TEXAS SNAPSHOT, MARCH 2006

Austin Office Market

Pat Herron, herronwilliams llc

In 2005, Austin's office market saw more than 1 million square feet of positive absorption, marking the second straight year that absorption exceeded 1 million square feet. Leading the way was the Far Northwest, Northwest and Southwest markets, which, consequently, are also the areas where new office developments have been proposed. In addition to the positive absorption several market factors seem to be driving rental rates upward. These are the “flight to quality,” which has caused Class A landlords to increase rental rates, and the numerous Class A properties to sell at very optimistic prices; these purchasers are betting on a quick return to a robust office market.

Austin is currently in the middle of an upswing in rental rates and a shift to being a landlord's market, as citywide average rental rates are at $20.37 per square foot. Southwest Austin saw an increase of more than $3.50 per square foot from a year ago, while the Far Northwest jumped more than $2.70 per square foot. Many commercial real estate professionals feel that Austin's rental rates will continue to rise, reflecting the increasing demand for office space.

Overall Austin's office occupancy rate hit 86.5 percent at the close of 2005, an increase of approximately 3.6 percent from year-end 2004. A 15 percent market vacancy is considered a healthy market, so new development should be on the horizon.

These factors, combined with Austin's job growth, are leading to speculation that new office construction is on the horizon. To date, speculative projects have been announced for the Far Northwest, Northwest and Southwest sectors of the city. There has been very little pre-leasing so it remains to be seen if construction will actually be started.

The most significant development that will commence in 2006 with completion expected in 2008 is the construction of Advanced Micro Devices' campus on a 60-acre parcel in the Southwest sector of the city. Currently AMD has more than 3,000 local employees spread across 12 buildings from southeast Austin to northwest Austin. This consolidation will bring a significant amount of office inventory back to the market at rental rates less than those required to support new construction.

Austin remains a popular destination for new companies by combining low median home prices with a vibrant economy. The city's recent accolades in national publications have included Entrepreneur magazine labeling Austin the “#1 Entrepreneurial City in America,” Forbes ranking Austin as one of the top three cities for businesses and careers, and Wired! magazine naming Austin the “Most Wired City in America.” The ongoing recognition in national publications, better-than-expected job growth and the sustained efforts of the Austin Chamber of Commerce all have contributed to the return of a healthy and vibrant Austin office market.

New owners/developers typically enter the Austin market initially by acquiring existing inventory. For example, Aspen Growth Properties recently acquired approximately 1 million square feet of existing inventory and has several new projects on the board. Along with Aspen, new office projects are being planned by Hill Partners, Trammell Crow Company, Cousins Properties, Brandywine Investments and Endeavor Real Estate Group. It remains to be seen which projects will actually break ground.

The Southwest, Northwest and Far Northwest continue to be the most vibrant office markets. The Southwest and Far Northwest both are experiencing major residential growth and will see the development of new office projects. The Southwest sector of the city has few developable tracts remaining, but existing office buildings are likely to be renovated and updated.

Infill land tracts with existing development entitlements are a scarce commodity in Austin. The few tracts that are ready for construction are held by developers that most likely will go forward with the project. With the completion of the infill development, expect more office product to be built in Austin's surrounding areas.

— Pat Herron is the vice president of herronwilliams llc in Austin, Texas.

©2006 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.