Office Leasing Market Imbalance Explained

The most asked question I get these days is “Are office rents in the Austin area coming down since more and more buildings seem to have more vacancy?”

The answer? Likely. I wish I could be more definitive, but the Austin market has shown amazing resiliency over the years despite the tech bubble, the stock market crash, Covid crisis, and current high interest rates. These along with other minor events have affected the market in the short term, but the Austin market has always bounced back stronger for it.

The main reason Austin is more resilient to market changes compared to other cities is its continued push to be branded as a high-tech region, achieving its desire to emulate Silicon Valley, California. And now that we are on firm footing as a high-tech region, the addition of Samsung, Tesla, Apple, Meta, Indeed, Google, and Oracle among others, has provided the deep roots that help anchor our local economy in times of economic droughts.

Now for the numbers. According to CoStar¹, since 2020 we have been hovering between a negative 2% to a positive 3% (-2% — +3%) annual rent growth. In comparison, prior to 2020, we were running at a positive 5% to 8% (+5% — +8%) annual rent growth. Our current rent growth is a positive 1.1% (+1%) despite the post-covid office occupancy contractions. Moving forward the projected rent growth does not look so good for landlords. Costar is projecting a negative annual rent growth of 1% to 2% (-1% — -2%) starting in late 2024 thru late 2026, which should translate to rent concessions and possibly lower rental rates.

The reason we aren’t currently seeing significant rental rate drops is landlords are more receptive to offering rental concessions like abated rent, additional build out dollars, etc. rather than reducing the rental rate. The reason being when the rental rate drops, so does the value of the real estate asset since the value of the asset is tied to the rental rate (income it generates). At the moment, I am not seeing that many concessions, but I expect that will change as the vacancy rates continues to climb in the area.

I also get asked “Do the rental rates in the submarkets vary much?” The answer? You bet. For example, the typical downtown Austin office building rental rate averages a whopping $95/ft. (which includes $10/ft. for parking). On a 5,000 ft space that comes out to $475,000 per year. The typical office building in Northwest Austin of similar quality building has rental rates averaging $60/ft./yr. On the same 5,000 ft space that comes out to $300,000 per year. That’s 58% less than its downtown equivalent. So Downtown Austin has the most expensive office rents followed by West Austin and the Domain in North Central Austin coming in at $70/ft/yr. The most cost-effective office space can be found in Northeast and Southeast Austin in the $40/ft/yr. range.

Click here to review the full Costar Office Leasing Report and as always, I am available to talk about the market or your specific need at any time. I can be reached at 512-736-5933 or email at oddo@toweratx.com

Source Citations

¹ – CoStar, April 19, 2024, “Office Market Report, Austin, Texas”