What's happening
Local real estate firm officials said hundreds of thousands of square feet of offices are vacant across Austin in spaces that are both directly leased and subleased. The trend has continued from the start of the COVID-19 pandemic through this summer; data from Aquila Commercial shows overall office vacancies in the city have increased by nearly 2 1/2 times since mid-2020.Kirk Silas, Aquila's director of market research, said activity is still slow, driven in part by businesses's remote work policies and lessened demand. Larger companies—particularly in tech—are leading the way, JLL Austin leasing lead Kevin Kimbrough said, although the leasing trend is being seen at all levels across many sectors.
“The driving factors for that are going to be economy in general; there’s slower hiring, layoffs. And then obviously the work from home and the fact that the push to get people back in the office; it’s there, but it's not really going at as good of a clip as the office market wants to see it,” CBRE office broker John Gump said. “So you have lack of demand and you have increased availability.”
While a large chunk of office space remains available, the pace of new additions is not likely to match what the city's been seeing over the last several years. While Aquila tracked about 15 notable office projects set to wrap up through the end of 2023 or in 2024, only three major projects have firm timelines set for the following years—while dozens remain on hold or in early planning stages.
“If an office building hasn’t already started construction and if there is no preleasing of a building, ... barring that, you won’t see any new office buildings,” Gump added. “No large banks, no investors are going to be putting any money into developing any sort of a spec office product for a considerable amount of time.”
Doug Ressler, manager of business intelligence at CommercialEdge, said Austin's office vacancies are edging closer to historic highs after the sector was “insulated” from the worst of the pandemic's effects thanks to longer-term leases that were already in place. The expiration of those deals will mean more transition in the market, he said.
“Although the Austin market has seen a pullback in leasing, particularly from the tech industry, companies are continuing to hire, and the Austin unemployment rate remains below the Texas and national averages,” he said. “Levels of uncertainty remain in the foreseeable future, but bright spots in the market may emerge as we progress through 2023.”
Market breakdown
Despite rising vacancies, Kimbrough said he's seen demand for office space rising a bit this summer—especially to the east, where analysts pointed to the draw of new residential, retail and entertainment additions.
“Probably six years ago, it wasn’t really much of a market,” he said. “The excitement of all the food and [beverages] that’s already over there, and of course all the multifamily housing, you’re just seeing that start to pick up again and invigorate again.”
Notable office projects, such as Springdale Green, are still coming online, and more could be on the way in the years ahead in a market Kimbrough said is “evolving on all fronts” despite a vacancy rate that Aquila found to sit at 33%. Gump said the East Austin submarket will continue to contend with an oversupply of space after its recent construction boom, but companies will still likely be drawn to area amenities.
“Even though it’s not happening immediately, ... there’s still that positive aspects of that where people are looking for those type of offerings that they have in the east market,” he said.
Looking at downtown's growing skyline, the millions of square feet of new office additions are visible even as many large tenants are reconsidering their needs. Vacancy there is over 20%, led by many larger tenants backing out of space, analysts said.
“Not only did the growth not really happen like they thought for a lot of these institutional-type companies, but then the work from home reduced the need for space,” Gump said. “We are definitely seeing a large increase in available sublease in the towers because those are the larger buildings with the larger blocks of space where these larger institutional tenants have been leasing space.”
However, some maintained the outlook for the many office towers already in progress is solid.
“The new construction that’s hitting in the [central business district] or that has delivered as of today has seen great success, so much so that the new construction downtown is getting fairly full,” Kimbrough said. “That speaks to why you see additional buildings still coming out of the ground and still looking to go in the CBD or in The Domain, is just because that flight to quality is still a thirst by tenants looking for a space in the market.”
To the southwest, observers said the more suburban-style market's relatively smaller offices and slower leasing activity led to less noticeable changes than other sides of Austin are seeing.
“No development’s really happened there for a few years now because it’s kind of hard to develop in that area, and there just hasn’t been as much demand there,” Silas said. “You don’t have all this new development delivering vacant, so there’s not big jumps in vacancy when a new building’s being delivered. So it’s been pretty steady over the past year or two just because of that.”
The outlook
The forecast for any swing in return-to-work versus work-from-home policies remains unclear. Silas said any early movements by business leaders toward more in-person work could end up bringing many more people back into offices across the city.
Earlier this year, Silas also found Austin remains a national leader for the physical occupancy of office space despite the lower usage across the board since the pandemic.
“It wouldn’t surprise me if maybe some of the bigger companies start successfully getting all their employees to go back and keep the same amount of office space; I could see maybe the smaller companies using that as an example to go off of,” Silas said.
Others watching the real estate market said unsettled economic conditions continue to affect those looking to build in Austin and how much space comes online following the last decade's uptick.
“Everybody’s questioning where are things going with the economy in general. Where’s the job market going? We’re all paying attention to that, and then you throw in the hybrid work model; we’re just in this weird space,” Gump said. “I think everybody’s just looking for a little direction in general. We’re all kind of waiting for that, it feels like, and we may not get it.”
