Office Market Continues to Support Spec Development

Jakovich says infrastructure concerns and increased hiring competition will remain key challenges.

AUSTIN, TX—Office market fundamentals continue to steadily improve, according to PM Realty Group . Class A direct occupancy rates have improved by 40 basis points to 89.6% from the prior 12 months to reach the highest level since the dot-com bust in 2001. Citywide class-A asking rents rose by $0.46 to $36.04 per square foot (gross) during the quarter and have jumped by 7.7% or $2.59 within the past 12 months. Jared Jakovich , PM Realty Group senior vice president, recently shared his thoughts on how these stats relate to the office market and what they mean for the future of the office market. GlobeSt.com: What surprised you about the Austin office market in the first quarter? Jared Jakovich: Austin’s office market posted its lowest quarterly absorption gain in two years with approximately 275,000 square feet of direct occupancy gains during the first quarter of 2016, after averaging close to 791,000 square feet of quarterly absorption in 2015, its best year on record. Despite the slowed pace to start off the year, Austin’s office market fundamentals still continue to improve with its 20th consecutive quarter of positive absorption, recording just over 8.1 million square feet of cumulative occupancy gains since the end of the Great Recession. GlobeSt.com: What is driving corporate expansion in Austin? Jakovich: Expansions by existing employers and technology firm relocations continue to drive office space demand. Recent headquarter corporate relocations and local expansions include Google, Apple, Dropbox, Oracle and Amazon , which provides clear evidence of the area’s increasing attractiveness to corporate users looking for a highly skilled and educated work force. Most recently, IT giant Oracle Corp . has announced plans to build a 560,000-square-foot campus-on 27 acres in Southeast Austin, with plans to expand its workforce by over 50%. GlobeSt.com : What development trends do you expect to see for the next 12 months? Jakovich: Strong office market fundamentals will continue to support additional speculative development as demand has now outpaced new supply for six consecutive years. The need for more affordable space could spur increased development activity in Austin’s outlying submarkets. GlobeSt.com : Can Austin sustain and accommodate all the projected growth/activity? Jakovich: Expansions by existing employers and technology firm relocations are expected to continue to drive hiring in professional and technical services, while continued population gains fuel job growth in retail trade, healthcare and personal services. However, infrastructure concerns and increased hiring competition will remain key challenges for the local economy that could constrain future growth. GlobeSt.com: What does the future hold for rents in the Austin office market? Jakovich: Rental rate growth has gained traction across in virtually all the submarkets within the past year, driven by rising demand, the addition of new inventory and rising operating expenses due to increased property taxes. Strong job growth is expected to lead to an even tighter office market for quality space, resulting in further rent growth and limited concessions. The Central Business District has seen rental rates maintain their position as the highest across all submarkets at $42.57 per square foot, increasing by 5.3% within the past 12 months to hit an all-time high. The steady rise in rental rates have resulted from limited space availabilities as class-A direct occupancy levels have moved up to 93.2%, reaching the highest level since 2000. With two office construction projects totaling 680,358 square feet underway in downtown, this new product (currently 37.4% pre-leased), will offer some relief to the lack of high quality blocks of office space and will add upward pressure on the average rental rates over the next 12 months. GlobeSt.com : How will the remainder of the year play out in the Austin office leasing market? Jakovich: With more than 951,000 square feet slated to deliver in 2016, the new product will provide office users with increased opportunities to expand or upgrade space, but the new space will come at a premium as landlords must account for rising construction costs and land prices. Although Austin’s office market is expected to record slower absorption compared to record levels seen last year, strong office-using job growth will continue to spur leasing demand and help push annual direct net absorption levels slightly above the market’s 10-year historical average of 1.3 million square feet.