AUSTIN OFFICE | Q2 2020

Quarterly Market ReportJULY 2020

HOUSTON | AUSTIN | SAN ANTONIO

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EXECUTIVE SUMMARYVacancy rate at 10.2%

The overall vacancy rate in the Austin office market was up only 10 basis points from 10.1% quarter-over-quarter, although up significantly from 7.9% year-over-year. The vacancy rate for Class A properties is at 12.0%, and Class B at 20.7%. In the second quarter, overall net absorption totaled 142,000 sq. ft.—Class A represented 124,000 sq. ft. and Class B tallied 32,000 sq. ft. Of the 7.5 million sq. ft. currently under construction, about half of that space has been spoken for. Of the 2.0 million sq. ft. completed in 2020, 69.8% of that space is occupied. The overall Austin average asking full-service rent is at $38.94 per sq. ft.—up from Q2 2019 at $35.69 per sq. ft.—while Class A space the Central Business District (CBD) is averaging $52.24 per sq. ft.

Economic indicators

The Federal Reserve Bank of Dallas reported that the Austin economy continued to contract in May due to the impact of COVID-19. The Austin Business-Cycle Index—a broad measure of economic activity in the metro—fell an annualized 20.3% in May, suggesting a weak economic performance. Austin’s unemployment rate dropped to a still elevated 10.4% in May, while the unemployment rate in Texas and the U.S. ticked down to 13.0% and 13.3%, respectively. Austin jobs dropped by 114,320 net jobs in the three months ending in May. All sectors except financial activities experienced payroll losses during this period. Leisure and hospitality plunged 87.0%, shedding the most jobs (-56,000), while Health and private education services declined 47.0% (-19,300). The financial activities industry saw a 30.7% gain, adding 4,750 jobs.

Market Indicators

Current Q2 2020

Prior Quarter Q1 2020

Year Ago Q2 2019

Vacant Direct 10.2% 10.1% 7.9%

Vacant Total 8.8% 8.8% 7.1%

Available Direct 16.8% 14.9% 12.1%

Available Total 14.4% 13.1% 10.6%

Net Absorption (SF) 141,723 642,606 1,250,985

Leasing Activity (SF) 625,868 1,793,138 3,137,236

Construction (SF) 7,471,074 7,206,671 7,188,091

Deliveries (SF) 371,381 1,293,603 249,357

Avg Asking Rent (Gross) $38.94 $38.26 $35.69

Inventory (SF) 92,357,661 91,986,280 89,750,362

MARKET OVERVIEWPositive net absorption

During the second quarter, Austin’s office market saw a decrease in the number of tenants moving into space compared to Q1 2020, and a year ago in Q2 2019. The aggregate effect of the net occupancy increase was just over 141,000 sq. ft. of positive net absorption for Q2 2020. The amount of total office inventory that is being marketed for lease was up 190 basis points quarter-over-quarter at an availability rate of 16.8%. The difference between this figure and the vacancy rate reflects expected future move-outs. The CBD overall vacancy rate is at 7.1%, although the availability rate is at 21.3%. This wide margin holds truer in Class A space in the CBD at 9.0% vacancy compared to 27.0% availability.

Leasing activity slowed

Leasing velocity decelerated at 626,000 sq. ft. during the second quarter—down from the previous quarter’s 1.8 million sq. ft.— and down from this time last year at 3.1 million sq. ft. As existing companies expand or relocate— examples include Facebook’s 230,000-sq.-ft. lease at Third + Shoal; Indeed’s 600,000 sq. ft. of leases in the Domain and Downtown; and Google’s nearly 1 million sq. ft. of leases in the CBD and East Austin—developers have responded to the strong demand with plenty of new supply in the pipeline.

Office construction

New supply delivered to the market in Q2 2020 stood at 371,000 sq. ft. The record-setting amounts of new construction that has taken place during the last 24 months has increased the overall inventory by 6.6% nearing 93 million sq. ft. Class A space has grown by 12.0% reaching a total inventory of 47 millions sq. ft. Going forward, it is likely that many construction date projections could be delayed due to COVID-19.

Investment sales activity

Real Capital Analytics data reports office sales volume for Q2 2020 in the Austin area at $21.8 million, down sharply from this time last year at $792.8 million. The primary capital composition for buyers in 2020 was made up of 48.8% private investors, and 37.4% cross-border (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). For sellers, the majority was 81.7% private investors, and 10.3% user/other investors. CoStar reported that Texas, the nation’s most populous nondisclosure

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AUSTIN OFFICE | Q2 2020

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state, had some record-breaking office tower sales by price per square foot in 2019, including the purchase of Third + Shoal in Austin for $820 per sq. ft. Meanwhile, property owners and tenants at some trophy properties throughout Texas are getting record-setting property tax bills as appraised values climb and put a heavier financial burden on tenants with triple net leases amid the pandemic.

Average asking rents

The Austin overall full-service average rates are at $38.94 per sq. ft., a 9.1% increase year-over-year from $35.69 per sq. ft. Asking rates for Class A space are averaging $43.10 and Class B are averaging $33.38 per sq. ft. Rent growth has varied across Austin’s submarkets. Many submarkets saw asking rates increase or remain the same, while some saw decreases. Office tenants may have more leverage with regards to negotiating rental rates, terms, tenant improvements and concessions than they have had in the past. However, since the market was healthily prior to the current situation, the relative impact to occupancies and rents in the future is uncertain.

Pandemic may change Austin in the long-term

The Austin Business Journal recently reported that a panel of local experts discussed how the pandemic may change Austin’s long-term outlook. In summary, Austin will face many of the same challenges it has continued to contend with on an ongoing basis, such as traffic congestion, the need for more affordable housing, and a tight labor market for tech talent. No one knows what Austin will look like in the future, but real estate investors and other businesses will be thinking about where to invest, and how those decisions will affect infrastructure moving forward.

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MARKET OVERVIEWSubmarket Stats

Submarket Statistics (Total reflects Class A/B/C)

Total Inventory (SF)

Total Vacancy

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Absorption (SF)

2020 YTD Net Absorpiton

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Overall Gross Avg

Asking Rent ($/PSF)

Austin Market Total 92,357,661 10.2 16.8 141,723 784,329 625,868 371,381 7,471,074 38.94

Class A 46,919,014 12.0 20.7 123,732 387,439 417,955 266,349 6,880,861 43.10

Class B 39,724,464 8.9 13.1 32,384 448,566 183,246 105,032 590,213 33.38

Submarket Statistics (Total reflects Class A/B/C)

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CBD Total 15,491,808 7.1 21.3 -358,571 -298,787 94,708 0 3,121,479 51.32

Class A 9,967,929 9.0 27.0 -349,201 -308,544 82,004 0 3,121,479 52.24

Class B 4,361,599 4.2 9.4 -8,448 10,679 11,257 0 0 47.58

Central Total 6,372,020 5.8 11.1 14,538 183,532 21,812 0 607,591 34.61

Class A 1,588,529 5.3 14.5 20,216 62,748 14,794 0 498,506 41.26

Class B 3,594,172 7.1 9.0 93 128,054 6,407 0 109,085 33.31

Cedar Park/Georgetown/Round Rock 6,554,830 8.7 9.2 41,468 138,475 28,601 59,482 191,720 31.06

Class A 3,554,346 11.1 9.5 17,394 91,355 14,333 59,482 35,320 34.04

Class B 2,681,930 6.4 9.8 24,074 50,229 14,268 0 156,400 28.03

North/Domain Total 9,530,974 4.9 11.0 140,746 608,627 26,162 40,827 390,012 37.80

Class A 4,508,200 2.2 10.4 118,552 615,665 2,543 0 330,012 45.24

Class B 4,936,761 7.4 11.7 22,194 -7,038 23,619 40,827 60,000 29.80

Northeast Total 5,626,873 12.7 18.3 95,820 74,535 124,766 0 38,500 24.44

Class A 2,155,064 23.5 36.3 -30,190 -105,787 120,209 0 38,500 30.72

Class B 2,803,491 6.9 7.9 126,010 118,023 4,557 0 0 22.04

Northwest Total 20,266,894 15.9 20.3 62,965 88,622 84,502 0 0 33.57

Class A 12,405,282 19.9 22.3 99,054 -13,556 45,547 0 0 36.13

Class B 7,644,287 9.9 17.5 -36,188 106,421 37,642 0 0 30.68

South Total 4,272,292 8.1 20.2 147,701 7,197 49,019 230,205 837,334 40.92

Class A 1,284,526 4.7 30.5 164,708 134,627 26,008 186,000 837,334 40.71

Class B 2,338,060 8.2 11.9 -10,572 -57,414 11,153 44,205 0 43.84

East/Southeast Total 10,766,245 13.7 18.9 -41,284 76,895 52,153 0 1,754,795 42.55

Class A 2,749,439 14.2 23.1 35,078 -6,617 0 0 1,490,067 44.09

Class B 6,825,211 14.7 18.4 -70,670 116,255 44,495 0 264,728 40.36

Southwest Total 13,475,725 8.4 12.9 38,340 -94,767 144,145 40,867 529,643 37.64

Class A 8,705,699 8.2 13.6 48,121 -82,452 112,517 20,867 529,643 40.77

Class B 4,538,953 9.1 12.1 -14,109 -16,643 29,848 20,000 0 32.71

Suburban Total 76,865,853 10.8 15.8 500,294 1,083,116 531,160 371,381 4,349,595 36.07

Class A 36,951,085 12.7 18.7 472,933 695,983 335,951 266,349 3,759,382 39.68

Class B 35,362,865 9.5 13.6 40,832 437,887 171,989 105,032 590,213 32.32

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

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MARKET OVERVIEWAustin Office Submarkets

1. CBD

2. Central

3. Cedar Park/Georgetown/Round Rock

4. North/Domain

5. Northeast

6. Northwest

7. South

8. Southeast

9. Southwest

AUSTIN OFFICE | Q2 2020

Quarterly Market ReportJULY 2020

NAI Partners Austin Office 701 Brazos Street, Suite 320Austin, Texas 78701

tel 512 580 6208

www.naipartners.com/austin

Quarterly Market Report

Leta WausonDirector of Research

leta.wauson@naipartners.comtel 713 275 9618

AUSTIN OFFICE | Q2 2020