Austin-area office rental rates increasing as vacancies decrease

In this district, the Aquila reports notes 19 “large blocks of contiguous availability,” with some spaces such as Indeed Tower having as much as over 200,000 square feet available. Eight office projects are under construction and nine are planned as future developments. Two of the projects that are under construction, Block 185, which is a single-tenant building, and Sixth and Guadalupe are 100% preleased even though they are expected to be finished next summer and the beginning of 2023, respectively.

Northwest Austin

In Northwest Austin, $46.09 is the average full-service rental rate, which is an increase from July 2021, when it was $44.26. The direct sublease and vacancy rate decreased from the first quarter, when it was 14.2%. Now, it is 13.2%, and this time last year it was 13.9%.

The report notes Northwest Austin has the most future office space developments underway with 16 developments either under construction or proposed. There are also 33 large office buildings with space available, the biggest being Domain Tower 2 with over 300,000 square feet vacant.

Southwest Austin

For the second quarter, in Southwest Austin the average full-service rental rate is $49.84, which is a $1.75 increase from July 2021. The direct sublease and vacancy rate, which was 16.7% in the first quarter, decreased to 15.3% in the second quarter. Despite the decrease from the first quarter, it is an increase from this time last year, when it was 14%.

The area does not have as much available space as Northwest or Central Austin with the maximum amount of space being a little over 100,000 square feet at Barton Ridge 400. Most of the office space available surrounds MoPac or Southwest Parkway. There are no developments being built according to Aquila's report, but there are nine buildings proposed, one of which, The Terrace 3, 4 and 5, would bring 707,602 square feet of office space to the area.

East Austin

In East Austin, the full-service rental rate average is $60.59, which is an increase from $58.36 in July 2021. The 34.2% direct sublease and vacancy rate is up from 29.5% in the first quarter but down from 42.9% in the second quarter of 2021.

Of the eight large office spaces with availability in East Austin, the largest is Eastbound with 217,347 square feet available. There are also two buildings that were completed in the second quarter. Thirteen other office developments are under construction or proposed for the area with many of them close to the I-35 border.

In the future

The data shows asking rental rates for Class A office space in the Central Business District can be up to $20 more than its more suburban counterparts. The report also states “office tenant demand in Q2 2022 was almost 5% higher than in 2Q 2021 despite economic concerns” and “tenant demand doesn’t always translate into signed leases.”

Aquila predicts that in the CBD, rental rates will continue to increase up to almost $90 for the average full-service rental rate by 2025. The data also predicts that Southwest Austin’s full-service rental rates will continue to rise on average, exceeding $55 by 2025. The Northwest Austin district is the only area predicted to stay about the same in 2025 at about $45. There was no future forecast data provided for East Austin. For the three areas presented with forecasted data, each area saw a decrease in the amount of vacancies through 2025.

Kirk Silas, director of marketing research at Aquila, said in an email that the rise of rental rates is a continuation of trends seen in the past few years.

“While downtown has continued to have leasing success, as can be seen from the positive net absorption, those leases have trended toward larger tenants ... that have been able to take large chunks of space and not be too concerned about the price. This was especially true prior to the pandemic, when most of the leasable space was in new construction, which was regularly being preleased by the larger tenants ahead of delivery,” Silas said.

Silas said the rising cost of rents in areas such as downtown is not necessarily limited to the price.

“I think there are definitely current and prospective downtown tenants looking at the cost of space downtown today and deciding that the location isn’t worth the price for them,” Silas said. “But it’s often hard to say whether that is solely due to the rental rates or due to all of the additional factors introduced by the pandemic.”