Amid Tech Turmoil, Austin Is Now Flooded With Office Space

A flood of office sublease space is washing over Austin, and combined with a steady development pipeline and a nationwide pullback in the tech industry that has buoyed the city for years, the market in the Texas capital seems headed for choppy waters, a culmination of nearly three years of tough conditions for offices nationwide.

Vacant sublease space in metro Austin increased 28% from the second quarter of this year to the third, reaching a total of nearly 2.5M SF, according to Colliers data. Of course, sublease space is up all across the country, but Austin’s rate of increase is outsized next to competitor cities. In Seattle, for example, another midsized tech-heavy office market, sublease vacancy was up about 9.2% quarter-over-quarter in Q3, according to Colliers.

"We've seen an influx in sublease space come to market, presumably due to economic uncertainty as well as companies adjusting to a hybrid workflow," said Colliers research associate Clarisse Rodriguez, who is in the company's Austin office. "As of now, there is still demand for office space, but we anticipate softer market trends to continue in the coming months."

There is also still an immense amount of new office space in the pipeline, Rodriguez said, though some construction has been halted due to the possibility of a recession in the near future. 

But Austin locals say that the attributes and strengths that drew companies and people to the city in droves over the last decade are positioned to help pull it through whatever challenges lie ahead.

"Austin has been one of the most resilient markets in the country and has been one of the fastest to recover following downturns over the past 20 years," Austin-based Avison Young principal Carl Condon said. "Even so, Austin is looking at some of the headwinds in front of it."

Avison Young puts the Austin sublease inventory higher: 3.6M SF to 4.6M SF, with the vast majority of these subleases coming from large blocks of space spread throughout the market, Condon said.

That much space might be a drag on the market, but it might have an unexpected benefit, Condon said.

"This added supply provides new opportunities for larger users looking at Austin," he noted.

Office development has taken place at a rapid clip in Austin, driven by the demands and cachet of companies like Apple and Meta, both of which signed on for huge chunks of space. And the pandemic was just a speed bump: Data indicates that 5.6M SF of new office space is in the development pipeline, equal to 9% of the city’s existing 62.5M SF of inventory. Nationwide, office space under construction represents just 1.7% of the overall inventory.

“There's quite a lot of new office space still under construction in Austin, besides the new product that has already been delivered over the last year," Cushman & Wakefield Associate Market Director, Research Jeff Graves said. "With leasing activity slowing, coupled with the glut of sublease space that has already hit the market, we expect that vacancy rates will remain elevated.”

Some 2.4M SF of office space has been completed so far in Austin in 2022, according to Cushman & Wakefield data. By comparison, only about 3% of inventory is under construction in Seattle, and in Boston, about 2.1%.

San Diego is closer to Austin's construction pace, but even it falls short, with about 7.1% of inventory under construction as of Q3 2022.

But Austin’s new buildings are popular, with about 30% pre-leased of the 2M SF that was under construction midyear, CBRE Executive Vice President Troy Holme told The Real Deal in May.

For instance, Google parent Alphabet Inc. committed to take all of the 793K SF Block 185 development now rising over Lady Bird Lake, and developers Lincoln Property Co. and Phoenix Property Co. say they have a major tenant lined up for The Republic, a 775K SF project in the Central Business District, haven't offered specifics about the tenant or the size of the lease.

However, pre-leases from tech firms look less certain than they did just one quarter ago. As the Austin Business Journal put it in late November: "Austin has to wonder: What's Google going to do?"

Tech layoffs are spiking nationwide, according to JLL, but even among the major tech hubs, the job cuts aren't evenly distributed geographically. 

The vast majority of announced tech layoffs this year happened in November, when the total came to nearly 36,200 positions nationwide, more than the other previous 10 months put together.

So far this year, layoffs by headquarters location have occurred mostly in the San Francisco Bay market, with over 38,000 jobs cut, according to JLL data. New York- and Seattle-based company cuts have also been significant with more than 12,000 each, but there have been very few cuts so far by tech companies based in Austin — only 780 positions this year.

"As tech companies in Austin reassess their office footprint, we can expect to see an uptick in sublease activity," JLL Research Senior Analyst Gabrielle Jansen said. "But office still has a critical, though noticeably adjusted, role to play in the new hybrid work reality.”

Although Austin has a strong tech presence, the city’s employment base is healthy and fairly diversified. 

Nonfarm employment in metro Austin increased 5.4% year-over-year in September, according to the Bureau of Labor Statistics, outstripping nationwide job growth of 3.7% over the same period.

Most employment sectors in Austin grew as well, including manufacturing, finance, professional and business services, and leisure and hospitality, which grew most of all at 15.3%.

Austin's information sector, which includes most tech workers, saw employment rise 5.9% during the same period, though that was before the recent contraction in the tech industry.

Plus, the city is home to the state government and the University of Texas, giving Austin a strong foundation of government workers, Jansen said. And people keep moving there: Austin's population has increased by 3.13% since the 2020 census. Growing populations, especially well-educated ones, tend to attract companies, even in downturns.

"The bright side is that Austin, and Texas in general, is still a destination for companies fleeing higher cost cities," Graves said. "Although maybe not enough to balance out the exodus of large office space users, it certainly helps."

Part of the Austin market's long-term growth may also be in life sciences, which is currently only a minor part of local office demand. JLL recently named the city as an emerging market with a strong talent base. 

Austin life sciences employment has grown 74% in the past three years, according to Newmark, and it is expected to increase by 6.5% each year for the foreseeable future.

Of course, employment doesn't always translate to office occupancy anymore; even before tech layoffs, the San Francisco market had a hard time keeping its offices filled. Yet there is evidence that Austin has been, and will continue to be, something of a positive outlier when it comes to office utilization.

"Austin is continuing to track new inflows of residents," Newmark Executive Managing Director of Global Research David Bitner said. "That won't make the market immune to the cycle, but more resilient from an economic standpoint."

For the week that included Wednesday, Nov. 16, ahead of a dip for the Thanksgiving holiday, metro Austin had the highest office utilization rate of any of the 10 cities that Kastle Systems tracks: 62.7%, well over the 10-city average of 48.1%.

"Kastle has only has x number of buildings, so there could be some omitted variable bias there," Bitner said.

"But you know, when I talk to people in Austin, it does feel like culturally they got back to the office faster, as a regional variation," Bitner said. "Facebook in Mountain View has been slower to come back than Facebook in Austin."