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Kim_Gatley
Kim Gatley
S
enior Vice President & Director of Research at REOC Austin

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REOC Releases 3Q 2016 Office Market Report

The Austin office market remains strong heading into the final quarter of the year with momentum expected to carry sustained activity into 2017.  New leases and expansions generated 782,267 square feet of positive net absorption in the third quarter.  Healthy gains were created by several newly completed Class A properties which came online with significant pre-leasing in place.  Domain 5, for example, was delivered anchored by Trend Micro (75,000 sf).  Similarly, 2700 La Frontera Plaza came online in  the Round Rock market nearly 90% pre-leased to Houghton-Mifflin-Harcourt (87,631 sf).  In the CBD sector, the 5th and Colorado building came online with almost 90% pre-leasing.

 

In all, more than 179,000 square feet of new office space was added to the market in the third quarter bumping the year-to-date total of newly delivered office space to nearly 779,000 square feet.  To date, demand continues to outpace new supply.  As a result, the citywide vacancy rate tightened from 8.6% last quarter to 8.1% at the end of the third quarter which is lower than 9.5% recorded in the same quarter a year ago.

Strong demand and diminished supply have propelled rental rates to an all-time high.  At the close of the third quarter, the citywide average rental rate reached $34.68 per square foot on an annual basis which marks a healthy 4.5% annual increase over the same period last year.  At the top of the market, Class A buildings in the CBD command an average quoted rental rate of nearly $51 per square foot, compared to $49.46 last quarter.  (To adjust for buildings which quote rents on a triple net basis, operating expense figures have been added into the equation to arrive at an average equivalent full-service rate.)

Strong rents coupled with a sub-ten percent vacancy rate signal a green light for developers to keep building.   There is more than 1.8 million square feet of office lease space currently under construction and much of the space has already been pre-leased. For example, the Shoal Creek Walk project (218,180 sf), is currently almost 40% preleased with completion estimated early next year.  Similarly, Galleria Oaks I inked a lease with True Car (37,757 sf) to anchor the building when it is delivered in March of next year.

Of course, the largest project currently underway is the 29-story tower at 500 W. 2nd Street which will house Google (207,940 sf).  The pre-leasing success reported in current projects has spurred plans for more development.  Another fully leased project being Lantana Ridge I & II will be delivered by early next year for YETI to take full occupancy. Future projects include Eastside Village (94,500 sf), which is currently under construction, and a fourth quarter start is planned for an 11-story mixed-use project at the Domain (310,000 sf).

The booming local economy continues to fuel corporate relocations and expansions.  According to the Texas Workforce Commission, the Austin-Round Rock metro area added 28,600 new jobs over the past twelve months ending September which equates to an annual growth rate of 3.0%.  Essentially, Austin is operating at full employment with a reported unemployment rate of 3.5% which compares favorably to the Texas rate of 4.9% and the U.S. rate of 4.8%.

Click the following link download REOC Austin’s complete 3Q 2016 Office Market Report

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