As a veteran Commercial Real Estate Broker, with 30 years of experience under my belt, I don’t recall a time in Austin’s history where the commercial real estate market in the central business district (CBD) has experienced a correction like it is going through now. This anomaly is what has compelled me to write this month’s article.
I am intimately involved with valuations in downtown Austin because I have a commercial property listed for sale. For the past several months, I have been communicating with other brokers with downtown listings, and we are all seeing the same thing. There is steady interest from buyers, whether investors or owner/occupants, but not many who are ready to commit.
I attribute this to two things. One is the somewhat temporary challenge of increased rates, which are in the upper 6% to mid 7% range. The second is that the pandemic appears to have permanently changed the way companies do business, requiring less office space since fewer employees need to be in the office full-time.
One property I have been tracking had an estimated value of around $1,100/ft back in 2019. Since then, there has been a steady decline in its value which now appears to be $850/ft. That represents a potential 22% drop in value!
With this current realization, I do see many owners deciding to hold off selling right now in hopes that interest rates will be coming down soon.
Another metric going against property owners is that cap rates (which are return on investment calculation based on net income and the sales price) have gone up from an average of 5.5% in 2021 to around 6.87%.1 The rule of thumb is the higher the cap rate, the lower the sales price and that tracks in what I am currently seeing.
In conclusion, if you are looking to invest in downtown Austin, there hasn’t been a better time. Keep in mind, I do believe you’ll be able to buy at a discount, but be prepared to hold onto the property for a significant period of time to capture quality renters and positive cashflow.
If this topic interests you and you want to talk further about investing in commercial real estate in downtown Austin or anywhere else, please call or email me at 512-736-5933 or oddo@toweratx.com.
Source References:
1 Costar – Office Submarket Report – CBD – 2024
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