Downtown Austin' Office Space is Booming But No One is Moving In

[hindesky]

I can't read it since I don't have a subscription.

https://www.washingtonpost.com/business/2023/10/15/downtown-austin-real-estate-doom-loop/

[hbg.50]

Quote

AUSTIN — Shooting up from the downtown skyline is a gleaming 66-story glass behemoth, a place “where Fortune 500 companies, high-rise residents and premier retailers come together to create a community of their own,” as sleek marketing brochures put it. The tech giant Meta scooped up all 19 floors of office space as construction was underway in early 2022.
But when Austin’s tallest building officially opens later this year, all that office space will be empty. Meta has ditched its move-in plans and is now trying to sublease 589,000 square feet of offices, 1,626 parking spots, 17 private balconies and a half- acre of green space. So far: no takers.
The skyscraper known as “Sixth and Guadalupe” is the most glaring example in the city that made a huge bet on the post-pandemic commercial real estate economy. While other cities worry about a glut of office space as workers resist returning to the familiar 9-to-5 grind, Austin’s challenges are Texas-sized.

Here, about 6 million square feet of new office space will hit the market in the next
few years — equivalent to 105 football fields. Between spaces completed since 2020
and what’s still in the pipeline, the office market will grow nearly 25 percent — the
fastest rate on the continent. That includes projects such as the Waterline, which will
become the tallest building in all of Texas, at 74 stories, when it opens in 2026, and a
!e 74-story Waterline skyscraper
mammoth 1.1 million-square-foot complex on the city’s outskirts where a former 3M
will be the tallest building in Texas
camwhpeuns ist biseicnogmrepdletvedloipneda (fienwtoyweaharst,. exactly, is still unclear).
And the vast majority of projects are blazing ahead without companies lined up to move in. Roughly 87 percent of new office space is expected to open vacant, according to data from the commercial real estate firm Cushman & Wakefield.
Developers and city officials say they’re riding the city’s next expansion, confident that tech companies and other growing industries will flock here in the years to come. Yet others fear the boom could quickly devolve into a bust, telling a cautionary tale about what happens when development outruns a local economy — and what’s left after the good times end.

Ryan Crawford was walking back from lunch with co-workers from AWS last month. Crawford said the area had been a bit more crowded since Labor Day, when a wave of return-to-office orders went into effect. But not by much.
“The bars, the restaurants are one-third full,” he said. “Few people are sticking around to socialize. Most people do live far away.”
Sitting at a table nearby, a man read a book on his lunch break. He had recently learned he was laid off from the consulting and tech firm Accenture, which was shedding more than 500 workers at its Domain office. He declined to share his name, fearing retribution from the company.
He said he lived nearby and had mixed feelings as the site went up. The high-end offices with the high-paying jobs fit uneasily in what was otherwise a lower-income area, he said. On the other hand, he had an easy commute, until his job went away altogether.
What would happen to his old office, he didn’t know.

That’s just an excerpt.

[79ta]

Quote

Austin’s office market is exploding. But no one is moving in.
By Rachel Siegel

AUSTIN — Shooting up from the downtown skyline is a gleaming 66-story glass
behemoth, a place “where Fortune 500 companies, high-rise residents and premier
retailers come together to create a community of their own,” as sleek marketing
brochures put it. The tech giant Meta scooped up all 19 floors of office space as
construction was underway in early 2022.

But when Austin’s tallest building officially opens later this year, all that office space will
be empty. Meta has ditched its move-in plans and is now trying to sublease 589,000
square feet of offices, 1,626 parking spots, 17 private balconies and a half-acre of green
space. So far: no takers.

The skyscraper known as “Sixth and Guadalupe” is the most glaring example in the city
that made a huge bet on the post-pandemic commercial real estate economy. While
other cities worry about a glut of office space as workers resist returning to the familiar
9-to-5 grind, Austin’s challenges are Texas-sized.

Here, about 6 million square feet of new office space will hit the market in the next few
years — equivalent to 105 football fields. Between spaces completed since 2020 and
what’s still in the pipeline, the office market will grow nearly 25 percent — the fastest
rate on the continent. That includes projects such as the Waterline, which will become
the tallest building in all of Texas, at 74 stories, when it opens in 2026, and a mammoth
1.1 million-square-foot complex on the city’s outskirts where a former 3M campus is
being redeveloped (into what, exactly, is still unclear).

And the vast majority of projects are blazing ahead without companies lined up to move
in. Roughly 87 percent of new office space is expected to open vacant, according to data
from the commercial real estate firm Cushman & Wakefield.

Developers and city officials say they’re riding the city’s next expansion, confident that
tech companies and other growing industries will flock here in the years to come. Yet
others fear the boom could quickly devolve into a bust, telling a cautionary tale about
what happens when development outruns a local economy — and what’s left after the
good times end.

“It’s just so striking that even after the economy has cooled off … all I see are cranes
everywhere around me,” said Julia Coronado, founder of MacroPolicy Perspectives and
a longtime Austin resident. “There are ‘for lease’ signs on these brand-new, beautiful
buildings. Who is going to go there? I don’t know.”

Austin wasn’t always like this. Decades before Tesla’s headquarters and a burgeoning
crypto scene arrived, the University of Texas was a major player in the local economy.
The state Capitol was among the tallest landmarks, and housing was cheap. Tech had a
presence starting in the 1970s and 1980s, thanks to Motorola, IBM and Dell. But a
popular mantra then summed up the desire to preserve the city’s small-town feel: “If we
don’t build it, they won’t come.”

But that changed as Big Tech expanded beyond San Francisco. Indeed, the job search
site, was co-founded in Austin in 2004. Apple, Google, Facebook and Palantir expanded
their local offices. In 2020, Oracle announced it would relocate its corporate
headquarters from Silicon Valley.

The pandemic supercharged Austin’s growth even more. The tech industry exploded as
the world shifted online. Home buyers raced to scoop up cheap properties, and young
workers seized the chance to work remotely under the Texas sun. And with so many
people flocking here — Austin is now the country’s 10th-largest city — developers and
local officials bet on a real estate boom.

Interest rates were rock-bottom until early 2022, making it easy for developers to get
financing for dozens of new projects. And because it’s common in Texas for commercial
real estate to be built entirely on spec, developers could get loans without any guarantee
that they’d be able to lease the space.

To cater to young workers with high-paying salaries, many buildings were designed as
all-in-one complexes, with office space, apartments, shops and dining all stacked
together. A new luxury building called Paseo promises the chance to “Live, work, play
and rest in one place” when it opens in 2025. A mile away at Sixth and Guadalupe, 33
floors of apartments are stacked on top of 19 floors of offices. Elon Musk’s brother is
opening up a restaurant on the ground floor.

Seth Johnston, senior vice president and market leader of Lincoln Property Co., said
timing is on the industry’s side. The global developer is behind multiple Austin projects,
including Sixth and Guadalupe, which got rolling when financing was cheap. Now LPC
and its peers will have the newest offerings with the sleekest amenities, Johnston said.
And there won’t be fresh competition coming up behind them, because financing for
new projects has almost entirely dried up.

“These companies, they want newer amenities in their space,” Johnston said. “They
want fresher air filtration systems. They want touchless technology, and that’s harder to
do in the older, ’80s vintage buildings downtown. … By and large, there’s always going
to be that flight to quality. And I think we’re in a position to hopefully take advantage of
that.”

In a statement, Meta spokesman Tracy Clayton said Meta’s goal is to “build a best-inclass hybrid work experience.” The company’s commitment to Austin is also made clear by the roughly 1,000 employees who live there, Clayton said.

Industry officials also argue that, technically, many of the buildings aren’t vacant.
Meta’s name is still on the lease at Sixth and Guadalupe, after all, even while the
company looks for new tenants. Another LPC building, called the Republic, has leases
lined up for a law firm and a private equity firm. Another building downtown had 35
floors scooped up by Google, which continues to pay rent even though its move-in plans
are still in flux. That means developers and their lenders stay financially sound, at least
for now.

Still, only the biggest, richest firms can afford to lease huge offices they don’t use. And
empty towers don’t do much to liven up an area or attract new customers.

Down the block from Meta’s skyscraper, Nikki Nichol was getting ready to open Ranch
616 one morning last month. The restaurant, where she works as an assistant manager
and bartender, is typically hopping on weekends. Except lately, Nichol said, more
customers complain about the towering buildings blocking all the breeze.

When Nichol moved to Austin in 2010, she paid $695 for a one-bedroom apartment.
Now she’s paying almost double for a studio. She said that parking is “atrocious” and
that getting around the city is impossible because of all the construction. She said she
can’t grasp the vision for a city that’s getting harder and harder to recognize.

“It’s like they’re going to ‘Field of Dreams’ it,” she said.

Remarkably, there’s a craving for even more space. Data from the Downtown Austin
Alliance shows developers have proposed an additional 3.9 million square feet of office
space — and would be moving forward if banks weren’t shying away from new loans.
“If rates were low and money was available, there’s every indication that these buildings
would get built,” said Dewitt Peart, the organization’s president and chief executive.
“Now the pandemic has thrown a wrench into everything. But I think the sense is that
money still wants to flow to Austin.”

At the same time, though, all of the new space is driving down the value of decades-old
buildings that are gradually hollowing out. On one downtown street corner, a drab 40-
year-old building bears a large “For Lease” banner. Right next door, construction crews
were working on a 58-story luxury skyscraper.

Jeff Graves, research director at Cushman & Wakefield, can look out the window at the
changing skyline. From his office, he pointed to a luxe new building right across the
street from an abandoned, rat-infested government building that is slated for
demolition. Turning a little, he gestured to an old Austin landmark that has managed to
hold on to its tenants, which he called an outlier.

Just on the other side of Graves’s window, a construction crew was practically dangling
out the side of a brand-new office tower.

Graves lived in Las Vegas during the 2007-2008 housing market crash and wonders if a
similar bubble could come for Austin commercial real estate. The answer may lie in
what happens with prices, which so far aren’t budging. Leases at brand-new skyscrapers
— roughly $50 per square foot at the newest buildings — are so high that smaller
businesses are getting priced out. But so far, landlords would prefer to throw in perks,
such as six months of free rent on a decade-long lease, before caving to a discount.
That approach may only work for so long. And things could come to a head if lenders get
antsy that they’re taking too much of a loss.

“No one wants to be the first to drop rates,” Graves said. “They’re in for a lot of money.”
Other problems could hit Austin hard, too. Tech firms that bulged in the pandemic are
laying off thousands of employees. Return-to-office policies are still fraught and, in
some cases, backfiring.

Zoom out a bit more, and cities nationwide are trying to figure out what comes next.
New York and San Francisco are overwhelmed with untapped office space. Some
economists fear that midsize cities, from Minneapolis to Memphis, could be even more
vulnerable to a kind of “doom loop” that starts with empty offices and canceled leases,
and spirals into something scarier for downtowns and city coffers.

And policymakers are still pushing hard to cool the economy down. Officials at the
Federal Reserve have made clear that they will keep interest rates high for as long as
necessary. No one knows how long their aggressive moves will slow growth, especially
because the totality of the Fed’s moves may not have hit yet.

Some economists argue those delays are shorter nowadays. The Fed telegraphs its
moves far in advance so the markets have time to price higher rates in. But when
Coronado, the MacroPolicy Perspectives economist, looks around Austin, she sees
consequences still ahead.

It takes years, she said, for massive commercial real estate projects to get financing and
permitting, and finish construction and price out leases. By the time each new building
goes through the cycle, supply will far outstrip demand. Prices could drop, even
plummet, in a way the city may not be ready for.

“I don’t know whether this just means losses for contractors, but it’s fine. Or losses for
some banks, but they absorb the blow,” Coronado said. “But I do know that even if it is
the intended effect of Fed policy, the full effect isn’t yet in the employment data, in the
construction data, that still lies ahead.”

Only time will tell. But already, the mismatch stands out. On a recent afternoon,
shoppers milled about the Domain, a sprawling outpost of office suites, restaurants,
high-end retail stores and hotels 12 miles north of downtown. Scattered between Gucci
and Tesla storefronts are a few reminders that shoppers are still in Texas: a burnt
orange window display at a jewelry store, a leather boots shop. An overhead speaker
played Taylor Swift’s “Wildest Dreams.”

The office park nearby towered over the few workers around. Companies such as
Indeed, Vrbo, Amazon, IBM, Charles Schwab and Facebook have taken up space. But
the overall vacancy rate across the complex is still 15 percent, according to Cushman &
Wakefield. (Amazon founder Jeff Bezos owns The Washington Post, and the
newspaper’s interim chief executive, Patty Stonesifer, sits on Amazon’s board.)
Ryan Crawford was walking back from lunch with co-workers from AWS last month.

Crawford said the area had been a bit more crowded since Labor Day, when a wave of
return-to-office orders went into effect. But not by much.
“The bars, the restaurants are one-third full,” he said. “Few people are sticking around
to socialize. Most people do live far away.”

Sitting at a table nearby, a man read a book on his lunch break. He had recently learned
he was laid off from the consulting and tech firm Accenture, which was shedding more
than 500 workers at its Domain office. He declined to share his name, fearing
retribution from the company.

He said he lived nearby and had mixed feelings as the site went up. The high-end offices
with the high-paying jobs fit uneasily in what was otherwise a lower-income area, he
said. On the other hand, he had an easy commute, until his job went away altogether.
What would happen to his old office, he didn’t know.

 

[ChannelTwoNews]

Austin real estate news: What's up with downtown? - Austin Business Journal (bizjournals.com)

"Consider this statistic from real estate firm Aquila Commercial LLC: There are 10 already-built towers downtown with at least 100,000 square feet of direct vacant office space — and three of the biggest and newest office blocks are completely empty despite being ready for tenants for many months.

On top of that, some huge new office towers are in the works and will be courting prospective tenants soon, and there's no shortage of less expensive office space outside of downtown."

[MidCenturyMoldy]

^ "Irrational exuberance" 

 

From the WaPo article: "Roughly 87 percent of new office space is expected to open vacant, according to data from the commercial real estate firm Cushman & Wakefield."  😬

Edited April 19 by MidCenturyMoldy

[The Hills]

I'm happy to see a pause in the amazing 15+ year building boom.  High rents have had a significant negative affect on both commercial and residential leasing in Austin proper the past few years and has caused a big shift to suburban sprawl.  I'm not in CRE, so I like it.

Edited April 24 by The Hills