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Companies in Austin Face Higher Rent Despite Moderation in Demand Drivers

Although it continues to exceed the growth rate in nearly all other U.S. metro areas, office-using employment growth in Austin has cooled a bit of late. Employment growth has fallen to 4.3% in the last 12 months for businesses in office-using sectors (financial, information and professional/business services), marking a considerable slowdown in pace compared to both 2014 and 2015 where office-using employment growth rose by more than 6.0% each year.

Leasing activity has also showed signs of losing steam. Over the past twelve months, leasing volume totaled only 5.3 million square feet (msf), the lowest amount since 2009. This marks a considerable slowdown from the rigorous pace of 8.3 msf leased on average from 2010 through 2015. Net absorption echoes this trend; Austin posted positive net absorption of 1.3 msf over the past twelve months, a figure that is just slightly more than half of the 2.2 msf mark from a year prior.

Constrained supply is the factor keeping availability from peaking in Austin as a result of reduced demand for space. Construction volume dropped from a peak of 3.1 msf under construction in the first quarter of 2015 to 1.1 msf by the end of September 2016.

Austin Office Construction

 

Consequently, because of this restrained supply and the continued (albeit slowing) demand for Austin office space, rental rates have pushed into uncharted territory for the region. Austin rents increased 2.0% to $32.40 overall and rose 0.7% to $36.58 in the Class A sector. Many small and mid-sized technology firms continued to demand space downtown and have been willing to pay the premium commanded by the amenity-rich district.

Despite the recent decrease in demand, the Austin metro area does not show any signs of slowing down in the near future. Demand is expected to continue to outpace supply for Austin office space for the rest of 2016 and 2017, barring a significant economic downturn in the tech sector. As a result, office rents will likely continue to nudge upward in Austin while availability remains scarce.

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Posted by:

Keith DeCoster

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Tim Wingfield

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