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Austin Office Market Q3 2023: Analysis and Trends

Introduction


As we dive into the third quarter of 2023, it's time to take a closer look at the evolving dynamics of the Austin office market. With significant changes in vacancy rates, net absorption, leasing activity, and more, it's crucial for investors, tenants, and professionals to stay updated on the latest developments in this ever-changing landscape. In this blog post, we will provide an in-depth analysis of the Austin office market, including key statistics, investment trends, and the impact of the current economic conditions on the commercial real estate sector.


Vacancy Rate Increases To 18.1%


The Austin office market experienced a notable shift in vacancy rates during Q3 2023. The overall vacancy rate rose by 60 basis points, increasing from 17.5% in the previous quarter to 18.1%. A contributing factor to this increase is the fact that only 29% of the year-to-date deliveries have been fully leased, leaving a significant portion of the market unoccupied.

Breaking down the numbers further, Class A and Class B properties posted vacancy rates of 20.6% and 16.5%, respectively. Several submarkets witnessed substantial year-over-year increases in vacancy rates, such as the North Domain (16.8% to 21.8%), the South (21.2% to 25.1%), the CBD (25.0% to 25.8%), the Northeast (17.2% to 19.1%), the Southwest (14.9% to 16.4%), and the Northwest (16.4% to 17.4%).


Investment Sales Trends


Year-to-date, Austin's office market has seen a cumulative 12-month sales volume of $405 million. With 183 deals completed in 2023, the average transaction price currently stands at $300 per square foot, accompanied by an average cap rate of 5.4%. A notable transaction in Q3 2023 included Brandywine Realty Trust's sale of the 173,000-square-foot Three Barton Skyway office building for $53.3 million to an affiliate of Riverside Resources in August 2023. This Class A office building, constructed in 2021, is situated at 1221 South MoPac Expressway, forming part of a larger four-building campus in Southwest Austin.


Negative Net Absorption Improves Due To Large Move-Ins


Despite remaining in negative territory, net absorption showed signs of improvement in Q3 2023, with a notable decrease in the rate of decline. The quarter saw net absorption at -375,637 square feet, a significant improvement from the -700,440 square feet recorded in the previous quarter. Year-to-date, net absorption stands at -1.9 million square feet.

Large occupancies played a pivotal role in alleviating the downward pressure on net absorption. Notable move-ins during the quarter included Google, which occupied 264,600 square feet of office space at 601 West 2nd Street in July, and the Capital Metropolitan Transportation Authority, which took up 145,390 square feet of office space at 3100 East 5th Street in August. Additionally, some tenants streamlined their office footprints, with Indeed vacating an entire building (183,911 square feet) at 2900 Esperanza Crossing (Domain Gateway) in August, and the Austin-American-Statesman returning 34,600 square feet of office space to the sublease market at 8000 Metropolis Drive, also in August.


Leasing Down 25% From Prior Quarter


Leasing activity in the Austin office market decreased by 25% during Q3 2023, with quarterly leasing velocity totaling 857,825 square feet, down from 1.1 million square feet in Q2 2023. Year-to-date leasing activity reached 2.7 million square feet.

The Southwest submarket accounted for 25% of the total leasing activity in Q3, including the largest lease signed for a 27,208-square-foot office space at 2500 Bee Caves Road in August. Another significant lease was inked for a 20,000-square-foot office space at 5301 Southwest Parkway in September.


The CBD Submarket Accounted For More Than Half of Q3 Deliveries


Office construction in Austin has reached 6.4 million square feet, spread across 30 buildings, with 3.5 million square feet (55%) available for lease. The CBD submarket led construction efforts with 2.2 million square feet, comprising 35% of all space under development, followed by the East submarket with 1.7 million square feet (27%).

Despite a decrease in deliveries (60%) from 690,647 square feet in Q2 2023 to 276,139 square feet in Q3 2023, one prominent completion in the CBD submarket dominated the third quarter's deliveries. A 16-story, 144,507-square-foot Class A office space at 600 W 5th Street was completed in September 2023, accounting for 52% of the total deliveries in Q3. Year-to-date deliveries amounted to 1.9 million square feet.


Rent Increases Slightly Year-Over-Year


The Austin office market's overall full-service average rate currently stands at $41.33 per square foot. This rate represents a slight decrease from the previous quarter's $41.55 per square foot but is slightly higher than the previous year's $40.27 per square foot. Asking rates for overall Class A and Class B space are $47.08 per square foot and $23.85 per square foot, respectively. In the third quarter, submarkets with the highest asking rates included the CBD at $59.60 per square foot, followed by the North Domain at $44.26 per square foot.


Austin Economic Update


The economic climate in Austin has also seen some shifts. The unemployment rate in Austin increased to 3.6% in August 2023, up slightly from 3.5% in July 2023. Despite this increase, Austin's unemployment rate remains lower than both the national rate of 3.8% and the state rate of 4.1%. The metro's employment declined by 1.9% in August, marking the first monthly decrease since February 2021. Notable declines in employment were observed in sectors such as health and educational services, leisure and hospitality, and financial activities. On the flip side, there were significant job gains in construction and mining and the government sector. Year-to-date, Austin's payroll employment has grown by 3.8%, outperforming both the nation (1.9%) and the state (3.3%).


Conclusion


In conclusion, the Austin office market has experienced several shifts and challenges in Q3 2023. A rise in vacancy rates, improvement in net absorption, a decrease in leasing activity, and a notable completion in the CBD submarket are among the key trends. Additionally, the economic landscape, marked by a slight increase in the unemployment rate, has seen varying impacts across different sectors. As we move into the final quarter of 2023, staying informed and adaptable will be crucial for navigating the evolving commercial real estate landscape in Austin.

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