Almost a quarter of Austin-area office space sits empty, but the news isn't all bleak

As the Austin-area office market continues to soften with new supply exceeding leasing demand, tenants are expected to be in the driver's seat this year, local commercial brokers say.

That forecast comes with the release of the latest figures for the first quarter of this year, which ended in March.

Locally and nationally, the office market has changed dramatically as more employees work either remotely or on hybrid schedules. Many companies, including those in the tech sector, have been downsizing, freezing hiring and reducing their footprints, leaving buildings with a glut of empty space.

More: Austin-area office market facing challenges, but outlook is optimistic

More: Austin office market has a glut of space, but experts predict it will eventually fill up

Here are highlights from the first-quarter report on the local market from CBRE, a global commercial real estate services firm:

• Across the Austin region, the vacancy rate hit almost 24% (23.8%) by the end of March, up from 20.6% a year ago, according to CBRE. The global brokerage tracks much of the five-county Central Texas market (with some exceptions, including Leander and Hutto).

• The first three months of this year were the first quarter since late 2022 in which the Austin office market has seen more space leased than vacated, on a net basis (that is, move-ins minus move-outs).

• Sublease space across the market (a sign of a softening market when the amount rises) is on a downward trajectory, declining almost 8% from the previous quarter.

• As of March, more than 70 tenants were seeking space totaling over 2 million square feet.

• New construction continued to stall, with no new projects breaking ground in the first quarter. That trend is expected to continue until demand catches up with the supply of new office space being delivered in 2024. A total of 2.1 million square feet of office space is expected to be completed this year, with about 16% of it pre-leased at this time.

• In the first quarter, construction wrapped up on three new buildings, adding close to 1 million square feet (955,646) of office space to the market.

• Austin ranked first in the nation in return-to-work efforts, with an average building occupancy rate of 58.1% as of mid-March, according to Kastle Systems’ weekly Back to Work Barometer.

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In his 21st annual housing forecast in February, Austin-area real estate expert Eldon Rude said every office market in the country has excess office space.

"There will be issues with office," Rude said in his forecast. "Tech companies are going to have to find creative ways to get people to the office." But at some point, he said, the empty office space will get filled.

In Austin, Facebook's parent Meta is looking for tenants to sublease more than 600,000 square feet of prime office space in a new 66-story mixed-use tower at Sixth and Guadalupe streets, currently the tallest building on Austin's skyline.

In addition, Google has postponed moving into the 35-story sail-shaped building it has leased downtown that overlooks Lady Bird Lake, and there's no update on when employees might start occupying that space.

More: Austin's downtown commercial, office space seeing record vacancy rates. What comes next?

In Austin, Atlanta-based Cousins Properties Inc. is the dominant downtown office landlord.

In July, Tim Hendricks, who heads Cousins' Austin office, said the market "locked up in August of last year (2022), and it has really, really been tough" since then. Facing economic uncertainty and capital markets that "got out of whack," some tenants decided against taking risks, opting instead for a wait-and-see approach.

"It just felt like the wheels came off, and it has continued through the second quarter of this year," Hendricks said in July. "We don't need any additional (office) supply in the downtown market right now."

What's the state of the local economy?

The overall economic health of the Austin metro area remained stable in the first quarter, despite layoffs in the high-tech sector, CBRE said.

More: Austin-based Tesla reportedly set to lay off 10% of its workforce. Here's what we know.

Max McDonald, a senior vice president with Austin-based Aquila Commercial, said there are several tenants looking for a sizable amount of space, with some seeking more than 100,000 square feet — "an occurrence less frequent in 2023."

At the same time, "we're also observing a trend of tenants downsizing," McDonald said. "This trend is impacting the demand for well-located spaces under 15,000 square feet. Looking ahead for the remainder of 2024, we anticipate a moderate leasing pace as landlords focus on retaining existing tenants in response to market conditions.”

Kristi Svec Simmons, a senior vice president with CBRE in Austin, gave this overview of the local office market:

How would you say the Austin-area office market is faring overall?

2024 feels like it will be the year of the tenant. There has not been a better time for tenants looking for opportunities in this market. Austin has been lucky with recently announced expansions with a tenant demand that has fallen but is steady. Are we out of the woods just yet? No, and we anticipate some turbulence, especially with older, vacant buildings outside of core urban areas. Compared to other similar-sized markets, we are very lucky to be living in this great city.

What type, and size, of companies do you see expanding in the market?

While we are on the lower side of tenant demand, we are currently seeing over 70 tenants in the market (looking for) over 2 million square feet of space. The trend over the last 12 months has favored companies under 20,000 square feet, and many of them have been professional services-type firms. We are starting to see a pickup in activity for technology companies but nothing near the demand we saw in 2019 or even 2021.

What are some of the reasons sublease space is declining?

Several different factors have contributed to the decrease in sublease space.

One is simply the subleases are expiring, which ultimately affects the direct vacancy rate (this factor is especially present in the suburban markets where leasing activity is low). The second factor is that work-from-home trends are changing and we are seeing more companies come out with mandates, which is improving office usage. The other factor we are seeing more and more often is how aggressive (office users who are marketing sublease space) are getting to attract tenants (for example, by offering low base rents, or offering deals to pay operating expenses only).

What do you think is in store for the Austin office market this year?

I think 2024 will be the year of the tenant. We have not seen such aggressive concession packages in over 11 years, and tenants are taking advantage of those terms. This is especially true in the markets outside of amenity-rich areas, like suburban markets, where vacancy is at record high levels and activity is at record low levels. Overall, new development has slowed as well as the amount of sublease space hitting the market. This leaves room for existing space to be removed from the market, which ultimately will help vacancy rates. We are hopeful that activity will continue to trend upward.

This article originally appeared on Austin American-Statesman: Austin's 2024 will be 'year of the tenant,' says one commercial broker