Austin, Dallas Lead the Office Pack Going into 2020
Dallas will sustain levels of growth nearly twice the national average during the next five years and that stellar job growth has translated into abundant development and absorption at 5.4 million square feet.
AUSTIN, TX—US payroll jobs grew 2.2% in the 12 months that ended December 31 and of the 2.1 million new jobs added, 598,000 were office-using positions, according to Transwestern’s latest US office market report. The technology and financial services industries, which are dominant players in high rent-growth markets, each accounted for 20% of total job growth, with medical and business consulting industries also making considerable contributions to new demand.
Despite some trepidation in the commercial real estate industry heading into 2020, the office market closed the year strong. Annual average asking rental rates in the aforementioned high rent-growth markets grew 2.3% year-over-year, ending the quarter at $27.08 per square foot. Markets exhibiting the greatest rent growth included Tampa (10.6%), San Francisco (8.7%), Pittsburgh (8.4%), California’s Inland Empire (8.4%) and Manhattan (8%).
“A durable economy combined with strong business confidence positions both tenants and landlords well for 2020,” said Elizabeth Norton, managing research director at Transwestern. “However, trends do indicate that market fundamentals, although healthy, may start to decelerate slightly.”
For example, while the national average vacancy rate remains below 10%, it ended the year 10 basis points higher than one year ago. Similarly, although US net absorption topped 15 million square feet in the fourth quarter led by Chicago and Dallas-Fort-Worth, the 2019 total of 62.8 million square feet is significantly below the prior year’s total of 84.8 million square feet.
“Dallas’ robust office market performance continues to reflect the solid fundamentals driving growth: a large, diverse population that enjoys a high quality of life and low cost of living,” Andrew Matheny, research manager for Transwestern’s Dallas office, tells GlobeSt.com. “The BLS again ranked Dallas-Fort Worth as number one in the nation for job creation of 120,700 new positions in its latest estimates over much larger metros such as New York and Los Angeles. Almost one in three new jobs created in Texas were created in DFW. Even more remarkable is that Dallas will sustain levels of growth nearly twice the national average over the next five years.”
With respect to the Dallas office market, that stellar job growth has translated into abundant development and absorption. Transwestern ranked Dallas as the number one office market for net absorption at 5.4 million square feet, driven by both small and large users such as Pioneer Natural Resources moving into its new 1.1 million-square-foot campus and American Airlines, which moved its global headquarters to a new 1.7 million-square-foot campus.
“Other office metrics such as vacancy and rent growth may appear less dynamic on the surface, but these reflect broader trends that are driving companies to higher quality space,” Matheny tells GlobeSt.com. “Most office space in Dallas was built before 2000, and sees higher vacancies and lower rent growth, while new amenity-rich development continues posting strong absorption and new records for rent. In fact, this trend has become so pervasive that Transwestern recently noted that West Plano– a suburb that houses numerous corporate headquarters such as Toyota North America–will surpass the Dallas city center in office-using employment by 2025.”
Meanwhile, construction activity has not receded, growing 11.3% during the past 12 months. Currently, Manhattan, Austin, Boston, Seattle and Dallas-Fort Worth lead the nation in square footage under construction.
“There is some concern in a number of markets that office construction deliveries will outpace demand over the next year or two and this ultimately could give tenants some negotiating leverage,” Norton adds.
When compared to total market inventory, the greatest percentage of space under construction is occurring in Austin, Nashville, Charlotte, San Jose/Silicon Valley, Seattle and Salt Lake City, all registering above 5%, with Austin’s new construction topping 14% of current inventory.
“Austin has more total square feet of office space under construction than any other US market except for Manhattan,” Karen Judson, vice president, marketing and research for Transwestern’s Austin office. “This is due to a strong demand for large block space, created by the influx of tech companies including Google, Facebook, Amazon, Indeed, Apple, VRBO and Oracle. The competition for space is strong enough that many companies looking for 100,000 square feet or larger prelease full buildings before they break ground.”
Judson says Austin rents remain on the higher end of the US cities, comparable to coastal markets such as San Diego, Orange County and Miami. Overall, Austin’s rental rates dropped slightly from the average a year prior. But the most desirable submarkets including downtown Austin, The Domain and Eastside are recording significant increases in asking rents. Class-A buildings in downtown Austin are achieving rents in the $75 to $78 per square foot range. That is nearly double the fourth quarter average rent for the entire Austin MSA.
Moreover, Austin’s lower-than-average absorption for 2019 is due to a variety of factors. However, the biggest impact was 3M vacating its 1.2 million-square-foot campus in third quarter. The owner of the campus, World Class Capital, was embroiled in lawsuits at the close of the year, so the state of this vacancy is undetermined. Without the 3M campus in the equation, Austin recorded a strong 1.5 million square feet of positive absorption for 2019.