Latest State of Downtown report shows the city core's businesses and housing are in transition

Wednesday, November 13, 2024 by Chad Swiatecki

The latest report on downtown Austin's economic and cultural health shows the city core is seeing ongoing vacancies and low utilization of office space in a trend that has caused a flattening of many indicators of business activity. That analysis was among the findings of Downtown Austin Alliance's Q3 State of Downtown report , which looked at commercial, housing and cultural activity for the area.

The report highlights the struggles of the office market, where vacancy rates remain above 20 percent despite a slight increase in gross asking rents. Sublease space has grown as well, reflecting ongoing uncertainty in the sector even as more employees return to in-person work, with weekday office populations reaching a post-pandemic high.

Downtown office vacancies increased by 70,000 square feet in Q3, pushing sublease space higher and keeping overall vacancy rates elevated while the gross asking rent for office space rose by $0.35 per square foot quarter-over-quarter, suggesting signs of stabilization.

Luke Goebel, DAA's economic development research manager, said the increase in subleasing availability is a sign that companies are looking carefully at how much office space they need based on the popularity of hybrid work arrangements with their workers.

"What tends to get lost in the story of the office market is that everyone just assumes it's absolute doom and gloom when that's not the case at all," he said. "Leases are still being signed. It's just now it's much more manageable-sized spaces. You have a lot of these firms and companies that are recognizing, 'OK, with hybrid work being here to stay, do we really need to take five full floors when we could probably get away with only two or three full floors?'"

The report found development activity in the downtown area has stalled in 2024, with some hope for an upturn in 2025. Mixed-use projects dominate the construction pipeline, which the report said could enhance downtown's role as a hub for living, working and leisure.

Currently, 2.8 million square feet of mixed-use projects are under construction, with 5.1 million square feet proposed. Other sectors in the mix include 1.4 million square feet of office space under construction with 2.2 million square feet proposed, along with significant planned residential and hotel expansions.

Jenell Moffett, DAA's chief impact officer, said the strength of the mixed-use market is likely to make downtown a much more diverse area in terms of the activities going on and how spaces are being used. She said the pivots some developers have made to replace planned office space with housing or hotel tenants show the flexibility downtown needs, with public tenants such as the University of Texas taking space and somewhat reducing the commercial foothold in the core.

The area's retail market has shown resilience, with occupancy rates exceeding 95 percent. However, the report notes a 14 percent rental rate increase over the past year – to $39.17 per square foot under triple net terms – poses a barrier for new tenants.

The report notes the downtown housing market is set for substantial growth in the next two years, with rental rates expected to decline or level off in response to changes in the area's population increase that are starting to favor suburbs with lower housing costs.

Moffett said after more than a decade of rapid commercial and residential growth downtown, the cooling off of that activity suggests the area is poised for major public infrastructure projects such as the Interstate 35 reconstruction and Project Connect to remake downtown over the next decade.

"We've had this huge population growth, and now the public infrastructure is falling behind that. And I would anticipate that once that public infrastructure is in place, the private infrastructure will follow," she said. "Right now, I think it's just the public sector's turn. You come to I-35 infrastructure or you come to the (Austin) Convention Center, the Capitol Complex project ... This is all public investment, where it's now their turn to make sure that it's meeting the needs of the community."

Photo made available through a Creative Commons license .