 Austin: Current Market Conditions
By Michael Kennedy, SIOR, President, Commercial Texas
The story of today’s Austin’s office market is a tale of 5 years….from 2003-2008, but really two time frames: 2003 – 2006 and 2006 – 2008.
Austin’s primary submarkets are defined as the Central Business District (CBD), the Southwest Market (SW – generally south Mopac Expressway and Loop 360, south of the Pennybacker Bridge), and the Northwest/Far Northwest Market (NW/FNW – generally north of Mopac Expressway, 183N to Hwy. 620/SH45 and east to IH-35.) All experienced similar characteristics over 2003-2006. Things changed in 2007, when the CBD market diverged positively and the SW/NW/FNW occupancy percentage turned down again due to increased inventory and decreased absorption.
Overall, from 2003-2008 the market looked like this:
CLASS A OFFICE
CBD Vacancy SW Vacancy NW/FNW Vacancy
2003 |
2006 |
2008 |
|
2003 |
2006 |
2008 |
|
2003 |
2006 |
2008 |
20.5% |
17.8% |
14.7% |
|
14.8% |
4.2% |
17.4% |
|
27% |
8.7% |
20.9% |
AREA OFFICE RENTAL RATE GROWTH
CBD SW
| |
2003 |
2006 |
2008 |
% Incr. |
|
|
2003 |
2006 |
2008 |
% Incr. |
Citywide |
$21.33 |
$25.75 |
$30.84 |
44.6% |
|
Citywide |
$19.59 |
$23.76 |
$29.51 |
50.9% |
Class A |
$23.47 |
$27.44 |
$32.75 |
39.5% |
|
Class A |
$21.96 |
$25.71 |
$31.51 |
43.5% |
NW/FNW
| |
2003 |
2006 |
2008 |
% Incr. |
Citywide |
$17.21 |
$23.08 |
$26.98 |
56.8% |
Class A |
$18.73 |
$25.39 |
$28.75 |
53.5% |
NEW INVENTORY
(Square Feet)
| |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Delivered |
83,843 |
676,186 |
0 |
0 |
1,256,061 |
843,685 |
2,071,180 |
Proposed |
|
|
|
|
|
|
4,928,518 |
ABSORPTION Q1 2007 – Q2 2008
Absorption
CBD SW NW/FNW Totals
Last 18 Months |
407,088 |
63,652 |
(94,133) |
376,607 |
Market data courtsey of Capitol Market Research.
It’s a tale of 5 years and two time frames. The Austin job growth of 2003-2006, with the turnaround in the economy off the high-tech bust, low interest rates and the free flow of capital all boosted Austin’s star. With significantly reduced vacancy rates in the SW and NW/FNW submarkets, there seemed to be no reason to not build for what appeared to be guaranteed demand and success.
Building sooner also was a way to lock in rapidly escalating construction and labor costs which would protect developers against later more costly competitive projects proposed or coming on line. Labor and labor quality both were in shortage due to the public and large private projects also underway, such as the Dell Children’s Hospital, 130 Highway construction, continued retail construction demand i.e.: Domain, Hill Country Galleria.
Even with hindsight being what it is, there was really no reason to think at all that office projects would not be positive. As was frequently the comment “things are more positive in Austin and Texas than other parts of the country.”
Conventional wisdom said go forward.
As of Q3 2008, we have learned that we are not in “conventional” times, and these times do not have conventional solutions, BUT things are more positive in Austin and Texas. It just happens that the bottom we are “better off than” is lower than anyone anticipated.
Bottom line: went into it with eyes wide open; fundamentals in place; learning what was going on in the larger world – learning that Austin is part of that world more so than ever before.
No predictions this quarter. Let’s see what the New Year brings.
Take care and have some peace.
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