Surging Austin office market hits record high for rents


Highlights

Rents for top-quality space hit record high, averaging $40.17 per square foot.

Report: 3.8 million square feet of new office space is under construction, an all-time high.

Buoyed by Central Texas’ continued job growth, the Austin-area office market saw rents for top-tier space reach a record high in the second quarter, the latest figures show.

Rents for Class A space — both in downtown Austin and across the region — hit all-time highs of $56.63 per square foot and $40.17 per square foot, respectively, according to Cushman & Wakefield’s Austin office, which tracks the local office market.

On average, top-tier office space in the Austin market was 89.3 percent occupied, the same rate as in the second quarter of 2017, Cushman & Wakefield said.

About 3.8 million square feet of office space is now under construction in the metro area, which is a record amount, Cushman & Wakefield said. Of that total, 1.1 million square feet is being built in downtown Austin.

“Companies continue the trend of relocating and/or expanding to Austin, which has resulted in a record low unemployment rate and increasing pressure on office supply,” said Cushman & Wakefield’s Brian Walker. “This is particularly true with Class A office space which continues to be in high demand. Companies are pre-leasing top-tier office product with strong amenity packages as a tool to recruit and retain top talent. As a result, the Austin market is seeing new high benchmarks in rates for Class A (space) across the board.”

Two other reports also cited the Austin-area market’s resiliency.

CBRE said about 800,000 square feet of new construction kicked off in the quarter, bringing the total now underway to 4.2 million square feet, by its count, and “demonstrating the strong demand that exists in the market.”

In its second-quarter report, commercial real estate firm Savills Studley said tenants leased 1.4 million square feet of office space in the second quarter, and 7.3 million square square feet in the four most recent quarters — well above the long term market annual average,

“Both tech heavyweights and a myriad of startups” are helping fuel demand for office space, the report said.

“The top tech firms in the region account for a very high share of Austin’s tenant base,” Savills Studley said, noting that the top 10 tech firms own or lease about 6 million square feet of space, or nearly 10 percent of the local market. Tech firms that have have been expanding their Austin presence include include Google, Apple, Facebook, Amazon, Oracle and HomeAway.

Most recently, Indeed signed a lease for 307,000 square feet of space in a building Trammell Crow is constructing downtown, on a site known as Block 71. Indeed officials have said the company could add as many as 3,000 new jobs in Austin over the next several years.

“Big tech has cemented its market takeover with Amazon and Facebook, among others, accounting for almost half a million square feet in demand,” said Ryan Bohls, managing director for the Austin office of Newmark Knight Frank. “With new supply options like Block 71 being leased as quickly as they come online, there’s little relief in sight on soaring rental rates.”

In Savills Studley’s report, research director Brad Hauser said some top tech firms in Austin are expanding on corporate campuses, while others “are making aggressive moves on future development sites.”

“In general, the competition for space is becoming as fierce as the battle for talent,” Hauser wrote.

A limited supply of space is leading developers to move forward with new projects.

One of those is Domain 12, which is slated to be the newest and tallest office tower within the Domain mixed-use project in North Austin. Dallas-based Tier Reit officials said the company decided to move forward on the 17-story building based on “a substantial prospective tenant pipeline in excess of 1.3 million square feet, including letters of intent for 170,000 square feet.”

Tier Reit said its adjacent Domain 9 and Domain 10 sites are fully designed and permitted to accommodate an additional 630,000 square feet of office space.

Also at the Domain, Stonelake Capital Partners is underway with Domain Place, a five-story office building that will have 41,000 square feet of space, said Will Jenkins, director in Stonelake’s Austin office. The building is 20 percent pre-leased, and will be Stonelake’s new Austin office location.

In addition, Stonelake Capital Partners and HPI Real Estate Services & Investments plan to break ground in the summer of 2019 on two more buildings at the Domain: Domain Tower II, an 18-story building that will have about 325,000 square feet of space, and Domain Tower III, a 24-story building with about 305,000 square feet of space, Jenkins said.

Elsewhere in the market, “East Austin has seen several significant office leases signed for technology and software companies including car2go and Zebra Insurance, and there are several companies currently in lease negotiations for big blocks of space greater than 30,000 square feet,” said Jason Steinberg, brokerage principal in Austin with ECR, a commercial real estate services firm.



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