austin office | q4 2017 quarterly market report€¦ · as we move into 2018, austin continues to...

AUSTIN OFFICE | Q4 2017

Quarterly Market ReportJANUARY 2018

HOUSTON | AUSTIN | SAN ANTONIO

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Supply & Demand

www.naipartners.com/austin

EXECUTIVE SUMMARYLowest vacancy rate on record

Austin’s overall vacancy rate dropped to 8.6% in Q4 2017—the lowest vacancy ever recorded in the Austin office market, and a decrease of 20 basis points quarter-over-quarter and year-over-year. Net absorption registered 591,486 sq. ft. as of the quarter’s end, adding up to 2.2 million sq. ft. of positive net absorption year-to-date, with only 2006 and 2015 surpassing the current annual total. Demand has outpaced supply in the last five years, excluding 2015, although ending 2017 evenly balanced. New construction delivered during the fourth quarter stood at 441,336 sq. ft., resulting in a squeeze on vacant space. Another record-breaker, full-service asking rents jumped by $0.55 per sq. ft. quarter-over-quarter to close 2017 at $34.94; and soared year-over-year at $1.66 per sq. ft. The amount of space under construction averaged 4.3 million sq. ft. in 2017, indicating another all-time high, during a robust year for the Austin area office market.

Austin unemployment remains significantly below the state and national rates

The Austin economy grew at a healthy pace in November. The seasonally adjusted area unemployment rate for November was 2.8%, remaining well below the 10-year average of 4.3%. In addition, the state average jobless rate fell to 3.8%, the lowest on record. Job growth in Austin picked up speed over the three months through November with professional and business services employment climbing at 12.2%, adding 5,000 jobs. Austin enters 2018 with a labor market and economy as strong as any it has seen since 2000, together with Apple, Facebook, Google and Amazon ready to fill up their campuses and offices.

Market Indicators

Current Q4 2017

Prior Quarter Q3 2017

Year Ago Q4 2016

Vacant Direct 7.7% 7.8% 8.1%

Vacant Direct+Sublease 8.6% 8.8% 8.8%

Available Direct 11.0% 10.8%

10.6%

Available Direct+Sublease 12.8% 12.4% 12.1%

Net Absorption (SF) 591,486 339,099 490,701

Leasing Activity (SF) 1,942,121 1,666,289 2,539,676

Construction (SF) 4,356,224 4,091,878 3,416,185

Deliveries (SF) 441,336 178,077 245,106

Gross Avg Asking Rent $34.94 $34.39 $33.28

Inventory (SF) 78,970,868 78,529,532 76,764,045

A s we move into 2018, Austin continues to experience a healthy commercial real estate market across all property

types. In 2017, the Austin of f ice market ended the year with strong activity, with technology companies accounting for one-third of lease signings in the fourth quarter. Co-working options continued to expand, as WeWork signed leases for two more spaces: 65,000 sq. f t. in Downtown and 90,000 sq. f t. at 801 Barton Springs; and Firmspace took 30,000 sq. f t. at 500 W 2nd Street.

Tenants in the suburban market will star t to see additional of f ice options available in 2018 with almost 4 mill ion sq. f t. of of f ice space being delivered, which will provide some relief to tenants that are will ing to commit to a lease for the next f ive to seven years. One market factor tenants need to keep in mind when evaluating shell space is the increasing cost of construction. It is not uncommon for construction in a new shell building to be in excess of $75.00 per sq. f t. Another area of increasing costs has been the continued rise in operating expenses across the metro area. Some Downtown Class A buildings now have operating expenses over $26.00 per sq. f t. Much of the increase in operating expenses is being driven by The City of Austin’s and Travis County’s increasing property tax assessments.

Texas continues to see strong population growth and added more people than any other state from 2016 to 2017, according to national and state population data released by the U.S. Census Bureau. Austin remains one of the prime locations for individual relocations, especially among millennials. This trend, combined with the quality of technical skil ls of the Austin labor force, continues to lure companies to Austin and encourage local businesses to grow. There is perhaps no greater evidence of this than Amazon’s announcement that Austin was one of only two locations in Texas that made its shortlist of 20 cities that could become the site of the retail giant’s planned second headquarters project.

David DawkinsManaging Vice President | Austin

NAI Partners

“One market factor tenants need to keep in mind when evaluating shell space is the increasing cost of construction.”

Broker’s PerspectiveQuarterly Market Report

2www.naipartners.com/austin


MARKET OVERVIEWSupply and demand evenly matched

Austin ended the fourth quarter of 2017 with 600,000 sq. ft. of net absorption, all of which was represented by direct space except 95,000 sq. ft. of sublease space, continuing the quarterly streak of consecutive positive absorption at 27. During the same period, 441,000 sq. ft. delivered to the Austin office market. All told, vacancy fell to 8.6% from 8.8% last quarter. Overall, supply and demand are generally evenly matched, as they have been for some time now. Largely, growth in property demand is meeting equal levels of new supply, leaving vacancy rates mostly unchanged. For example, the average vacancy rate for office properties in the area has held steady near 8.9% for seven consecutive quarters, and the same holds true for net absorption at roughly 475,000 sq. ft.

The major move-ins contributing to net absorption in 2017 include 303,836 sq. ft. of space occupied by Google at 500 W 2nd St.; 246,665 sq. ft. taken by University of Texas Systems at 210 W. 7th St.; and Home Depot Technology Center moving into 184,500 sq. ft. at Parmer 3.1 in the Northeast submarket.

Construction thrived in 2017

As of Q4 2017 there is 4.3 million sq. ft. of space under construction in the Austin office market, including buildings that are primarily owner-occupied, with 40% of that space available. The largest projects underway at the end of fourth quarter 2017 were the 100% owner-occupied Oracle Campus, a 550,750-sq.-ft. building at 2300 Cloud Way at The Waterfront in the Southeast submarket with an expected completion date of January 2018; and Third + Shoal, a 347,072-sq.-ft. facility that is 92% pre-leased, located at 208 Nueces St. in the CBD, with a scheduled delivery date of October 2018. Currently, overall occupancy in the Austin office market is at 91.4%, up from 91.2% at the end of Q3 2017, and at this time last year. At the end of 2017, reported occupancy was the highest level recorded by NAI Partners since 2000.

Leasing and Sales Activity

Leasing activity increased during the fourth quarter with a total of 1.9 million sq. ft. taken off the Austin market, all of which was fulfilled by direct space except 26,800 sq. ft. of sublease space. These amounts are down from 2.5 million sq. ft. at this time last year. On a percentage basis, transactions grew quarter-over-quarter by 10%, while the year-over-year drop was at 9.5%. The largest lease signings occurring in 2017 included the 231,506-sq.-ft. lease signed by

Construction

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Quarterly Market Report



Deliveries

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Facebook at Third + Shoal in the CBD submarket; the 118,000-sq.-ft. deal inked by Newgistics at The Summit at Lantana - Building 3 in the Southwest market; and the 72,824-sq.-ft. lease agreement by Life Size at Two Barton Skyway in the Southwest market.

Real Capital Analytics data reports year-to-date office sales volume in the Austin area at $1.694 billion, resulting in a year-over-year change of -15.1% as investors are having a difficult time locating assets to acquire in Austin. The buyer composition is made up of 60% institutional, 21% private, 11% REIT/listed, and 6% cross-border. A positive sign for the Austin office market in December was the acquisition by Ascentris of Paloma Ridge, a two-building, two-story 210,351-sq.-ft. office property at 13620 Ranch Road 620 N. in the Cedar Park submarket, from Alliance Bernstein JV Stream Realty.

Austin makes the cut for Amazon’s headquarters

The e-commerce giant issued its short list of 20 metro areas making the next cut for the companies North America headquarters. Throughout the U.S., Canada, and Mexico 238 proposals were submitted in the bidding process. Amazon will be compiling more information on each of the locations as it narrows down the list further for the planned $5 billion investment including jobs for up to 50,000 employees. Moody’s Analytics has ranked Austin as the No. 1 metro most likely to land Amazon HQ2 thanks to several selling points such as its close proximity to the University of Texas; the fact that it is a representative of a “hip Texas-version” of Seattle; it’s home to the headquarters of Whole Foods, which Amazon purchased in 2017; no state income tax; and an established tech industry. The full list of metros includes: Atlanta; Austin; Boston; Chicago; Columbus; Dallas; Denver; Indianapolis; Los Angeles; Miami; Montgomery County, Md.; Nashville; Newark, N.J.; New York City; Northern Virginia; Philadelphia; Pittsburgh; Raleigh; Toronto; and Washington, D.C.

Tight market driving rents up

The tight office market continued to push Austin metro asking rents up, reaching $34.94 per sq. ft. to close out 2017 at a record high. At the end of the fourth quarter, prices have climbed 14.1% above the five-year average of $30.62 per sq. ft. Overall direct rates ended the year at $35.14 per sq. ft. and sublease at $32.40. Looking at submarket rents, Class A space in the CBD hit $51.10, while Class A in the Central Austin submarket listed $40.37 per sq. ft. for Q4 2017. In addition, year-over-year asking rents grew by 5.0%-although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator. Brokers report net effective rents dropping significantly once negotiations begin.

Leasing Activity

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Austin Office Cumulative Monthly Sales Volume Source: Real Capital Analytics

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Class A Direct Class A Sublease Class B Direct Class B Sublease

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MARKET OVERVIEWSubmarket Stats

Submarket Statistics (Total reflects Class A/B/C)

Total Inventory (SF)

Total Vacancy

(%)

Total Availability

(%)

Q4 2017 Net

Absorption (SF)

2017 YTD Net Absorpiton

(SF)

Leasing Activity

(SF)Deliveries

(SF)

Under Construction

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Overall Gross Avg

Asking Rent ($/PSF)

Austin Market Total 78,816,099 9.0 12.5 793,905 2,165,854 1,892,629 574,213 4,141,624 34.94

Class A 38,248,458 8.8 14.2 397,889 1,904,080 1,337,496 396,136 3,672,513 39.06

Class B 33,751,877 9.3 12.5 118,547 320,921 573,350 45,200 683,711 28.88

Submarket Statistics (Total reflects Class A/B/C)

Total Inventory (SF)

Total Vacancy

(%)

Total Availability

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Q4 2017 Net Absorption

(SF)

2017 YTD Net Absorpiton

(SF)

Leasing Activity

(SF)Deliveries

(SF)

Under Construction

(SF)

Overall Gross Avg

Asking Rent ($/PSF)

CBD Total 13,788,375 8.2 10.7 255,231 592,001 400,633 218,180 487,072 48.92

Class A 8,935,071 10.1 12.8 252,444 603,669 355,853 218,180 487,072 51.10

Class B 3,693,155 5.8 7.7 -19,568 -13,363 31,428 0 0 41.80

Central Total 5,906,578 5.5 10.1 -65,652 -21,633 172,467 0 95,863 30.90

Class A 1,477,008 3.7 9.6 -6,026 5,725 83,892 0 95,863 40.37

Class B 3,018,319 7.9 12.1 -46,481 -6,665 78,031 0 0 27.75

Cedar Park/Georgetown/Round Rock 6,009,042 5.6 8.0 69,386 302,051 21,774 0 154,476 29.45

Class A 3,024,013 7.6 9.3 27,903 179,584 4,078 0 59,476 30.67

Class B 2,687,803 3.9 7.4 42,573 123,557 17,696 0 95,000 25.42

North/Domain Total 7,274,443 7.7 12.8 -39,850 324,693 531,306 0 891,535 33.61

Class A 2,832,671 2.6 16.1 29,715 480,862 354,163 0 891,535 37.79

Class B 4,257,593 9.7 8.7 -69,565 -79,368 177,143 0 0 27.16

Northeast Total 3,978,849 10.3 13.7 10,861 154,893 5,241 116,000 274,257 21.19

Class A 1,049,273 15.3 12.1 7,293 181,968 1,195 116,000 274,257 25.38

Class B 2,211,266 7.6 15.5 3,568 -51,015 4,046 0 0 21.46

Northwest Total 19,358,296 7.7 12.5 123,987 29,548 347,586 0 220,000 31.92

Class A 11,281,906 7.8 13.5 33,067 -37,808 246,260 0 0 33.73

Class B 6,720,264 9.0 13.2 90,780 64,809 101,173 0 220,000 28.97

South Total 3,346,879 4.9 9.1 98,620 105,409 42,730 34,169 168,775 32.59

Class A 784,524 3.0 17.8 57,245 49,425 16,139 34,169 168,775 34.48

Class B 1,827,832 5.4 5.6 39,876 42,701 22,390 0 0 29.53

Southeast Total 6,349,201 15.7 20.3 86,085 190,152 28,108 0 1,600,828 28.20

Class A 467,521 6.3 22.7 21,984 48,936 58,773 0 1,504,117 40.54

Class B 5,047,899 18.7 21.7 4,010 108,166 15,023 0 246,711 27.91

Southwest Total 12,804,436 11.2 15.8 255,237 488,740 342,784 205,864 248,818 34.32

Class A 8,396,471 12.0 16.3 -25,736 391,719 217,143 27,787 191,418 37.31

Class B 4,287,746 8.3 12.6 73,354 132,099 126,420 45,200 122,000 29.36

Suburban Total 65,027,724 8.9 12.5 538,674 1,573,853 1,491,996 356,033 3,654,552 31.58

Class A 29,313,387 8.4 14.6 145,445 1,300,411 981,643 177,956 3,185,441 35.88

Class B 30,058,722 9.8 13.0 138,115 334,284 541,922 45,200 683,711 27.77

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

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MARKET OVERVIEWAustin Office Submarkets

1. CBD

2. Central

3. Cedar Park/Georgetown/Round Rock

4. North/Domain

5. Northeast

6. Northwest

7. South

8. Southeast

10. Southwest


Quarterly Market ReportJANUARY 2018

NAI Partners Austin Office 701 Brazos Street, Suite 320Austin, Texas 78701

tel 512 580 6208



Leta WausonDirector of Research

[email protected] 713 275 9618


austin office | q4 2017 quarterly market report€¦ · as we move into 2018, austin continues to...

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