Beyond 2020: AQUILA's Experts Discuss What They Expect to See in 2021 and Beyond

As we look back on 2020, I think we can all agree that this was a year of change: change in how we work, how we socialize, and how we live. With so much disruption to what we previously considered “normal,” we wanted to take a moment to ask our AQUILA real estate experts what impact they foresee these changes having on Austin’s commercial real estate market moving forward.

Read on to find out what AQUILA’s experts expect to see in the near and distant future.

How do you foresee Austin’s real estate market performing in 2021?

Ben Tolson: I believe we will see the emergence of trends that will shape and define the economic recovery ahead of us. The existence of trends implies greater activity across our office market than we’ve seen for most of 2020. Some larger, strategic transactions could reset market participants’ outlooks on practical vacancy and availability and force more strategic decisions, which will provide some positive momentum. Handicapping the when and how of all this is hard, but the possibility of a widely circulated vaccine in the first part of 2021 should provide a timeline to guide decision-makers back to the negotiating table. Practically, this points to 2022 as a stronger year than 2021 for actual absorption, but our market should start feeling the ripples of some larger moves downstream.

Miles Whitten: Right now when you look at office, the big question is what will the huge sublease inventory and additional product coming online do to rental rates if vacancy rates don’t quickly return to pre-COVID levels. For industrial I think the only question is how high can this tide rise with Tesla, Amazon, BAE Systems, and others making huge commercial real estate investments in the area and driving all of their suppliers, customers, and related businesses to our market.

Jay Lamy: I believe we will see significant transaction activity on leases because some leases, due to COVID-19, were pushed out one year, some leases were vacated and many tenants put sublease space on the market. Austin has become attractive on multiple fronts. Californians and New Yorkers are looking to expand tech companies into Austin in order to find talent. And, at the same time, Austin is seen as a melting pot where executives who lean politically right of center can find a state that gives them the religious freedoms and freedom of speech that they seek within a city that, while left-leaning, is considerably more tolerant of these freedoms than many coastal cities.

Bethany Perez: It’s so hard to predict right now, but I think and hope that Austin will be one of the first markets to recover as it has done in the past. Our city is extremely desirable, and we’ve already seen a mass inflow of people and companies moving here from the west and east coasts during the pandemic. Hopefully, the residential market is a leading indicator of the commercial market. In 2020, many companies put off real estate decisions due to the uncertainty of the virus coupled with the election. With a vaccine on the horizon and the election behind us, I think 2021 will provide companies with a little more stability so they can make long-term decisions including their office space. I’m predicting that we will see some pent-up demand surface by 2Q or 3Q 2021 when a few of the large tech companies are expected to return to the office.

Kristi Simmons, SIOR: Given how many tenants have put their requirements on hold, we anticipate there to be pent-up demand in the first quarter. Leases will continue to expire so at some point, decisions will need to be made. It could slide to the second quarter, but we forecast the activity to increase. This will be good for those tenants as there will be a lot of space on the market (sublease and direct) and they will have leverage. It has been a landlord’s market for years, so this will be the tenant’s time to lead the negotiations. We do anticipate the amount of space on the market to continue to increase and we don’t see that slowing down anytime soon.

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Will Sikora: I foresee the Austin industrial market remaining strong in 2021 with Tesla’s arrival and multiple major developments underway to service the vendors that are following Tesla into town. Furthermore, the impact of COVID-19 and the desire for people to remain at home as much as possible has boosted the e-commerce industry (and the warehouses that service it), which we expect to continue into 2021 and beyond. Lastly, I expect to see a bit of pent-up demand from local tenants who have decided to “wait until 2021” to make a real estate decision due to the pandemic.

Max McDonald: Above average for the country, but below average for Austin

Bart Matheney: I think the office market will be slow out of the gates and will largely be driven by when larger / tech companies start using their office space again. As more people get comfortable with the vaccine, the office market will begin to improve, which will probably be at some point in mid to late next year. There have been a number of new companies that have been looking at Austin as a relocation option, and executives for these companies are reported to be buying houses in the area. This could produce fairly steep demand once it turns on.

What do you think will be the most important long-term change to commercial real estate due to COVID-19?

Ben Tolson: Faster fragmentation of our market than we would have predicted in late 2019. Highly productive, high-margin businesses will be best positioned to make meaningful decisions faster coming out of this pandemic. The cost of real estate relative to the total cost to attract and retain a highly skilled workforce is a relatively minimal variable in the total calculus for this set of tenants. In my mind, this signals a future in which there’s much more big tenant activity in the Class A – particularly newly constructed – market much sooner. The nuance here is I think this force will go beyond a traditional “flight to quality” experienced in past downturns. Lowering rates alone may not be the lever it once was in the past for certain buildings if their prospective tenant remains remote as a matter of survival for some period of time.

Miles Whitten: The main change is that remote work has been embraced and employees have shown they want more flexible work schedules moving forward, regardless of a global pandemic. I expect these changes to stay. The real question is what that means for office space. I expect companies to still need offices and to expect nearly all of their employees to come in at least occasionally because otherwise, I think their competitors will outperform them. The office is here to stay and there’s a reason for that. The vast majority of people and companies are better at doing their job in an office setting. Now, if companies need less space and the office is less important than it used to be, I could see rates in the CBD permanently decreasing to compete with rates and amenities offered by smaller, distributed ”hub” office sites that are closer to and/or more convenient for employees. If CBD rates come down permanently, then, at least here locally in Austin, we have a real reckoning to deal with. If this happens more nationally/globally as it relates to urban city centers, that is a monumental shift in the way we live our lives.

Jay Lamy: We will see spaces that increase the number and sizes of meeting areas, increase the opportunities for shared space, reduce the cost of space, provide flexible workforce environments, BUT realize that there is nothing like in-person communication that can not be replaced by Zoom or technology.

Bethany Perez: I think the biggest change we will see to the commercial real estate market due to COVID-19 is how offices are used. While the office place isn’t going away, it will look different than it has in the past. I think collaboration, mentorship, and culture built in the office place are more important than ever. While some industries and jobs can successfully work remotely, others simply can’t and are less productive. I believe employers will need to figure out how their office space can best be utilized to accommodate their specific company. Some changes I’m already seeing include more hoteling concepts to accommodate flexible work schedules. I’m also seeing a shift to less density as social distancing measures are critical right now. I believe COVID-19 has made us realize more than ever that time is our most precious resource and people have enjoyed and gotten used to a more flexible work schedule. While the density component might fluctuate over time, I can see the flexible work schedule sticking long-term.

Kristi Simmons, SIOR: The number one change will be flexible work schedules. I can envision companies allowing employees to have a little more flexibility, but ultimately employers will want the office back to “normal.” Companies will focus on how to maximize their footprint and take less square footage. Hoteling could become a popular focus. One thing I hope stays is the ability for all-virtual tours. It is nice to show companies space without them having to travel.

Will Sikora: Without a doubt, the most important long-term change to the commercial real estate industry will be COVID-19’s effect on companies’ willingness to let people work from home. If this structure is something that companies adopt as a long-term plan, the obvious effect will be a decrease in demand for space.

Max McDonald: Smaller average office footprints.

Bart Matheney: Ultimately I think Austin and the office market will be a big beneficiary of the flight we are seeing from denser, highly taxed cities and states on the East and West Coasts. We have our own issues that need addressing, but for now, we seem to be a top destination for those fleeing these coastal cities.

Conclusion

A lot has changed over the past year, but Austin’s commercial real estate market remains strong and hopeful for a quick recovery.

To learn more about what has been happening recently in Austin’s office and industrial market, download our recent Office and Industrial Market Reports.

To learn more about how Austin’s commercial real estate market will change in 2021, check out these articles: