Austin office market listed with highest office construction rate nationwide

Austin had the highest rate of office construction in the nation as a share of the Texas capital’s overall inventory.

Offices under construction in Austin in the first quarter represented 9.4 percent of the city’s existing inventory, according to CBRE. Charlotte, North Carolina was second at 8.4 percent of inventory, San Jose was third with 6.4 percent, while Nashville was fourth at 6.3 percent.

Office development continues to ramp up in lower-cost, high-growth Sun Belt markets, especially for tech and life sciences uses, according to CBRE. That’s expected to continue as companies move to the region from coastal cities and places like Chicago, said CBRE first vice president Bo Beachem in Dallas.

“Austin, leading into the pandemic, had an extremely robust development pipeline,” Beachem said. “So the trends are more or less consistent with the strength of the market leading into the pandemic. And I think we recovered as quickly as any market.”

The Austin market has had three consecutive quarters of positive net absorption, according to the report, swiftly recovering from the COVID-induced slump it endured. Companies, especially venture capital and private equity firms, are expanding to the Austin area to help facilitate a startup ecosystem, Beachem said.

Attracting workers depends on quality of life and cost of living, and those are still favorable compared with more expensive coastal markets, even as the median home price in the city continues to rise.

“So you look at our development pipeline, the lion’s share of new product that’s coming along and under construction is within three sub markets that all have that live work, play, dynamic walkability, it’s still all about how do you recruit and retain them,” Beachem said. “Companies are gravitating toward those locations where their employees have an experience. Not just pool office space, but environments where they’ve got the ability to entertain clients or go places for team building after work.”

Austin and other thriving office markets also have “a lot of new multifamily development, kind of tracking the younger millennial demographic that is a significant piece of the workforce here in Austin,” Beacham said.

As companies continue to develop new workplace strategies, competition for high-quality office space and flight to quality continues to ramp up, with Class A average asking rates in Austin hitting a record high $53.34 per square foot in the first quarter, the first time it exceeded $50 since CBRE began tracking the metric in 1989.

Office construction has mostly slowed nationally since 2020 amid rising costs and elevated office vacancies, but Sun Belt markets have continued to thrive. The region also has among the highest number of workers back in the office. Austin has led the Sun Belt’s pandemic-era domination of employment growth with a nearly 15 percent year-over-year increase in office-using employment in March, more than three times the 4.6 percent increase nationwide, driven by the movement of corporations.

“It’s still driven largely by talent and where talent wants to be and where they’re moving to”, Beachem said.

“Your dollar that you earn here goes a little further than some of the more expensive markets like San Francisco and New York and Chicago and LA markets, Seattle. But it’s really all about the talent that’s here and the talent that’s willing to move here.”

Beachem sees this robust development pipeline continuing throughout 2022 as companies continue to move to provide better experiences for employees, and most of the new developments delivered over the past 24 months are either stabilized now or on the road to stabilization.

“We’re definitely seeing material impacts and increases on construction costs, so that either developers’ returns are going to get compressed, or tenants are going to have to pay higher rates to justify those projects.”

Compared with markets like Hosuton and Dallas, the fundamentals here are a lot stronger, according to Beachem, and a lot of Austin’s absorption has been attributed to new organic expansions as opposed to just relocations from tenants already existing there.

[CBRE] — James Bell