TEXAS SNAPSHOT, SEPTEMBER 2009

Austin Office Market

Overall, the Austin office market is facing many of the challenges that other major metropolitan areas are struggling with nationwide. However, the Austin market has relatively strong employment fundamentals and continues to attract office-using employers and skilled employees. The office market,  and the industrial market, should rebound earlier and stronger than the national bounceback once positive absorption returns, with the South, Southeast and CBD submarkets leading the way.

Austin currently boasts the strongest employment market of any major metropolitan area in the country, though significant weakening in the office sector is projected due to overbuilding. The amount of vacant space increased by more than 1 million square feet in 2008, an addition of 14 percent to existing inventory. These additions shifted the leverage in lease negotiations to tenants, resulting in lower rents and elevated concessions, particularly in the Northwest and Round Rock/Georgetown/Cedar Park submarkets, which experienced the greatest increases in inventory. As a result, asking rents are forecast to fall to $24.66 per square foot and effective rents are projected to end 2009 at $20.72 per square foot, annual declines of 6.2 percent and 7.1 percent, respectively. Office investment sales have slowed as financing constraints hamper the market. The median sales price, however, is 8 percent higher than 2008 at $186 per square foot.

The overbuilding has caused developers to shelve many projects in 2009 due to slow leasing activity associated with the recession. As a result, only 830,000 square feet will be added to stock, down from 2.4 million square feet last year. The largest project under way is the 215,000-square foot first phase of East Avenue on the former Concordia University campus. The property is scheduled to come on line in the third quarter and has leasing commitments for nearly 75 percent of the space.

In the leasing market, Sony Entertainment signed a lease in the first quarter for 38,000 square feet and OneWest Bank Group has signed a 173,000-square-foot lease in the North Central submarket. A decrease in venture capital spending and limited demand for large blocks of space will result in a 310 basis point rise in vacancy this year to 21.9 percent, the highest rate since 2004.

The industrial sector is experiencing the same overbuilding seen in the office market. Negative absorption continues to overhang the industrial market, although flex space experienced “only” negative absorption of 64,000 square feet through mid-year 2009. Austin now has total industrial inventory of almost 38 million square feet, with 66 percent dedicated to warehouse space and the remainder as flex. Warehouse rents have declined approximately 30 percent and flex space rents have dropped 10 percent to 15 percent. A strong recovery for the industrial sector is projected to occur when positive absorption reaches 1.5 million to 2 million square feet annually.

— J. Michael Watson is Marcus & Millichap’s regional manager for Austin and San Antonio.

©2009 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.