Austin office market still strong despite uptick in vacancy


Highlights

Demand for space remains strong despite slower job growth.

Market’s positive momentum expected to hold throughout 2017.

The occupancy rate in Central Texas’ office market softened slightly in the first quarter compared to a year ago but rents are still on the rise, a new industry report shows.

In its quarterly office market report, Cushman & Wakefield said the occupancy rate for top-tier space (Class A) averaged 90.1 percent at the end of March, down from 91.3 percent on average as of March 2016.

Rents for the highest tier space rose 3.3 percent, to an average of $37.86 per square foot per year from $36.63 in the first quarter of 2016, Cushman & Wakefield reported.

Rick Whiteley, managing director for Cushman & Wakefield Austin, said the Austin area office market continues to be one of the strongest in the United States, despite the region’s job growth — which fuels demand for office space — having slowed some lately.

“Sustained job growth over an extended period of time in high tech industries and others that need more and more space coupled with a steady but manageable supply of new space continues to result in strong underlying market fundamentals such as occupancy rates, rental rates, and absorption,” Whiteley said. “This remains true even though job growth through December 2016 was not as robust as it was in the preceding four years.”

In a seperate report, commercial real estate brokerage CBRE said that although the office vacancy rate has ticked up a bit, “the office market is expected to keep its positive momentum through 2017 based on the projected job growth of 29,000 new Austin payrolls.”

Whiteley said at this stage, it’s hard to tell exactly what impact, if any, slower job growth is having.

“Vacancy has increased slightly but tying it to this slowdown is premature. It is likely one of the contributing factors, but not the only one.”

Chrissy Fuller, a principal in Austin with Avison Young, a global commercial real estate services firm, said the increase in overall vacancy is mostly due to new buildings coming online. CBRE said developers delivered about 1 million square feet of new space to the market in the first quarter, with an additional 1.7 million square feet under construction.

But despite the rise in vacancy, “the market has not cooled off, ” Fuller said.

“We have seen an uptick in activity in the first quarter of 2017, part of which could probably be attributed to pent-up demand from the election and holidays and most of which we will probably see the effect of in market stats over the next few quarters. With around 2 million square feet of office under construction and continued population and job growth, we see continued momentum on the horizon for the rest of 2017. Our out-of-town clients continue to consider Austin one of their main ‘growth offices’ compared to other locations.”

Whiteley said that software companies, along with social media and financial technology firms, are some of the companies that have been consistently driving demand for space in Central Texas.

In downtown Austin, tenants are facing several challenges, “including significant operating expenses due in large part to high property taxes,” said Will Douglas, a first vice president in Austin with CBRE.

“Parking is also an increasingly big challenge and the lack of availability has allowed landlords to increase rates significantly,” he said.

Diana Holford, senior vice president with global commercial real estate brokerage JLL, said most of the push in rents can be attributed to increases in taxes on commercial buildings.

“Landlords pass that cost on to the tenants who are responsible for paying for increases in operating and tax expenses,” she said.

The “tender spot” in the market presently is in sublease space, Holford said. Douglas notes there is now 1.3 million square feet of office sublease space on the market, the majority of which is in downtown and northwest and southwest Austin.

“Most times sublease space trades at a discount,” Holford said. “Consequently, if you are looking for a deal in office space, a sublease is your ticket.”



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