A growing tech sector has helped push Austin out of the shadow of Dallas and Houston and made the capital city a destination for both employers and an influx of new residents.
CBRE rated Austin as the #6 tech talent market in the country for 2018 based on its depth, vitality, and attractiveness to tech employers and tech talent. Business Facilities also rated Austin as the #2 tech hub based on the concentration of tech jobs and #3 for economic growth potential in its 2018 Metro Rankings Report. The company is home to major tech firms that include Dell, Apple, IBM and Oracle among others.
The thriving tech sector is fueling demand across the real estate sector. The PwC Emerging Trends in Real Estate 2018 report ranked Austin as the #2 city for overall development and #3 for investment out of 78 metros. Specifically, the report cited its population growth and attractiveness to Millennials as key drivers for its economic growth.
That economic and population growth is spurring demand for space across commercial and multifamily markets. There has been an uptick in medium and large companies that have either relocated to Austin or are considering expansions. For example, pharmaceutical giant Merck & Co. has announced plans to open its new IT innovation center in Austin in a move that is expected to create 600 new jobs.
That interest has helped to launch a wave of new development. Approximately 3.5 million square feet of office space was under construction across the metro at the end of first quarter, according to Colliers. One new building expected to open in Downtown Austin later this year is Third + Shoal. The Austin Music Hall was demolished to make room for the 29-story, 345,000 sf office building.
The office investment sales market also has been experiencing robust activity. After hitting a high of $3.4 billion in transaction volume in 2015, sales dropped back to $2.1 billion and 2.0 billion in 2016 and 2017, according to Reonomy. So far, sales are off to a slower pace in 2018 with recorded transactions to date for the first half at $312 million. However, volume is likely to rise as more sales are recorded.
Austin also is firmly on the radar for apartment developers. The metro has seen a surge in apartment construction with about 10,000 new units that have been completed over the past 12 months as of mid-year, according to Berkadia. New supply is outpacing absorption, with vacancies that are elevated compared to the rest of the country with a metro-wide average of 9%. Downtown Austin, which has seen an active development pipeline for both high-rise apartment and condo projects, is reporting vacancies at about 7%, according to Berkadia.
One new project under construction in Downtown Austin that is expected to be completed this year is Gables Republic Park. The 24-story tower features 221 luxury apartments that will sit on top of a new 159-room Hotel ZaZa.
The active development pipeline is giving investors fresh buying opportunities. In fact, Reonomy data shows that apartment investors have been accelerating in recent years. Apartment sales reached a whopping $5.9 billion last year, which is up over the $4.6 billion in sales that occurred in 2016 and more than double the $2.4 billion in sales recorded in 2015, according to Reonomy. Apartment sales also are off to a slower pace in 2018 at $562 million during the first half. Again, that number will rise as more completed transactions are recorded.
Investors will have to keep an eye on new supply with numerous projects still in the pipeline. Some of the notable new commercial projects that have the potential to have a big impact on the market include:
- The Austin City Council voted in August to proceed with negotiations to build a Major League Soccer stadium in North Austin. Precourt Sports Ventures is proposing to build a $190 million, 20,000-seat stadium for the city-owned McKalla Place site, which sits near the Domain mixed-use development and the city’s warehouse brewery district in North Burnet.
- Construction is expected to start this year on The District, a $200 million mixed-use development in Round Rock. According to the Austin Chamber of Commerce, the 65-acre development is expected to include up to 3 million sf of office, over 200,000 sf of retail, over 900 multifamily units and an upscale hotel when it is fully built out.
- Trammell Crow Co. has been selected to redevelop a key Downtown Austin block currently owned by the University of Texas. The 1.6-acre “Block 71” is expected to be redeveloped as a mixed-use project.
- Lincoln Property Co. and Phoenix Property Co. are teaming up to build a proposed 37-story tower overlooking the newly renovated Republic Square in Downtown Austin. Plans are still in the early planning stages, but the project is expected to span 1.4 million sf, about half of which would be devoted to office.
Some of these proposed projects will not only create new supply, but also could be “game changers” in shaping future location decisions, demand for space and property values for neighboring assets. In addition, both Austin and Dallas are on the list of finalists for Amazon’s proposed HQ2, which will have a significant economic impact on the winning city. The Greater Austin Chamber of Commerce submitted more than 40 potential sites for the new headquarters.