Even as pandemic fears finally begin to wind down, return-to-office movements in North America are varying wildly depending on the market. Ottawa, for one, is looking pretty sluggish. San Francisco, once the hottest office market in the U.S. until 2019, now has an office vacancy rate of 25 percent. Meanwhile, Austin’s office market continues to soar, leading the United States in office job growth as of the second quarter of this year. From Meta (formerly Facebook) to Apple to Tesla to Amazon, it seems we keep hearing about companies nabbing space in Austin almost every day.
Austin’s real estate market in general has long been hot for a variety of reasons, but as companies everywhere try to fill their offices to pre-pandemic levels, there’s merit for commercial real estate developers to understand what it is about Austin that makes its office market tick.
Unfortunately, one of the biggest takeaways from Austin’s office boom isn’t exactly a lesson that every city can learn how to implement: to spread out. Unlike urban settings like New York City or San Francisco, Austin isn’t land-locked and has ample room to grow. And with room to grow, there’s room to build. Austin was already anticipated to experience the largest office market expansion in the U.S. this year, and according to global commercial real estate company Avison Young’s Q2 2022 Austin Office Market Report, 8.5 million square feet of office space is now being developed, and urban submarket release rates have reached 41 percent. Craig Leibowitz, Executive Director, Innovation and Insight Advisory, U.S. at Avison Young, told me that Austin’s inventory of new space is larger than nearly every city in the United States at this time.
Tenants have also taken advantage of high-quality sublease opportunities within Austin’s urban submarkets as demand and pricing hit all-time highs. Between the final quarter of 2020 and the second quarter of 2022, sublet availability in these submarkets plummeted by approximately 50 percent, and in the central business district alone, this availability decreased by 64 percent.
Availability of space is obviously a central part of the real estate equation when companies decide where to lease or where to build, especially as the onset of hybrid work has paradoxically prompted the notion that companies may want to expand their office footprint for future use. But availability of space isn’t the sole driver behind Austin’s growth. With office vacancies still at pre-pandemic levels and the Austin area having the highest percentage of new office development of any major market in the nation, this building pipeline poses a significant short-term risk to Austin’s office market. However, compared to other tech-heavy cities, Austin continues to experience robust population growth (which is also driving office rents to an all-time high) and relative affordability, the availability of new office space is only one factor that may help businesses get a head start on a post-pandemic office comeback.
Austin may have ample space to build unlike several other major U.S. cities, but one of the key competitive advantages that the city has, according to Leibowitz, is the companies that are locating there. “It’s all about the industry composition of the cities,” said Leibowitz. “And then the next question is, how are people productive within the framework of that industry?”
Leibowitz explained that very broadly, cities that have greater composition of a front office workforce or any workforce that needs to be productive within the framework of an office building are going to experience more active office markets. “If we’re talking about an economy that’s largely composed of individuals who can work remotely in a continued, productive manner—-in those cities, the return-to-office efforts have been hampered,” he said.
When referencing Austin’s office market, you’re mainly looking at tech employers, but the actual day-to-day functions of those employees can be radically different. For instance, you could have software engineers who may never need to set foot in an office on one side of the equation, or you could have marketing salespeople who do need to return to the office, at least on a part-time basis. The return-to-office movements within the tech industry purely become a company-to-company phenomenon.
Austin continues to lead the U.S. in the increase of office jobs and offers a preview of the IT industry’s post-pandemic return to office strategy. With 60,000 new office positions created since February 2020, job growth has reached record highs, and the tech sector continues to be the primary driver of leasing activity. So at first glance, Austin may not seem like a candidate to lead the nation in the return to the office, until you look at other industries taking root in the city.
The post-COVID environment has reinforced the need for advancements in the pharmaceutical industry and a lot of segments of the life science workforce aren’t really productive outside of an office or lab. Texas is one of the top biotech states in the nation with more than 3,900 businesses and 97,600 employees, but Austin’s life sciences assemblage in particular has developed into a well-rounded representation of the industry as a whole through a combination of targeted relocations and ongoing support for the life sciences industry. Austin’s Chamber of Commerce states that the region’s nearly 300 life sciences businesses, which employ over 18,000 people, are concentrated in the research fields and market categories that are experiencing the fastest growth, such as pharmaceuticals, medical devices, diagnostics, contract research, and biologics.
Leibowitz believes that the reason why so many companies really began to set up shop in Austin is because of the war for talent conundrum that most companies are still faced with. “We’ve seen a lot of migrations of individuals post-COVID,” Leibowitz said. “So when tech companies open up shop in places like Austin, it’s with the notion that labor markets along the West Coast have been tapped out.”
For Leibowitz, it’s not just about attraction, but the retention of those employees. There’s a notion in some markets, for better or worse, that after a year or two, there will be competition across the street. Which means that employees who would be looking to leave the company would have the ability to leave for a similar job nearby. “There are discussions being had by some of our clients who are saying ‘I want to be where other tech companies aren’t.’ And these discussions are being made by leading tech corporations,” said Leibowitz. “They want to be where qualified talent either is currently situated or wants to be situated. Therein lies why Austin has been a beneficiary of all of those inbound migrations.”
Eventually, Austin’s office boom has to reach some level of equilibrium, or some semblance of pre-COVID normalcy. Many predict this to happen in the next four to six months. Of course, this estimate is absent of any health-related circumstances (like a sudden new variant) but it is still optimistic compared to several other comparable office markets in the U.S. Both New York City and Los Angeles are experiencing recent upticks in leasing activity, but demand is still below half of what those cities experienced before the onset of the COVID-19 pandemic. Return-to-office movements are a complex ordeal with no one-size-fits-all approach, but according to Leibowitz, taking a closer look at the industry composition within the city is crucial to understanding how to best reignite activity.