment to keep up with growth. Affordability also remains a major concern as it relates to the city’s housing stock.
Austin is rare, quirky and exclusively ours. As the Downtown Austin Alliance says, “home to the world’s largest urban bat colony and statues of both Stevie Ray Vaughan and Willie Nelson, downtown lies at the crossroads of wild and weird. A magical mix of entrepreneurs and artists means one-of-a-kind businesses, events and experiences flourish left and right.”
It is imperative that Austin doesn’t lose that sense of place, and we believe that the next generation of development in downtown will evolve to ensure that this incredible mix of uses and experiences can be enjoyed by a greater density of people and companies.
— By Adam Nims, principal of Trammell Crow Co.’s Austin Business Unit. This article originally appeared in the November issue of Texas Real Estate Business.