The commercial real estate market in Austin, Texas, is poised for a dynamic year in 2025, characterized by both challenges and opportunities across various sectors. The sectors focused on in this outlook report are office, industrial, retail and investments. The information obtained for this report come primarily from CoStar data and forecasts; my go-to source for commercial real estate information.
Office Sector
Austin’s office market is experiencing a Dr. Jeckyl and Mr. Hyde personality at the present. On the one hand, Austin’s vacancy rate is 17%; remaining among the highest in the US. It stabilized in 2024Q2 and 2024Q3 but with expected delivery of speculative developments in 2024Q4 and 2025Q1 the supply-demand imbalance will only increase causing vacancy rates to likely increase to the mid 17% or higher range by 2025Q1. However, despite the deflationary pressures from high vacancies, asking rents have risen by 1.8% annually to date. Property owners are achieving sustained rent levels by bolstering concessions and offering flexible lease terms to prioritize occupancy.
The saving grace for landlords is the increased activity among large users including new market entrants such as X (formerly Twitter) and the expansion from firms like Nvidia. Yet, if not enough users lease enough large blocks of space, the 4.7 million sq.ft. under construction could cause vacancy rates to go over 19% by 2026Q1. If that were to happen, rental rate growth could lower from 2% annually to -1% annually, which tenants would applaud.
Industrial Sector
The industrial real estate sector in Austin is still feeling the heightened anticipated demand for space from when the Tesla plant came online and when Samsung announced an additional semiconductor manufacturing plant. The anticipated demand has been fed by developers delivering over 10 million sq.ft. assuming there will be dozens of suppliers and vendors planning expansions in the area. To date, the supply of space has outpaced demand causing a softening of the market. For comparison, the market traditionally sees less than 3 million sq.ft. delivered annually in most years.
This oversupply of space has resulted in a negative rent growth of -1.7%. That’s very good news for tenants looking for space. Current market rental rates are in the range of $10/ft/yr. base rate to $18/ft/yr. base rate.
Retail Sector
The retail sector landscape can best be described as tight due to strong demand and limited available space. This is due to Austin being one of the country’s fastest growing cities – Still. Although developers have delivered 2.1 million sq.ft. in 2024, the availability rate is only at 4%, which also means rents have been increasing at a brisk pace of 3.2%. For perspective, the national average for retail rent increases is currently at 1.9%.
Investment Outlook
Expectations of buyers and sellers continue to remain divergent in all property classes. This has slowed overall transactions because sellers for the most part are not willing to sell for lower valuations. The sales that have occurred have been trading at higher capitalization rates in the 7% range for office and industrial and 6% for retail property since sales prices have discounted from 5% to 40% depending on the particular property type.
One of the largest owner-users that purchased 3 office buildings totaling over 300,000 sq.ft. in 2024 was the City of Austin. The continued appetite of the City of Austin to acquire everything from land to improved property over the last 10 years has been good (and not so good). Its good because their steady appetite for real estate helps keep the market stable. The problem with the City acquisitions is they typically have been paying higher than market prices in my opinion.
Summary
Every four years, as is typical following a national election, optimism is high for the economy to grow. Austin is well positioned to continue to attract new businesses which should translate to a continued need for additional commercial real estate of all types.
If you are looking to expand your operation and need guidance on leasing commercial space or are looking for an investment property, reach out to me. I will help guide you using all the resources at my disposal to help you determine the best property for you.
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For more information or any questions you might have, please call or email me at 512-736-5933 or oddo@toweratx.com.
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