Halftime Report: Startup to Sublease Pipeline & What It Means For Austin

Opening Bell 🔔: It doesn’t take much looking around to see Austin (and most other markets) are dealing with an unprecedented amount of supply when it comes to office inventory. The development boom of recent years has flooded the market and economic headwinds haven’t helped us absorb it. It’s not all doom and gloom, Q2 showed early signs of stabilization. We’ll take a look at the numbers and what it means for the city moving forward.

Market Snapshot 📸:

Q2 saw avg rates drop, an increase in deliveries, construction project starts drop, net absorption fell, and so did overall direct vacancy rate. Sublease space continues it’s downward trend. We’re starting to trend in the right direction.

Dive Deeper 🤿: Q2 saw over 1.2 MSF of leasing activity, so deals are getting done. There was no “monster” deal as in the previous quarters so the average executed lease came in at 5,547 sf (about 3,000 sf lower than last quarter). Here’s how those deals broke down by industry and by lease type.

You can see tech lead the way (nothing new for Austin), but the healthcare sector led in number of leases signed at 10 (confirmation of one of our Q1 predictions). What sticks out to us here were the signings of Flosports at Bouldin Creek for 29,866 SF and ClosingLock at 100 Congress for 27,000 SF.

Both of these companies started on the Austin startup scene and have been growing steadily but this is their first time taking down some best-in-class property. It’s thanks in large part to the unique market opportunity that exists in Austin right now. We have 3.3 million SF of Class A building sublease space, making premier space available at well below market rates for startup companies like ClosingLock. Just look at where they’re coming from too, 815 Brazos St (a 1950’s class B building) to a Google sublease in 100 Congress. That’s a major upgrade from being spread out across 3 floors.

Pro Insight 🧑‍🏫 : Co-working space has quietly been on the rise here in Austin as well. Yes you have the headline Industrious deals from the last year, but We-Work renewing 41,476 sf at Quarry Oaks II and the emergence of Dwell Co-working at 1106 Clayton Ln (a 9,249 sf deal) are all positive signs. We’re currently in the midst of the city’s 3rd best VC funding year-to-date (and we’re only at the halfway point) which means there are plenty of opportunities for startups out there in the Austin market to capitalize on.

Keep an eye on Meta’s 6th and Guad (there’s rumors PWC just took a floor) 500,000+ SF of sublease space as well as more Google space at 601 W 2nd and Vista Equity Partners nearly 80,000 SF sublease at the brand new Republic building.

It’s not just sublease space, Manychat just signed a full floor at 7001 Burnet Rd as their first non coworking office. Look for more of this in the back half of the year as funding stays strong in the city and companies poised to grow do so at advantageous rates.

Final Buzzer 🚨: Premium, Plug and Play space has never been more accessible for companies that are growing beyond the walls of coworking. The pipeline of startup’s in co-working to their first true office space is alive and well here in Austin as the city continues to prove resilient. It might be some time before vacancy rate really declines, but things are moving in the right direction.

Until next time,

Cory