An old saying – a mantra – once reflected the philosophies of residents –and even businesses –regarding Austin office real estate: “If we don’t build it, they won’t come.”
After all, many residents were already living in their own Field of Dreams.
In those days, the University of Texas was a driving force in the local economy, and the tallest landmark was the state Capitol. House prices were affordable, too.
It’s not that Austin was behind the times. Tech organizations like IBM, Motorola, and Dell? They all had their presence during the 1970s and 1980s.
A city that stays within itself–while keeping an eye on the big picture–tends to sustain itself. The residents often love it, conveying a sense of local pride that inspires and creates a unique vibe, and the businesses tend to thrive.
Nonetheless – there’s always the desire to strive for more.
Arguably, as the world expands and technology becomes more ubiquitous, even a “don’t build it and they won’t come” city like Austin must adjust. External and internal forces have a way of changing what already works and trying to make it work better.
Thus, we now live in a world where Austin is no longer self-contained with an intimate economic infrastructure.
It’s transformed into a beacon for big tech, the home of Tesla’s headquarters, and a platform for crypto throughout its booms and busts.
A Historical Dynamic Shift in the Austin Office Real Estate Market
It’s worth asking how a city like Austin – one that so ardently fought for a more grassroots identity–entirely transforms itself into a tech and big business hub.
The natural evolution of our society and surrounding civilizations has much to do with it. You can’t avoid the inevitable, and you must adapt and evolve. It’s the way of things.
Big Tech was always going to exceed the confines of San Francisco. Austin proved itself a welcoming landing spot with Indeed’s–the job search site – 2004 co-founding in the city. A defining moment in Austin’s history.
Eventually, Facebook, Apple, Google, and Palantir expanded from their local offices, extending their reach to Austin. Oracle recently relocated its headquarters from Silicon Valley to Austin.
With all of this preamble, memories of what used to be continue to linger.
The Washington Post interviewed Nikki Nichol, the assistant manager and bartender at Austin restaurant 616. Generally, the establishment constantly buzzes with clientele.
Yet, even 616’s consistent business is at risk, with patrons growing frustrated with towering buildings stifling the breeze.
Nichol’s story doesn’t begin and end with the restaurant in which she’s employed. It extends to her living circumstances. She paid $695 for a one-bedroom Austin apartment in 2010.
It now costs her double for a studio. She also notes the atrocious parking and the difficulty of getting around the city in the face of omnipresent construction.
This isn’t an indictment on Austin and its current path or trajectory, nor are we doomsaying. Still, it’s crucial to note how this reflects a city in flux, trying to carve out a firm identity and vision in this brave new world.
In many ways, Austin is at odds with itself–best reflected by the near 25% growth of Austin office real estate. That’s the most in North America.
No longer is Austin “not building it.” Quite the opposite. They’re very much building it. However, that doesn’t necessarily mean “they will come.”
Austin Office Real Estate Construction: Homes Without Tenants
Austin’s growth reached new heights during the pandemic, as the entire world went online and the tech industry took over. Cheap property attracted homebuyers in droves, while young professionals were lured by the prospect of remote work in the gorgeous Texas climate.
This surging migration has led to Austin’s current standing as the US’s tenth-largest city. As such, local officials and land developers wagered on a boom in Austin office real estate.
The rock-bottom interest rates that lingered until 2022 further sent matters into a frenzy.
Dozens of new, sprawling projects received financing, spearheaded by developers’ ability to acquire commercial real estate loans without proving their ability to lease their spaces. After all, commercial real estate can be built entirely on spec in Texas.
Many buildings were designed as all-in-one complexes with young, high-paid workers influencing these projects. These were at once apartments, office spaces, dining spots, and shops all clumped together.
In 2025, the Paseo–a luxury building–will offer inhabitants a one-stop shop for everyday life, work, play, and rest.
Travel a mile to the Sixth and Guadalupe skyscraper, and you’ll find 19 floors of offices with 33 floors of apartments above and a restaurant owned by Elon Musk’s brother on the ground floor. This glass behemoth illustrates much of Austin’s current climate.
While construction was underway in early 2022, Meta purchased 19 floors of Sixth and Guadalupe.
However, Meta bailed on its plans to move in. Instead, the tech giant intends to sublease the 589,000 square feet of offices, 17 private balconies, a half-acre of green space, and 1,626 parking spots.
Most crucial to mention is the Sixth and Guadalupe skyscraper is not alone with its vast space and lack of tenants. This issue pervades much of Austin office real estate.
Office Real Estate in Austin: Vast Supply, With A Surge In ‘For Lease’ Signs
Including previously discussed examples, six million square feet of Austin office real estate will be available in the coming years.
Once more, we’ll refer to the Austin office real estate market’s rise of approximately 25% between completed spaces since 2020 and what remains in the pipeline.
These projects include the Waterline–the soon-to-be tallest building (74 stories) in the state, opening in 2026. Also, a former 3M campus will be redeveloped into a 1.1 million-square-foot complex on Austin’s outskirts. Nobody knows what it’ll be, but development is moving onward.
On the surface, this is exciting. This abundant office space should mean more jobs, a booming economy, and new lifeblood for the city that will grow more wealthy by the minute.
Yet, the reality of the situation tells a different story. It’s not necessarily bleak, but it’s not 100% rosy, either.
Yes – the projects have plenty of momentum. Still, nearly 90% of the new Austin office real estate will open vacant.
Two sides exist to this story. Industry officials are quick to point out how many of these buildings aren’t technically vacant. For instance, the Sixth and Guadalupe lease still has Meta’s name on it despite the company seeking new tenants.
The Republic –another LPC building –has lined up private equity and law firms for leases. 35 floors of another downtown building – scooped up by Google – continuing receiving rent payments despite in-flux moving plans.
Thus, developers and lenders remain financially sound for the time being.
Nonetheless, there’s a different side to this story.
Occupancy Struggles Hampering The Austin Office Real Estate Market
Industry officials might have some numbers on their side right now, but there’s a flip-side to that coin.
For one, it’s essential to ask who can possibly afford to lease enormous, skyscraping office building space they don’t use. You guessed it: Heavyweight firms with endless streams of capital.
Moreover, leases are around $50 per square foot in these new skyscrapers, pricing out smaller businesses.
These prices aren’t budging either because nobody wants to drop their rates, influenced by the vast potential for profits.
Instead of reducing rates and offering discounts, landlords are adding perks to their offers (e.g., adding six months of free rent to a ten-year lease).
Concerns loom over whether this method can continue to work – especially if lenders start getting impatient–and Austin could enter a commercial real estate bubble.
Recent numbers offered by Avison Young speak further to the above concerns. Q3 saw many challenges, including significant losses in occupancy. 321,000 square feet of space has become vacant, pushing occupancy losses to 1.6 MSF.
In fact, vacancy levels reached all-time highs in Q3, primarily due to new construction.
However, the indicators remain mixed – it’s certainly not doom and gloom. Case in point–office space between 1,000 and 10,000 square feet has surged in popularity. Much of this is due to the increased prevalence of hybrid work.
Are Consequences Still Ahead For Austin Office Real Estate?
Will Austin face a doom loop where vacant office spaces and canceled leases transform into something more daunting?
The Fed claims they’ll maintain high interest rates to slow growth. This could further stoke consequences in Austin.
Commercial real estate projects last for years because of factors like permitting, financing, construction, and pricing out leases. As each cycle ends, supply vastly exceeds demand. Thus, prices might plummet, and the city could suffer as a result. Although it could mean contractors or bankers take the hit and move forward without much rancor.
Still, it’s nearly impossible to predict what’s to come since the construction and employment data don’t yet tell the story.
Time will be the greatest indicator of where things land.
Meanwhile, those in Austin can’t help but notice the clash between its “don’t build it and they won’t come” roots and where it stands today.
Interspersed between a twelve-mile stretch of high-end retail stores, office suites, and hotels north of downtown are hints of what Austin used to be. More stripped-down, authentic stores, including a leather boots shop, can be found between Tesla and Gucci storefronts.
Will Austin’s enduring grassroots heartbeat shine through as it strives to conquer this brave new world? Or will it get absorbed in an office real estate bubble?
