OFFICE MARKET
Austin’s outlook for 2008 is more cautious than 2007, given today’s macroeconomic uncertainty and an unusually rapid rise in rental rates over the past two years. Only 669,330 square feet of absorption took place in 2007, down substantially from the 1.1 million square feet of absorption that took place in 2006. Vacancy rates rose in the historically strong Northwest submarket to 10.79%, up nearly 2% points from the previous year. Seven new properties totaling almost 800,000 square feet came online in the Southwest submarket during 2007 causing vacancy rates to double to 13.19%. The citywide positive net absorption is due primarily to the aggressive absorption numbers posted by the CBD. The CBD saw over 228,866 SF of direct absorption in 2007, giving it a direct vacancy rate of 14.09%, mirroring the citywide direct vacancy rate of 14.01%. Despite more modest absorption numbers from the previous year, Class A rental rates jumped to $31.28 full service. The rise in rental rates and lower absorption numbers are likely related. The Austin office market’s nearly $4/SF jump in rental rates last year was driven by capital market activity, namely Blackstone’s sale of its Equity Office Properties portfolio to Thomas Properties. The jump in rental rates of the sold properties has been matched by Class A landlords throughout the city, leading to a sharp rise in rental costs. Because this rise was not driven by normal supply and demand forces, tenants have held fast, doubling up on their space and postponing new leases, resulting in the city’s rising vacancy rates. (CBRE.COM)