TEXAS SNAPSHOT, JUNE 2008

Austin Office Market

Crow

The Austin market is a place people want to be due to the city’s outstanding quality of life, economic growth and low cost of living. The city also has a new international airport, an aggressive rail, as well as new commuter initiatives.

Expansion is one of the current trends shaping the city’s office market with more than 900,000 square feet of office space coming on line in the first quarter of 2008. Office space currently under construction stands at nearly 3 million square feet. Separated by class, there is a substantial amount more Class A space being added than Class B space.

The Austin market also offers a vast amount of opportunity for first-class, national players to continue to add a limited amount of Class AAA space to the central business district (CBD), although its submarket is considered to have high barriers to entry.

Green initiatives are another trend spreading throughout the Austin office market with current green initiatives continuing to grow and affect development on many levels.

Austin is significantly improving its transportation infrastructure by upgrading the commuter rail — connecting the government area, University of Texas at Austin and the central business district (CBD) together. This connection will provide easier access to the CBD and should bring in approximately 100,000 new people a day, radically changing the CBD retail areas by increasing demand for restaurants, clubs and the like.

North Austin and Highway 183 both have seen extensive new construction that will take time to be absorbed upon completion. The industrial area on the southeast and east sides of Austin surrounding the airport recently have witnessed an overflow of development that will take time to be absorbed. Texas is a state with large portions of reasonably priced undeveloped land, which developers continue to view as attractive for development. While some of these areas are clearly overbuilt, the city of Austin is still an exciting, growing area that ultimately will absorb these properties as well as future development.

Austin has seen an influx of East Coast firms, such as The General Investment & Development Companies, and West Coast firms, such as CIM Group, Inc., take a strong interest in the Austin area. In general, development and purchase opportunities are excellent and relatively inexpensive in comparison to the East and West Coast markets.

Technological firms, as well as California firms, have been expanding into the Austin office market, partially due to the college-educated employment base Austin offers, with nearly half of the total population holding a bachelor’s degree or higher.

Due to the current state of the economy, absorption in Austin has declined compared to the past 5 years when the city reported significant growth. In the first quarter of 2008, Austin displayed negative absorption; however, compared to the rest of the U.S, Austin remains a bright spot in this industry. Those choosing to invest in Austin, especially the CBD, would be making a wise decision. 

At the end of 2007, the Austin CBD Class A office rental rates averaged nearly $33.00 per square foot on a full-service gross basis, while suburban Class A office rental rates of Austin at the end of 2007 averaged just over $31.00 per square foot on a full-service gross basis.

Austin vacancy rates are at approximately 16 percent for the first quarter of 2008. Surprisingly, however, rental rates overall still are increasing across the board, marking another record high for citywide asking rents. There has been a noteworthy increase of more than $6.50 from the first quarter of 2006.

The CBD in Austin will continue to perform well as new tenants are acquired and existing leases are renewed or expanded. The CBD office market should see more stability compared to other parts of Austin due to the fact there is not an overflow of new developments occurring in this area as there is elsewhere.

The Austin market remains a bright spot in the real estate industry compared to other areas in the U.S. The rental rates are still increasing while new office space is developed. A portion of the properties in this market is undergoing renovations to increase overall value. The CBD market also continues to offer a variety of tenants, in turn providing the city with a more dynamic atmosphere and market.

— Ross Crowe is vice president, asset management, with Grubb & Ellis Realty Investors in Austin, Texas.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.