Rents hit record highs in Austin’s office market


Highlights

Demand for space is outpacing supply, local brokers say

Some buildings are being renovated to attract millennials and tech companies

Rents for Austin-area office space hit new highs in the third quarter, the latest figures show, as demand continued to outpace supply in the local market

Rents for top-tier (Class A) office space in the Austin market reached $39.71 a square foot, an all-time high, Cushman & Wakefield Austin said its third-quarter report.

Rents for top-tier space downtown also hit a new record, $55.77 a square foot per year, said Cushman & Wakefield, which tracks the local office market.

Across the region, top-tier office space was 89.9 percent occupied on average, down slightly from an average occupancy rate of 90.4 percent in the year-ago quarter.

“The Austin office market remains tight,” said Greg Johnston, managing director of Cushman & Wakefield in Austin. “Newer blue chip tech companies like Google, Facebook and Amazon continue to expand in Austin, and the market for younger startups is strong and healthy.”

Rents have been buoyed by tenants like Amazon, Facebook, Box and Cloudera, which continue to add space both downtown and at the Domain in North Austin, said Ryan Bohls, managing director in Austin for Newmark Knight Frank, a commercial real estate services firm.

“Scarcity is the name of the game right now,” Bohls said. “There are too few spaces to accommodate the demand with the net result being increased rent growth for tenants and high sale prices for the institutional capital entering the market.”

Although the local office vacancy rate remains steady at near 10 percent, lease rates continue to climb.

“The live, work, play lifestyle is a powerful attraction to high-end companies, which strengthens their ability to attract and retain the best talent,” Johnston said.

Diana Holford, senior vice president in Austin with commercial real estate firm JLL, said tenants want to be “in the bright shiny new buildings, which continue to lease at a brisk pace.”

“Tenants, looking to compete in the recruiting wars, are reinventing space” to include amenities like lounge areas, outdoor decks and patios, Holford said.

That’s the case with 211 Seventh, a 12-story office tower on East Seventh Street downtown. Highland Resources’ recent renovations to the building are attracting tenants including BigCommerce and Silvercar to Austin’s downtown tech corridor. Capital Factory, a high-tech incubator, is across the street.

Much of the interior of 211 Seventh was stripped and remodeled with younger tenants in mind, featuring open floor plans, exposed ceilings and concrete and a renovated lobby. More shared amenities were also added including a kitchen and lounge, bike storage and a new gym and showers.

In addition, a formerly underused outdoor courtyard has been renovated, providing tenants a collaborative space.

“We’re extremely excited about the courtyard renovations because it distinctly makes our building stand out,” said Jeff Simmons, Highland Resources vice president.

So why renovate when it’s a landlord’s market?

“Two reasons,” Simmons said. “It won’t always be a landlord’s market and when a natural decline occurs we’ll be in a much better position to retain and attract a limited tenant pool. And maintaining high-end, quality space also attracts quality tenants who are in it for the long haul.”

Cushman & Wakefield brokers Bob Wynn, Mark Greiner and Melissa Totten are leasing the 160,000-square-foot building, which has 30,000 square feet available for rent.

“The location of 211 Seventh is quickly becoming a hot commodity in terms of walkable amenities and innovative neighbors,” Wynn said. “That’s why it’s attracting some of the most promising and established tech companies in Austin.”

Another building in line for a makeover is the Southfield building at Interstate 35 and Ben White Boulevard in South Austin.

Somera Road Inc. just bought the 9-story, 142,000-square-foot building in an all-cash transaction. The New York-based investor plans to rebrand, rename and reposition the building, and tailor nearly $10 million in upcoming improvements to the needs of the millennial workforce. Renovations are expected wrap up in late 2018.

“We are enthusiastic about this market and think there is enormous potential in this building,” said Ian Ross, Somera Road managing principal.

Maximus, an S&P 400 company that provides business process services to government health and human services agencies, currently occupies the entire building and is due to move out in early February.

Somera Road and Austin-based Peloton, which will lease and manage the property, said the building could attract tenants from a range of industries, including tech and creative class companies.

“As Austin’s population continues to rise, there are two main problems for office tenants: traffic and attracting and retaining millennial talent,” Ross said. “We saw the Southfield office building as the perfect solution to bridge this gap. Tenants will now have an additional office option within a stone’s throw to amenity-rich South Congress, a quick drive to downtown and about four miles to the airport. The location is ideal.”



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