Austin office market still strong despite uptick in vacancy


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.”

Reader Comments ...

Next Up in Business

Uber’s vision for future of ride-hailing: Driverless cars, air taxis
Uber’s vision for future of ride-hailing: Driverless cars, air taxis

Ride-hailing company Uber launched in 2010 built on a simple concept: Push a button, get a ride. Its popularity was driven by its ease. Much in the same way, Uber and other high-tech companies are now trying to build the next phase of ride-hailing on that same simplicity. Uber says it is partnering with aircraft firm Bell to bring an on-demand helicopter...
Beyond Bitcoin, can blockchain technology change the world?
Beyond Bitcoin, can blockchain technology change the world?

Anyone who remembers the “dot-com” boom — and subsequent bust — of the late 1990s might be having flashbacks amid the hype surrounding the terms “cryptocurrency” and “blockchain.” But proponents of the emerging technology underlying the new buzzwords say it largely deserves the attention it’s been...
Need a hotel this weekend for SXSW? Plenty of options still available
Need a hotel this weekend for SXSW? Plenty of options still available

Heading to Austin this weekend to catch the tail end of South by Southwest? Unlike past years, there are plenty of hotel rooms still available – many of them priced at or near normal rates. That’s likely because the city continues to add hotel rooms in the downtown area, including the 1,048-room Fairmont Austin that opened just before SXSW...
St. Austin Catholic Parish seeks redevelopment proposals
St. Austin Catholic Parish seeks redevelopment proposals

St. Austin Catholic Parish — a landmark for decades on Guadalupe Street — is seeking proposals for “a prime Central Austin redevelopment opportunity” to add commercial uses on part of its land across from the University of Texas campus. The parish has hired commercial real estate firm CBRE to solicit proposals from developers...
With contingent of 1,300, Brazil bets big on SXSW
With contingent of 1,300, Brazil bets big on SXSW

Brazil is betting big on South by Southwest. The South American country has about 1,300 of its residents in Austin this week – one of the largest foreign contingents at the festival and up nearly 200 people from last year. Those visitors aren’t just here to take in the sights and sounds of SXSW. Many are eager to do business, representing...
More Stories