Austin, Texas.
Austin’s office market saw near record absorption and occupancy in 2019, according to a recent report from CBRE. This has led to higher rental rates and decreased vacancy, and a higher profile for the Texas capital.
A big part of that robust performance has to do with the tech sector. As I’ve reported in the past, Austin has seen a surge in demand with tech companies needing office space. This demand has come in the form of “big tech” companies either moving or expanding to the city (many of which are Bay Area-based), as well as a growing number of emerging, venture-backed startups.
Troy Holme, executive vice president at CBRE in Austin, said 2019 was “one of the best absorption and occupancy years ever” for the city.
CBRE’s Kevin Hanan points out that in 2019, Austin delivered over a 6% expansion in total office product (more than 3 million square feet), setting a record.
No doubt that 2019 was a good year real estate and job-wise in Austin, but what about 2020 and ahead?
Tight market conditions will only intensify, according to CBRE. The brokerage projects that Austin will have the highest office-using job growth in 2020 among U.S. markets. Specifically, CBRE expects the city will see a 2.6% rise in office jobs this year compared with last year. Meanwhile, San Francisco came in second, with an expected 2.5% rise.
“We still anticipate rent growth and that the Austin office market will continue to tighten in 2020,” Holme says. “This is mainly because the development side of the market is very controlled and we do not see a lot of buildings being built on spec. This will protect the market from oversupply.”
Migration continues
Despite more companies—and people in general—leaving the Bay Area due to its high cost of living and doing business, the San Francisco and Silicon Valley office markets still have significantly higher office rents than Austin (although some parts of Austin rival those numbers). As of the fourth quarter of 2019, average asking rents in Austin as a whole were $38.89 with a 10.7% vacancy, according to CBRE. By comparison San Francisco’s average asking rent was more than double, at $88.19 with a 3.7% vacancy rate. Silicon Valley’s average asking rent was $65.73 during the same time period with a vacancy rate of 6%.
“The Bay Area is a much larger market with a supply shortage. And San Francisco itself has a higher concentration of office-using employment,” Hanan says, “and with the supply shortages, any growth will keep rents in a league of their own.”
The differences in rents and vacancies are reflected in the number of companies opting to move or office in Austin. Last April, I wrote an article for Crunchbase News about how Austin has seen a significant uptick in the number of companies relocating or expanding here in recent years. And Cushman & Wakefield data indicates that 17 Bay Area tech companies have leased office space in Austin since 2010, including the likes of Adobe, Apple, Dropbox, Facebook and Google.
In fact, CBRE has formed a Bay Area-based team that is specifically focused on helping companies “seamlessly expand or relocate from the Bay to similar, often cheaper markets” such as Austin, Denver or Nashville, Hanan adds. (Hanan himself relocated from San Francisco to Austin in 2019.)
He expects that trend to only continue in coming years. Austin, he said, “guided by its entrepreneurial ecosystem, abundant tech talent and Texas' business-friendly attitude, will continue to invite corporate expansions and new beginnings in 2020 and beyond.”
Growth despite other options
It’s impressive that Austin’s office market has continued to grow despite an increasing number of companies allowing for remote employment (such as this local company) and the influx of new co-working spaces (such as this one) or traditional coworking providers such as the beleaguered WeWork.
I caught up with Mark Dewey, publisher and CEO of a new digital media startup that just raised $1 million in seed money, to hear why he chose to office out of WeWork for austonia.com's first headquarters rather than lease space.
“I didn't want us to be sitting in a room somewhere in a random, quiet, isolated office,” Dewey told me. “Co-working offers a bright and energetic work environment. There's plenty of opportunity for privacy—for the team and for individuals—and it's against a background of people busy making their own businesses successful. It's a very positive energy.”
Dewey also cited the ease and flexibility that WeWork offers that traditional office space does not.
“No furniture to buy, no kitchen to stock, no bathrooms to clean, no networks to set up and maintain,” he says. “Just show up, get the WiFi password, and get to work. It's more expensive, per month, than a traditional office lease, but I think co-working's flexibility makes it ultimately more economical.”
For those companies that want the flexibility but not the long-term lease commitment, there’s an Austin-based startup ready to help. Swivel, which just raised $8 million in venture funding from JLL Spark and Jim Breyer of Breyer Capital, has developed an agile leasing platform and network.
Pre-qualified member companies can contract with Swivel’s landlord “partners” for turnkey office space on flexible terms such as 12-month leases. The company’s target market is tech-enabled companies in their growth phase, which so far make up about half the tenants leasing through its platform.
It’s only February so there’s still time, but I’ll be paying attention to the Austin office market and how things play out in 2020. Stay tuned.
