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Austin Office Market Driven by Tech Firms

by Kevin Kirkpatrick, San Antonio, October 2013

 

The future looks bright for office properties in Austin, Texas thanks to expansion efforts by high-tech and soft-tech companies. The uptick in office demand is expected to translate into higher property tax assessments and higher tax liabilities.

 

The Economy

 

Austin's booming economy bodes well for the city's office market. More than 9,800 new office jobs were added in the most recent 12-month period, according to Marcus & Millichap. This represents an increase of 5.1%.

 

A growing number of high-tech hardware manufacturers have established new production plants in the Austin metro area. Meanwhile, soft-tech companies such as IT management, software design and computer engineering are expanding at an even greater pace.

 

The opening of technology centers for Visa, GM, Apple and HomeAway are recent examples of this trend, which stands to further strengthen demand for office space.

 

Sales

 

The number of office sales transactions increased 50% over the past 12 months when compared with the corresponding period last year. Properties of less than 50,000 square feet accounted for the most activity, but the greatest acceleration in deals was recorded for properties of 100,000 to 200,000 square feet.

 

Cap rates averaged 7.6% but varied significantly by location, quality and tenant strength. High-occupancy Class A properties average in the low to mid 6% range, while performing Class B assets sold between 7%-8%.

 

Rents

 

The average asking rent for local office space increased 4.9% to $26.30 per square foot. For Class A space, rents rose to $32.36 per square foot.

 

Austin's Central Business District and Southwest submarkets, which have traditionally reported above-average rents, recorded the strongest year-over-year gains. Average market rates in the CBD hover just under $35 per square foot, while the average in the South submarket is $27.30 per square foot.

 

Vacancy

 

Austin's office vacancy rate declined to 12.9% overall. At mid-year, Class A vacancy rested at 15.9% and the Class B/C sector dropped to 10.9%

 

Among Austin's submarkets, Round Rock remains the tightest with a vacancy rate of 6.7%. The other submarkets are ranked in the chart on the right.

 

Tax Implications

 

The Travis Central Appraisal District (TCAD) is faced with the arduous task of translating year-end economic conditions to a sound and justifiable assessed value for all properties. All the above-mentioned factors play a major role in establishing a fair market value.

 

Submarket Vacancy Rate

 

1.

Round Rock

6.7%

2.

North

8.0%

3.

South

8.6%

4.

Southwest

10.2%

5.

Cedar Park

11.0%

6.

CBD

13.4%

7.

Northwest

13.5%

8.

Central

15.0%

9.

Northeast

17.0%

10.

Southeast

17.6%

In 2013, the TCAD proposed a countywide value increase for office buildings of 16%. It was mitigated through the appeals process to an average increase of 7.2% -- less than half of what the District initially proposed.

 

Based on improved market conditions, office building owners should anticipate another round of assessment increases for 2014. Proactive appeals will be necessary to manage the increasing expense of property taxes.