Hobbled Austin office market is poised for recovery after COVID-19

More than 3 million square feet of office space is under construction in Austin's downtown area, also called the Central Business District. (Design by Shelby Savage)
More than 3 million square feet of office space is under construction in Austin's downtown area, also called the Central Business District. (Design by Shelby Savage)

More than 3 million square feet of office space is under construction in Austin's downtown area, also called the Central Business District. (Design by Shelby Savage)

When internet services behemoth GoDaddy announced 331 layoffs and the closure of its Austin offices June 24 amid the coronavirus pandemic, the move signaled some of the challenges COVID-19 posed across industries, including office real estate. GoDaddy had just signed a 15-year lease in December at a new building in East Austin. Now, it is the company’s responsibility to find a sublet.

The office real estate market leading up to March, when the virus began to spread, was strong. Currently, 7.4 million square feet of office space are under construction throughout the city, with expected completion by the end of 2022—this total does not include the 3 million-square-foot Apple campus in Northwest Austin—according to the research arm of Aquila, a local commercial real estate firm.

With major projects such as the Indeed and Google towers, the Parsley Energy Building and the skyscraper at Sixth and Guadalupe streets, downtown Austin, also known as the Central Business District, expects to see office space grow by 3 million square feet by 2022.

However, as the city has progressed through the pandemic, downtown office subleases, which represent corporate entities offloading space they no longer need, have seen a significant rise.

Between March and July, the amount of office space now available in downtown Austin for sublease has doubled from 520,546 square feet at the end of March to more than 1.04 million square feet at the start of July, according to Aquila. At the end of 2019, that number stood at 342,218 square feet.

Although some economic pains are apparent, experts say office real estate is not dead but, in Austin, poised to bounce back. However, uncertainty looms, and many agree that the coronavirus, with its forced experiment in mass teleworking, focus on personal space and hypervigilance in cleanliness will change how the future workplace looks and operates, at least in the near term and potentially for a long time.

Austin’s bounce-back ability

Uncertainty, a hallmark of 2020, is poisonous to the economy. Chad Marsh, a managing principal with Endeavor Real Estate Group, one of Austin’s largest commercial developers, said the last several months have been an exercise in flexibility and managing change. He said the longer uncertainty around the coronavirus lingers, the more damage the economy will incur, including the real estate sector.

There have been a lot of takes across the industry on how the coronavirus would impact office space. Some have predicted companies will favor more permanent work-from-home structures, resulting in a contraction of office space needs; others have said companies will need more office space to accommodate new social distancing standards, creating an expansion of office space demand. Marsh maintained no one in the industry has answers. “We all have the exact same data and information up until today and the same lack of clarity to what the future holds. It’s a lot of guesswork; we’re in unprecedented times,” Marsh said.

When the 2008 financial crisis struck, Ben Tolson was just starting his commercial real estate career. He said it forced him to closely examine the vulnerabilities of the market that caused issues as well as the strengths that led to recovery.

Tolson, who is now a principal at Aquila, said he saw in 2008 a greater disconnect between the “fundamentals of the marketplace” and its participants. He saw a much “less disciplined environment”—commercial projects that were poorly conceived, in his view, were getting financed and built anyway. It left Austin with a lot of new, lesser quality and vacant offices.

Yet, Tolson said companies still saw Austin as a desirable place to relocate, which helped accelerate the city’s recovery. The pandemic’s impact on the economy differs from the recession, but Tolson said Austin is better suited to handle disruptions this time around.

“Look, I think, in the near term, this pandemic has devastated a lot of businesses, so we are going to see a rash of subleases, and we are going to need to work our way through that, which is going to take time. There’s no way to sugarcoat that end of it,” Tolson said. “One thing that is harder to handicap, there are a lot of companies, on the coasts primarily, that are looking at Austin very seriously to relocate or expand.”

Already in 2020 this “Austin effect” has become apparent. Billion-dollar companies, such as Rex Teams, have announced intentions to look at Austin, with companies like Google and Apple investing heavily in local expansions. Tolson said relocation rates slowed in recent years because there was not enough attractive office space.

That is changing across the city, especially in downtown, where Class A office space—the newest and highest quality—will increase by millions of square feet within the next 24 months.

Healthy market, but a different look

In May, Movability, a local transportation management organization, polled 732 Austin workers across a range of industries—97.5% were working from home due to the pandemic. According to the survey, 76% of respondents would like to continue working from home at least some of the time, with 64% preferring to split time evenly between the office and home.

In a national survey, global design and architecture firm Gensler polled more than 2,300 U.S. workers who regularly worked from an office for a company with more than 100 employees; 44% wanted to continue to work full-time at the office, with the other 56% wanting some type of work-from-home arrangement.

The surveys offer a glimpse into the potential hybrid reality of future offices. Offices will still be an important part of the future for most companies, Director of Workplace at Gensler Nena Martin said; however, she said they will look a little different in the near term, with more significant design changes potentially coming in the long term.

“I think spaces are going to be a lot more dynamic, meaning that we have to be more specific in how we design the spaces so that, for those who are working from home part of the time, the office is serving as a tool that can flex. Just think of it as a Swiss Army knife,” Martin said.

Martin said she has already had conversations with clients in Austin that have office space, or have projects under construction, that have reached out about shifting some of the design to accommodate post-pandemic needs. For tall buildings, she said there is especially interest in innovating elevators.

Since the mid-2000s, a Leadership in Energy and Environmental Design, or LEED, Certification, which recognizes sustainability in design and construction, was the gold standard for new office space. Martin said in the wake of the coronavirus, the 2020s are going to focus on the Well certification, which acknowledges design focused on the well-being of those who occupy it.

Well certification emphasizes design facets, such as air quality, natural light and amenities including fitness centers and outdoor space. The Foundry, a mixed-use build in East Austin completed in 2019, was the first structure in the city to receive this certification.

Tolson said contrary to the staleness of construction in 2008, much of the office space under construction in downtown Austin represents the future of the market. He expects downtown Austin to be on the front line of innovation in office design.

“Everything that’s under construction right now is much better calibrated for the future of our city wants and what our future tenants want,” Tolson said. “I think in the next 12-24 months, we’ll see some opportunistic moves taking advantage of the fact that we now have some really desirable facilities.”

Major local employers, including Facebook and Dell, have both said working from home will be a part of their companies’ futures. How such behavioral changes in workflow will impact the market remains up in the air.

Jennifer Wenzel, with the Teacher Retirement System of Texas, led a panel of real estate experts in June for the Urban Land Institute, which touched on the future of office space. She said the office will change as employees ask to work from home, but what the overriding trend will be is hard to say.

“The old office of the past was a place to access your computer and technology and carry out routine tasks. The new office will be a place to meet and collaborate and create a corporate culture,” Wenzel said.
By Christopher Neely
Christopher Neely is Community Impact's Austin City Hall reporter. A New Jersey native, Christopher moved to Austin in 2016 following years of community reporting along the Jersey Shore. His bylines have appeared in the Los Angeles Times, Baltimore Sun, USA Today and several other local outlets along the east coast.


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