Office rents at record highs in Central Texas market


Highlights

Job growth fueling demand for office space

The occupancy rate for Class A space averaged 89.3 percent, down from 90.4 percent in June 2016.

Despite slightly slower growth in the Austin area’s economy, the region’s office market ended the second quarter on a strong note, with rents reaching record highs, according to a new report.

Gross rents for top-flight office space (Class A) in Central Texas hit $39.19 per square foot per year in June, an all-time high and a jump of almost 7.8 percent from the prior June, according to the latest report from Cushman & Wakefield Austin, a commercial real estate services firm that tracks the local office market.

Rents for top-tier space downtown also hit a record, averaging $54.11 a square foot per year, Cushman & Wakefield said.

The occupancy rate for Class A space averaged 89.3 percent, down a notch from 90.4 percent in June 2016.

“Even with a slight uptick in vacancy across the city, national corporations continue to expand their presence in Austin due to its reputation for a high-quality of life, educated talent pool and cost of living,” said Brian Walker, director of tenant representation for Cushman & Wakefield. “Because of this influx, the office market remains strong, specifically in leasing newly delivered high-end office product. Overall, Austin’s future continues to show healthy growth.”

Austin’s 3.6 percent jobless rate is significantly lower than the national average of 4.4 percent, Cushman & Wakefield said in its latest quarterly report. And job growth in the region also continues to outpace national averages, the report noted.

Citing U.S. Bureau of Labor statistics, the report said the Austin region added more than 29,000 jobs in the past 12 months, a 2.9 percent growth rate.

In another quarterly office report, global commercial real estate firm Avison Young said that “demand for office space from large technology tenants relocating to the Austin market remains strong, driving leasing activity and rental rates to new highs.”

Avison Young said rents grew almost $5 per square foot compared to June 2016. And as Class A supply grows, rental rates are projected to remain high, Avison Young said.

“While climbing operating expenses are largely responsible for such marked increases due to rising building valuations commanding higher taxes, sustained demand has held rates at an upward clip,” Avison Young said.

New building openings were a highlight of the second quarter, Cushman & Wakefield said.

More than 928,000 square feet of new space opened, including 500 W. 2nd, whose anchor tenant will be Google Inc., as well as a new office building at the Domain in North Austin, and Galleria Oaks A and Galleria Oaks B adjacent to the mixed-use Hill Country Galleria project in Bee Cave west of Austin.

Galleria Oaks A and B, each of which have 75,000 square feet, are 65 percent leased combined, said Kevin Granger, a partner in Austin with Peloton Commercial Real Estate Services. The two largest leases to date are TruCar Inc., which is leasing 36,000 square feet of space in Galleria Oaks A, and Summit Hotel Property Group, which is leasing the top floor in Galleria Oaks B, Granger said.

In the market in general, “activity is still very strong,” Granger. “We have a large amount of good organic growth of existing companies, and a large influx of new companies coming into Austin that are continuing to grow.”

Granger said there’s “a strong trend” of tenants wanting to be in mixed-use projects, such as the Hill Country Galleria and the Domain, with convenient living, dining, shopping and entertainment options available for employees. Such projects help recruit top talent, Granger said, and as a result employers are willing to pay more to lease space in or near such projects.

In downtown Austin, the overall occupancy rate dipped from the first quarter, to 90.2 percent. Cushman & Wakefield said. Much of the increase, however, is due to the opening in May of 500 West 2nd, a new tower with 505,000 square feet of space. Though 95 percent leased, only a few tenants have moved in so far. Google will be leasing more than 200,000 square feet in the building, which CBRE is managing and leasing.



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