Normally in the 4Q report of each year, we like to take a look back and reflect on the events that transpired over the previous 12 months. There was definitely no shortage of excitement in the Austin commercial real estate market over the course of 2021, but this year I decided to take a forward-looking perspective on where I think our industry might be headed in the (potentially not-so-distant) future.
In this narrative, I’ll touch on two important topics influencing the future of the Austin office market, including:
- The changing downtown environment
- Out-of-town investors bullish on Austin
The Changing Downtown Environment
If you had to describe the perfect downtown, it would probably have an ample amount of walkable amenities, greenspace, manageable traffic and public transportation. While Austin undoubtedly has the amenities and greenspace taken care of, its traffic and public transportation system leave something to be desired.
Prior to COVID-19, the traffic in Downtown Austin was becoming an increasing concern as construction on some of Austin’s largest office towers began squeezing the main traffic thoroughfares into and out of downtown (roughly 1.7 million sf of office delivered between 2016 and 2019). It was evident we were in for some trouble once these towers were filled with employees, even with all traffic lanes open.
With COVID-19 came the biggest disruptor to the office industry: working from home. This provided temporary relief to Austin’s traffic congestion. Traffic numbers plummeted in 2020 but any Austinites who began commuting back to their office in 2021 would tell you we are not far off from pre-COVID-19 congestion. An abundance of multi-family in the development pipeline (+/- 3,500 units) should help convert some of the car traffic into foot traffic. However, a current office construction pipeline of roughly 2 million sf will certainly have its presence be known come rush hour.
This begs the question, what will Downtown Austin look like if the traffic continues to get worse? Will autonomous vehicles be our saving grace and help with parking concerns? Will our downtown market transition to a collection of mega-tenants occupying full buildings with their own internal ecosystems? Will smaller tenants be forced to search for cheaper, more accessible space elsewhere? It’s probably too early to tell.
What we do know is Austin’s downtown still has some runway left from a development perspective and no shortage of attention from institutional investors. There are a number of remaining downtown blocks with no capitol view corridor restrictions that are ripe for development (assuming the right mix of ownership, capital and entitlements can be put in place) and could be the future homes of more large office projects. There is also Stream Realty’s assemblage of multiple properties on Sixth Street that could drastically change that part of downtown if redeveloped. Although these properties face some difficulties due to historical significance and size limitations, with significant ownership on East Sixth there is real potential to change the overall profile of that area if desired.
Austin’s downtown could look and feel like a very different place over the next decade or two.
Out-of-Town Investors Bullish on Austin
Speaking of institutional attention, I want to touch on the increased prevalence of out-of-town investors purchasing properties in Austin for the first time. Although Austin has had its fair share of non-local investors over the years, it appears they are becoming increasingly bullish on Austin.
In 2021 alone we saw several significant acquisitions completed by first-time buyers in the Austin market. In the table below, you can see these buyers range from New York to Chicago and Los Angeles. For this many transactions of this type to be undertaken in a single year, clearly outside investors and the incoming investment into Austin isn’t slowing.
Time will tell if these investment groups will further expand into Austin, which will largely depend on the success or failure of these initial purchases. But, if all goes well and Austin continues its upward trajectory, I wouldn’t be surprised to see even more first-time buyers enter the Austin market in 2022 and beyond.
2021 Office Transactions with Out-of-Town Investors
|Foundry I & II, 321 W 6th||239,856||Tishman Speyer||New York City|
|Northview Business Center||260,393||R2 Companies||Chicago|
|100 Congress||419,785||Carr Properties||Washington D.C.|
|816 Congress||433,024||Regent Properties||Dallas & Los Angeles|
|600 Congress||543,521||Beacon Capital Partners||Boston|
|Indeed Tower||730,000||Kilroy Realty||Los Angeles|
Austin Office Market Sale Volume
Traffic jams or not, Downtown Austin’s future has a lot of inevitable change coming as investors, companies and people continue to fill the city. A large pipeline of denser housing developments will hopefully help lift up some of the retail and restaurants that faded away as a result of the pandemic, in addition to staving off the rush hour gridlock. Stay tuned for a deep dive into Austin’s skyline in a later report this year!