Even the second fastest-growing city, Austin, Texas, is seeing a significant retracement in its office market. The first two quarters of 2022 resembled pre-2020 market conditions. Leasing activity was robust, sales were steady, and new development had no issue pre-leasing. But according to Casey Casper of Stream Realty Partners, the market has slowed down significantly since June, an increasingly more common story nationwide.
Casper has been with Stream Realty Partners for eight years and focuses primarily on tenant representation for office and industrial clients. During his time in Austin, he has worked through the turbulent growth and contraction this market has undergone. Interestingly, the past few months have been the slowest office market he has seen in his career. According to Casper, the amount of sublease space has dramatically risen. Data shows that sublease availability has grown 66% since the first quarter and continues to show signs of increasing. In addition, many of Casper's clients are downsizing, explaining how 100,000 sqft leases are shrinking to 25,000 sqft. To compete, landlords and developers must resort to the creative use of spaces and spec suites.
Unlike Dallas or Houston, Austin is a very concentrated market. As a result, most leasing and development happens in three main areas: the Central Business District, East Austin, or The Domain. As of Q3, there are 6.1 million square feet under construction, and the vacancy rate is 17%. The flight to quality remains essential as businesses seek any benefit to lure employees back to the office. Even with the change in direction from tenants, Austin has had more success bringing employees back to the office than other cities. Of the occupied space, 60% of the employees are back in the office.
The growth of Austin's Technology Industry caused inflated rent and sale prices, making it hard for B-class tenants to maintain their leases. Round Rock and Cedar Park are two submarkets beginning to plant their roots as the suburban office market expands. Smaller businesses have started to occupy these outer markets due to the CBD's limited capacity and high prices. Bigger names such as Dell, Trellis Company, and Emerson Process Management already occupy over 1.8 million square feet in Round Rock.
Even though there might be a short-term hiccup, Austin's rapid growth in the office market and as a city is only in the opening innings of a multiple-decade run. The city has attracted companies like Google, Amazon, Tesla, and Oracle, who have recently opened new branches or relocated their headquarters to the Texas Capital.
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