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November 20, 2016

The Nation’s Top Marketplace – Austin’s CBD

RealMassive | Guest Authors

As in quarters past, Austin’s CBD submarket continues to entice an array of office tenants, despite some reports illustrating downtrends in occupancy and rental rates. Austin’s favorable business environment has emerged as a worthwhile investment, with companies such as Kuka Robotics, Samsung, and Indeed relocating and expanding to the Central Texas metro, showing little obstinance to the high cost of occupancy.

Though Class A vacancy in the CBD increased from 4.74% in Q2 to 5.46% in Q3, demand remains unfettered with the CBD waging the highest rate of leasing activity for the quarter at 381,649 sf. The average Class A gross asking rate in the CBD for Q3 was $51.71, with some buildings commanding rates upward of $61. While the North/Domain and East submarkets may be at the mercy of potential downturns in the tech sector, the diverse office culture the CBD touts shields office use and thus, demand.

Austin: The Nation’s Top Marketplace

Due in large part to rising building valuations, Austin has surpassed DFW as the number one city for real estate investment and development in the U.S., according to a recent ULI report. As such, development remains steady citywide with a packed construction pipeline.

With an additional 500,000+ sf of office space expected to come online in the CBD by early 2017, and another 1.4 million sf of mixed-use space set to deliver by 4Q18, the “live, work, play” environment that has become a fundamental of competitive talent recruiting continues to shape downtown Austin.

Rising Valuations

Highlighting the insistence on maximizing the value of downtown real estate is the Travis County-owned 308 Guadalupe site – the last fully undeveloped block in downtown Austin. Totally unencumbered by the Capitol View Corridor, the site is currently being solicited for development services after the proposed bond to develop the site as the courthouse’s expansion location failed due to assertions the land was too valuable for a courthouse.

Further contributing to growing valuations is the year-over-year tax appraisal increases commercial properties have experienced, many of which have seen a doubling in appraisal value since 2012. While inflated assessments pose challenges for development, the Austin market is poised for top-dollar investment transactions, such as the October ‘16 sale of 823 Congress for $347 psf.

Job Growth, Parking, and the Future of Downtown

Despite rising rental rates, demand in the CBD remains high with the largest barrier for companies locating downtown being the lack of parking. Survey results from the DAA conclude that the “current development market … strongly prefers on-site and dedicated parking”. So, while development remains abundant, the need for improving and expanding alternative transit options is paramount.

With year-end job growth projections indicating a 4.2% increase over 2015, demand for office space is expected to remain stable as growth in white collar jobs underpin demand. Add in the unending influx of new residents, the city’s recognition as “the Human Capital of the U.S.” and an unparalleled, diversified economy, and Austin’s ability to attract companies and talent outshines all other major metro areas.

Guest Post by Sullivan Johnston, Research Coordinator at Avison Young Commercial Real Estate