Austin office market cools a bit, but still healthy

Updated Oct 25, 2016

Despite a report showing year-over-year dips in occupancy and rents for top-tier space, Central Texas’ office market remains healthy, with tech and other companies continuing to spur demand, local brokers say.

In its third-quarter report, Cushman & Wakefield Austin said Class A office space was 90.4 percent occupied, on average. That’s down 1.3 percent from the year-ago quarter, when the occupancy rate averaged 91.6 percent.

Class A rents ended the third quarter at $36.47 a square foot per year compared with $36.53 a square foot at the end of September 2015, Cushman & Wakefield said.

The slight decline in occupancy is likely due to some large tenants relocating and leaving behind empty space, said Russell Young, executive vice president with CBRE in Austin.

“Occupancy figures being off by a percentage point don’t necessarily indicate a meaningful trend,” Young said. “Overall, the office market remains healthy with solid fundamentals, and we continue to see expansion in the Austin employer base and strong projections for hiring.”

White-collar job growth fuels demand for office space. Office headcounts will rise by 10,400 jobs this year, up 4.2 percent from the end of 2015, Marcus & Millichap said in its latest report.

Strong demand for office space in Austin has had vacancies on a downward trend since late 2009, Marcus & Millichap said in its latest report.

Ford Alexander, executive managing director of Cushman & Wakefield Austin, said the region’s healthy economy, talent pool and quality of life have kept demand strong for the new space coming to market.

“Business in Austin is still on the upswing and tenants are willing to pay to be here,” Alexander said.

As companies expand, “we continue to see landlords push rents and the length of term on leases,” said Diana Holford, senior vice president in Austin with JLL, a global commercial real estate services firm.

In contrast to Cushman’s numbers, JLL’s latest figures show Class A rents and occupancy rates ticking up in the third quarter compared to the year-ago quarter.

“Downtown and the Domain (in North Austin) are experiencing particularly torrid leasing,” Holford said. “Live, work and play environments are very enticing for employee recruiting.”

Companies looking for space in the suburbs are finding some rent relief, Holford said, because there’s a healthy supply of tenants subleasing their extra space. Sublease space typically rents at a discount compared to space leased directly by landlords, Holford said.

Jason Steinberg, brokerage principal with ECR in Austin, said that although there is more sublease space available, “little of it has to do with companies downsizing.”

“Companies are being more conservative about the amount of space actually needed and we are seeing more tenants think twice about warehousing space for a few years,” Steinberg said. “I believe this is largely attributed to the reduction in venture capital funding since the beginning of 2016.”

Savills Studley, a global commercial real estate firm, said Austin’s tech sector “felt some of the nervousness emanating from the Bay Area earlier this year as tech IPOs came to a complete halt.”

While mid- and late-stage ventures have been able to raise funds from private investors, the newest ones are still struggling, Savills Studley’s report said. And with office use being “heavily dependent” on the tech sector, leasing activity is showing signs of losing steam, Savills Studley said.

However, barring a significant downturn in tech, and assuming continued population growth, “the Austin metro area does not show any signs of slowing down in the near future,” Savills Studley said.