This quarter AQUILA tapped Jan Buchholz, former Austin Business Journal real estate reporter, to write our quarterly review. For the past six years, Jan has been the go-to source for Austin’s Commercial Real Estate market. She knows the major players and has been first to scoop the big projects and deals. Now that she’s retired she can write what she wants. So here’s her unfiltered View from the Eagle’s Nest!
Have you noticed? There’s a whole lot of glistening going on in downtown Austin.
There is probably not another downtown in the country that has undergone a more spectacular transformation during the past five years with high-rise office buildings, expensive urban apartments, world class hotels and sumptuous luxury condos jutting proudly into the Capital City skyline.
Parsing through data with a savvy investigator’s eye is the kind of analysis that entrepreneurs, investors, developers, corporations and small business owners need to know, and that’s the objective of AQUILA Commercial’s fourth quarter 2017 report.
With all due disclosure, this is my first freelance assignment since retiring from the Austin Business Journal as its real estate beat reporter of the past six years.
It was AQUILA’s obvious commitment to deep research and thoughtful evaluation that caught my attention as a business journalist and provided great value as I required historical context for articles.
Austin is weird and quirky. It helps immensely to turn to those who have veteran savvy to lead the way. So, without further ado, here’s my overview of last quarter’s office performance, along with an occasional aside.
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The rhythm of downtown beats strong
Are there hints of a slowdown in demand even as asking lease rates hit unprecedented highs – breaching the $60 per square foot mark with taxes and operating expenses added in?
Not one iota. In fact Congress Avenue is the tenth most expensive street for office leases in the U.S., according to a recent report by national real estate firm JLL. That puts Austin in the same league as New York, San Francisco, Los Angeles, Boston and Washington D.C. – markets far larger with business histories reaching back to America’s early days.
Another factor of major league importance in the Central Business District is the changing complexion of the corporate mix and workforce. Where less than two decades ago, Downtown Austin was primarily a laid back assemblage of law firms, accounting firms, government-related and banking entities, today it’s a pulsating hub of tech companies, energy outliers, media makers and creative start-ups. In short, it’s where innovation is happening — global companies and local innovators all want a piece of the action, ushering in unprecedented demand and sky-high lease rates few anticipated a mere decade ago as an ominous recession clouded the future.
Where less than two decades ago, Downtown Austin was primarily a laid back assemblage of law firms, accounting firms, government-related and banking entities, today it’s a pulsating hub of tech companies, energy outliers, media makers and creative start-ups. In short, it’s where innovation is happening — global companies and local innovators all want a piece of the action…”
Austin dodged the downturn that stifled other cities and roared back with a passion — delivering a street of dreams for local and national landlords. Even international investors are basking in the high ticket lease rates along the city’s most prominent street.
Congress Avenue’s pricey cachet is now seeping across the downtown grid with some of the most expensive real estate a few blocks west of the main drag. No one seems to be balking about the high rents.
Third+Shoal, the new 29-story office tower under construction at the former site of the Austin Music Hall is a prime example. Though the 350,000 square feet of Class A office space won’t likely be complete until the end of the year, there’s no chance to get in on the action. The project is already 100 percent leased to Facebook.
That same dynamic was at play at the most recently completed trophy office building at 500 West 2nd. Google, another marquee 21st century company, has set up shop at downtown’s newest glossy glass and steel edifice. Don’t expect an office in the same building. It’s also 100 percent leased.
If those statistics are not impressive enough, consider this: Three other sizable office developments that delivered over the past four years – Colorado Tower, IBC Bank Plaza and 5th+Colorado — are also 100 percent occupied. Nope, no sublease space available, either.
Only Shoal Creek Walk, the 218,000-square-foot office building that is welcoming its first tenants now just to the east of Whole Foods’ headquarters and flagship store, has availability – but less than 30,000 square feet.
So, what’s the bottom line for businesses that must be downtown for recruitment or client purposes? Expect to spend more for the foreseeable future. Rents are not retracting and the property tax burden is likely to maintain an upward track.
Also, companies new to downtown will have to search diligently for appropriate space. The CBD vacancy rate is a paltry 7.76 percent, down from 9.23 percent a year ago – and that includes all available sublease space, which also is in short supply.
A diamond in the downtown haystack
Perhaps the most enticing option is one I didn’t know about until I dug into AQUILA’s data. The penthouse at the new University of Texas System headquarters building at 210 W. 7th Street is available for private lease. More than 19,000 square feet is ready for occupancy on the 19th floor. In shell condition, the expanse provides a blank canvas for a tenant looking to make a commanding statement and incorporate stunning city views.
Though not as pristine as the UT system’s spanking new space, nearly 10,800 square feet has been recently vacated by a law firm in the penthouse at 100 Congress Ave., one of Austin’s most venerable addresses just footsteps away from Lady Bird Lake.
Across the street at OneEleven, or 111 Congress Ave., nearly 70,000 square feet is available on several floors. With its pyramid silhouette, OneEleven is another primo address, but it has tended to have more vacancy than other top tier buildings – likely owing to its unusual floorplates. Now that Fareground, the locally sourced food hall has debuted at OneEleven to rave reviews, there may be new appeal to snag a spot in that architecturally unique property. About 23,000 square feet of contiguous space is available on the 10th floor, and there are a variety of configurations elsewhere.
Frost Bank Tower at 401 Congress Ave. – arguably still the most iconic silhouette in downtown Austin — continues to draw well-capitalized tenants with an average asking lease and operating expenses hovering around $73 per square feet. Several significant tenants, including Vista Equity Partners and Pillsbury Winthrop Shaw Pittman law firm are undergoing major tenant improvements, according to records at the city of Austin Development Services Department. There still are a few availabilities – nearly 17,000 square feet on each of the 19th and 25th floors
And what’s next? The race to see which downtown office project will be next out of the ground is on. Several well-entrenched developers have announced projects, including Lincoln Property Co., Trammell Crow, Cousins Properties and Brandywine Realty Trust. But it likely will be Trammell Crow, which is building a new tower on a ground lease from the University of Texas system at West Sixth and Colorado Streets that is first out of the ground as they have site work underway.
AQUILA experts tell me Indeed has signed a major lease for that property. Indeed appears to be one of the most active tenants across the metro area, having also signed a lease for a building at The Domain being developed by HPI Real Estate.
The living, and working, are easy on the east side
Meanwhile, East Austin is in the limelight for ultra cool, sometimes bohemian-styled office space.
Should it come as a surprise that East Austin has become its own dynamic submarket? Yes, but no.
I-35 has been a major divide since the asphalt river was completed in 1962. Still, even the most severe infrastructure cannot curb creative and cultural longings.
During the past five years the man-made rift between East Austin and downtown has dissolved as entrepreneurs, retailers and small businesses have recognized the creative synergies ingrained in Austin’s culturally rich east side.
Credit former President Lyndon B. Johnson for recognizing the rich tapestry of East Austin. One of his favorite haunts was Cisco’s bakery at East Sixth and Comal streets, an area alive with possibilities. The entire area east of I-35 between Cesar Chavez and 11th Street is a whirlwind of construction activity – from the transit-oriented development of Plaza Saltillo to boutique hotels and creative office spaces.
In fact, AQUILA Commercial has broken ground on a significant development – 115,000 square feet of contemporary office space at 2010 E. Sixth St. The new project isn’t scheduled to open until fall 2019 but already Main Street Hub, the social media marketing company that was recently acquired by internet domain and cloud tech titan GoDaddy.com, has leased the entire project. Mergers and acquisitions particularly in the tech sector could dramatically impact real estate in the months to come, as well.
Thus, it’s a good thing that many more developments are underway for creative companies seeking the East Austin vibe. Local development firm Endeavor Real Estate Group is building 132,000 square feet at 901 E. Sixth Street, and another Austin-based enterprise – Riverside Resources – is building 135,000 square feet at 1801 E. Sixth Street. The fun is just beginning in the quirky eastside.
North by northwest is a Domain to be reckoned with
I haven’t even begun to reflect on all the activity at The Domain – Austin’s second downtown about 15 miles north of downtown. That’s likely a discussion for another day.
Just know that Facebook, Google and HomeAway are major believers in that area of town – even as those international heavyweights have made commitments to the CBD. It’s as if the creative class needs different venues across the city to maximize innovation.
Southwest Austin, which for years was the favorite of some of Austin’s most established companies, really hasn’t lost its sheen. The terrain, after all, is gorgeous. That’s where publicly traded companies such as semiconductor giant Advanced Micro Devices and software outfit SolarWinds have laid claim. It’s not all tech that have opted for the gateway to Hill Country. Ultra cool YETI Coolers is chilling out in new corporate headquarters on Southwest Parkway. The area – a favorite of C-suite executives for the past 30 years — hasn’t lost a bit of its charm.
The contrarians point to other locales
At this point in Austin’s illustrious history, most geographical areas are captivating. Dell Inc., the computer giant, opted for northern suburb Round Rock years ago. Round Rock and Williamson County, as a whole, remain appealing locations that are among the fastest growing areas in the U.S.
Closer to downtown, Silicon Valley titan Oracle Corp., with its head in the technology cloud, is moving into massive regional headquarters between downtown and Austin-Bergstrom International Airport – about five minutes from downtown and 10 minutes to the airport. With some 600,000 square feet of ground up space on the southern shores of Lady Bird Lake, Oracle, I predict, has already become the major game-changer in Austin’s development narrative.
Years ago, when my daughter came to St. Edward’s University, I marveled that such a convenient area – along the East Riverside Drive corridor – hadn’t caught on. It was just a matter of time. Oracle’s decision will be felt for decades to come. Expect some major announcements in that same general area, as it also appears that CapMetro is hoping to build a light rail along that busy roadway.
Also expect the ferocity of the hunt for compelling development opportunities to grow more ardent in the months ahead, depending somewhat on whether Amazon decides to locate it $5 billion HQ2 here. Even with a reputation for legendary traffic gridlock and general infrastructure shortcomings, Austin appears to have a great shot at landing one of the biggest economic windfalls in American history. We wait for Amazon Chairman Jeff Bezos to reveal his final answer – the winner of the 2018 corporate sweepstakes.
In spite of all of Austin’s naysayers – me included, at times – here’s the reality: Smart, savvy, young people want to make Austin home – an appealing and viable city for raising a family. They are here for the long haul and come to think of it, Austin’s a sweet place with the bandwidth to take on the world.
To learn more about the state of the market in 4Q 2017, download your free copy of AQUILA’s comprehensive, 70+ page Austin Office Market Report.
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