Austin’s Deal Volume Declines, Still a Hotspot for Development

Austin’s office fundamentals started to cool as we approached the end of 2023, with deal volume dropping since the third quarter. Despite the deceleration in office investment, the metro still maintains its position as a magnet for developers, with its under-construction office pipeline securing the fourth spot among peer markets.

As of November, Austin had 5 million square feet of office space under construction across 35 properties, or 4.6 percent of the existing inventory—above the national figure of 1.7 percent. Among other similar markets, the metro’s under-construction pipeline relative to total stock outpaced that of Nashville (4.5 percent) and Charlotte (3.2 percent) and came in second after San Diego, that led with 4.7 percent.

Notable projects boost Austin’s pipeline

Austin’s under-construction pipeline was lower than in Dallas (6.1 million square feet) and San Diego (5.2 million square feet), but surpassed Atlanta, Houston, Charlotte and Phoenix— which had the lowest underway pipeline of 1 million square feet.

Year-to-date through November, developers delivered 2.7 million square feet of office space across 34 properties, amounting to 2.5 percent of the total stock. Notable deliveries in the metro included the completion of the 599,234-square-foot Sixth and Guadalupe, a Class A+ mixed-use property developed by Lincoln Property Co. Kairoi Residential and DivcoWest began site work on the project in late 2019. The development that came online in November was financed with a $272 million construction loan originated by Quadreal Finance.

Another recently completed property is Domain 9, a 332,865-square-foot Class A office building developed by Atlanta-based Cousins Properties, situated within The Domain submarket of North Austin. The project was fully leased ahead of its completion by Amazon, that in 2021 announced its plans to add 2,000 new jobs at the Austin Tech Hub.

The Republic, a 816,560-square-foot office project underway, is expected to be delivered in 2025. Image courtesy of Neoscape

Construction starts in the metro totaled 884,430 square feet spread across 16 properties, representing 0.8 percent of stock, ahead of Phoenix’s and Atlanta’s 0.4 percent, but lower than in Dallas (1.0 percent).

In January 2023, Apple moved forward with its $1 billion Parmer Lane campus. As the tech giant completed of the first phase of the 33-acre, 12-building project in 2022, the company announced its plans for the second phase of its office campus. The latest addition will consists of a $120 million building dubbed Capstone Phase Two AC09, with completion expected for early 2025.

One of the largest office projects underway is The Republic, a 816,560-square-foot Class A+ high-rise in Austin’s downtown developed by DivcoWest, along with Lincoln Property Co. and Phoenix Property Co.. The project is slated for completion date in early 2025.

Waterline, a 700,000-square-foot mixed-use project developed by Lincoln Property Co. and Kairoi Residential, is another significant property currently underway. With a planned height of 1,022 feet, the Class A+ tower is expected to become the tallest building in the state. Construction commenced in late 2022, with financing from Blackstone Group in the amount of a $742 million loan, while completion is estimated for September 2026. Meanwhile, Jay Paul Co.’s Springdale Green, a two-building office project totaling 832,800 square feet of space that broke ground in 2021 will soon come online, with an estimated completion date in late January 2024.

In April, Redcar closed Redcar Fund II with $418 million in equity commitments. The funds will be used to support Redcar’s expansion in Austin and its strategy of investing in urban commercial real estate and converting underperforming industrial assets into creative office properties.

Sales volume drops, prices still high

Year-to-date through November, 2.9 million square feet of office space spread across 45 properties changed hands in Austin, for a total of $496 million. On a quarter-to-quarter basis, office deals in the metro increased in the second quarter of 2023, with $215 million in total sales volume, while in the third quarter investments dropped to $98 million.

Compared to other gateway metros, Austin ranked third, outpaced by The Bay Area, that led with $1.06 billion and Phoenix (948 million). The lowest sales volume since the start of the year was recorded by Dallas, with $158 million.

Office assets in the metro changed hands at an average of $316.4 per square foot year-to-date through November, way above the national figure of $192.8 per square foot. Austin secured the third place among gateway metros, with the most expensive office market being San Diego (402.3 per square foot), followed by The Bay Area (331.4 per square foot).

The $142 million purchase of VA Outpatient Clinic remains the largest office deal in Austin. Image courtesy of CBRE

The largest office deal since the beginning of the year remains the Boyd Watterson Asset Management’s $142 million acquisition of VA Outpatient Clinic in Southeast Austin. The 272,636-square-foot medical office property changed hands from seller Healthcare Property Advisors and is operated by U.S. Department of Veterans Affairs.

Another notable transaction includes the $87 million purchase of Fifth + Tillery, a 187,155-square-foot office property in Austin’s East submarket. The property was acquired in August by CapMetro from seller CIM Group.

In February, Acquila Commercial paid $71 million for Hartland Plaza, a Class A 181-855-square-foot office building situated within the West Central submarket. The low-rise property was also sold by CIM Group.

Austin’s vacancy increases, coworking sector still steady

Year-to-date through November, Austin’s office vacancy reached 21.2 percent, one of the biggest across gateway markets, only surpassed by Houston’s 25.4 percent. Across other similar markets, only Charlotte’s 15.7 percent, Nashville’s 16.6 percent and San Diego’s 17.7 percent were below the national figure of 18.1 percent. Since the start of the year, office vacancy was fluctuant in the metro: the rate increased from January’s 19.1 percent to April’s 22.0 percent, then decreased at 19.8 percent in June, point after which it saw an upward trajectory.

Significant leases in Austin include IBM Corp.’s 320,000-square-foot lease at The Domain, where the company already occupies 800,000 square feet of space and has 6,000 employees. The tenant will move at two upcoming office towers within Hines’ development, which will be known as Hines Domain Northside, and will total 500,000 square feet.

IBM signed a 320,000-square-foot lease at Hines Domain Northside, a two-building project to be completed by 2027. Image courtesy of Hines

The metro registered 1.1 million square feet of shared space, more than in San Diego (1 million square feet), Raleigh-Durham (861,208 square feet), Nashville (664,279 square feet) and Charlotte (518,576). Across gateway metros, Dallas led wit 2.4 million square feet, followed by Atlanta, with 2.1 million square feet.

Year-to-date through November, WeWork had the largest footprint of coworking space, with operations totaling 398,450 square feet. The company was followed by Regus, with 153,961 square feet, and Spaces, with 128,736 square feet.

In April, flex office provider Expansive announced the opening of Expansive Austin Highland, a 48,000-square-foot coworking location in central Austin. The company purchased a 53,415-square-foot office property in 2022 and began a multimillion-dollar improvement plan, with opening scheduled for May 2023.