- Revisit 20 years of market performance – more investors flocked to Austin office assets after the crash of ’08;
- Biggest current owners include major dealers in Austin office property and tech moguls;
- Austin’s last office building boom ended in 2002, the same year that marked the beginning of the age of sustainable design;
- Is Silicon Hills’ High-Tech Society Shaping Texas’ Second Mega-Metro?
It’s hardly news anymore that Austin has earned its place on the Silicon map of America, along with Silicon Valley and the Silicon Forest. Being the Texas state capital and home to a major research university, Austin was prime territory for the growth of its bustling tech scene, which is only one of the many innovative faces of the Austin spirit. Whole Foods started in Austin in 1980 with one small store, and now operates over 360 stores worldwide; Keller Williams grew from a single office in Austin in the early 1980s. Tech-related revenue generated for the state of Texas by Austin companies is second only to DFW, and this town is also the “Live Music Capital of the World.” This quintessentially austinite diversity in innovation fueled the city’s impressive growth over the past two decades and may have been key to the office market’s relatively quick recovery following the 2008 financial crash.
Read on to see how the Austin office market weathered the storm, which local office assets commanded the highest prices, who were the most active investors before and after the recession, as well as how big brand names in tech are shaping the region’s future.
20 Years Of Austin Office Investment – 2007 Was Wild, 2015 Was Great
Investment in Austin office property surpassed the $1B mark for the first time in 2007, when sales peaked at $1.6 billion right before the financial crash and recession hit. At the close of 2009, there was nowhere to go but up. The market bottomed out that year, with only $80 million in four sales.
Over the following three years, investment activity picked up significant steam—the Austin office market wrapped up 2012 with just over $741 million in sales, which was a nine-fold increase compared to 2009 numbers. Austin was quick to recover, and totals held above $1B in yearly office sales for five consecutive years after that, from 2013 through 2017.
Upon analyzing the top 10 sales of the decade preceding and of the decade following the financial crash, two things stand out right away: that 2007 was strikingly different from the rest, and that sales trends since the recession show increased investor confidence in the Austin office market.
The largest Austin office sale of the past 20 years was recorded in 2007. A joint venture led by Thomas Properties Group – now Parkway Properties – paid Blackstone’s then recently acquired Equity Office trust $1.15 billion for a 10-property portfolio. The five assets located in the city’s central business district reportedly encompassed over half of Austin’s Class A office space at the time. The portfolio deal accounted for 71% of total Austin office sales that year and was bigger than the other nine transactions in the top 10 sales between 1997 and 2007, combined.
The Austin office market attracted consistently higher investment after the recession. Leaving out the outliers ranking in first place, the average office deal price tag grew from roughly $118 million between 1997 and 2007 to about $226 million from 2008 onward. As the price per square foot steadily increased, more single-asset deals than portfolios climbed among the top 10 office sales in the decade following the financial crisis.
Post-recession, the market peaked in 2015, when yearly office sales reached nearly $2 billion. Two of the sales closed in 2015 rank among the 10 largest office deals of the decade. Accesso Partners, formerly Beacon Investment Properties, a Florida-based company, entered the Austin market with the purchase of Riata Corporate Park in Northwest Austin, followed by the acquisition of the even larger 7700 Parmer, in what remained the biggest transaction of the year. The massive 913,000-square-foot campus was home to high-profile tenants including Google, Oracle, eBay, PayPal, and Polycom at the time of the sale.
Major Dealers In Austin Office Property: Top Buyers, Top Sellers, Biggest Current Owners
Chicago-based Equity Office Properties Trust (EOP) – recently renamed “EQ Office” – bought $486 million worth of Austin office assets between 1997 and 2007, ranking high among the top 10 buyers on the market during that decade. EQ was famously acquired by Blackstone in 2007, after a bidding war with Vornado Property Trust. Blackstone immediately began dismantling the highly coveted office portfolio that had been assembled by EQ. Before the close of 2007, $1.2 billion worth of EQ-owned office assets were sold on the Austin office market, and an additional $300 million-worth were unloaded since. This activity put EQ Office among the top 10 sellers on the market, both before and after the crash of ’08.
The biggest sale among EQ Office’s Austin assets was the 2007 $1.15 billion, 10-property portfolio deal that still ranks above all other price tags in the market’s history. It propelled Institutional pension fund CalSTRS, along with venture partner Thomas Properties Group, in the number one spot of the “top buyers of the decade” list. In subsequent years, assets and ownership stakes in the portfolio changed hands in various combinations. Most notably, Thomas P.G. and CalSTRS bought out the Lehman Brothers stake in 2012, for $859 million. In 2014, Thomas Properties Group merged with – and is now referred to as – Parkway Properties. Neither feature among the top 10 buyers or sellers of Austin property in the past two decades. CalSTRS was the second biggest seller of office investment property during the decade following the financial crash, but still holds enough property to rank as the seventh largest owner of Austin real estate.
Cousins Properties was the second-biggest seller between 1997 and 2007. The two biggest deals closed by Cousins were the sale of two Research Park Plaza buildings for $79 million in 2004, and the sale of Austin’s iconic Frost Bank Tower in 2006, for $188 million— both to EQ Office. According to transactions recorded since 2008, Cousins was the largest buyer of office property in Austin and is currently the third-biggest owner by square footage.
Brandywine Realty Trust currently owns Austin properties encompassing nearly 2.7 million square feet and is the second-biggest owner of Austin office property by square footage. The trust has consistently ranked among the top 10 players on the Austin office market during the past decade; since 2008 it was the fifth-biggest buyer and the number one seller.
Of course, Austin being Austin, the top landlord in town is not a high-profile real estate investment company. Owning over 2.7 million square feet of office space – 2.1 million of which is just its Round Rock headquarters – Dell computer company is number one on that list. Four other names stand out among the top 40 office property owners by square footage in Austin: National Instruments, Apple, Oracle, and Intel.
Austin’s Last Office Building Boom Was In 2001
It’s been 17 years since the city has had a veritable building boom in the office sector. Construction trends going back to 1997 show significantly more activity in the years before the crash than there has been since. Over 16 million square feet of new office space was brought to the Austin market between 1998 and 2002, in properties 50,000 square feet or larger.
Development intensified notably in 1999, when 23 properties comprising just over 3.6 million square feet of space were delivered—a 146% increase compared to the year before. Austin developers upped their game in 2000, delivering 20 new properties totaling over 3.7 million square feet of new space to the market. 2001 marked the end of Austin’s last office building boom with a bang: 34 new office properties encompassing nearly 6 million square feet were completed that year.
Office development hit the brakes after those three intense years, and the market has not seen yearly additions of that level since. That is not to say the market has not fared well. Records show construction cycles have held relatively steady since 2002, with the office pipeline averaging roughly 1.3 million square feet of deliveries per year.
91% Of New Austin Office Space Is Green
The benefits of sustainable building have not been lost on local developers, tenants, or investors, in recent years. Though not much can be said for the few projects completed from 2011 to 2013, the past five years have seen significant improvement. Of the 9.6 million square feet of new office space completed in Austin since 2014, more than half is LEED certified, proposed for LEED certification, has an EPA Energy Star rating, or was awarded a different type of established green label.
Roughly 75% of space brought to market in 2016 was green, followed by 65% of office completions in 2017. Nearly 1.8 million square feet of new office space was already delivered in Austin since the start of this year, 1.6 million of which is green. In fact, 91% of new office space completed this year is considered sustainable. Since 2004, Austin has boasted a LEED Gold-certified city hall building, has had its own green building rating system for over 20 years, and continues to demonstrate strong commitment to responsible and sustainable design by favoring buildings that are healthy, safe, that reduce the urban heat island effect, make efficient use of energy and water, and protect water quality.
Is Silicon Hills’ High-Tech Society Shaping Texas’ Second Mega-Metro?
State demographers expect that by 2030 the Austin – San Antonio corridor will have densified sufficiently to begin morphing into the state’s second mega-metro. Combining Austin’s technology talent factory with San Antonio’s bustling military, biosciences and healthcare industries will likely result in a regional economy that will be hard to match. Austin is also one of the country’s fastest-growing metros, welcoming roughly 150 new people every day. Though current housing construction does not quite keep up with demand, Austin ranks third in the country for amount of vacant land in the urban core, so there is plenty of room to adjust. Forbes noted in 2009 how the region’s business-friendly economic environment, its attractive urban area, affordability and livability – just to name a few advantages – make the metro virtually recession-proof. The article also quoted a Brookings report which found that Austin saw a 34% overall job growth from 1998 through 2006.
Jobs in tech sectors still abound—in fact, 12 of the 25 biggest employers in Austin are technology companies. Dell is the city’s biggest private employer, surpassed only by the Austin Independent School District and the City of Austin itself. IBM’s Austin operations are the second-largest tech employer in town, followed by Amazon, Apple, AT&T operations – the company is headquartered in neighboring San Antonio – as well as the global corporation National Instruments, which is headquartered in Austin.
According to BLS data, 20,000 new jobs were created in the tech sector in Austin from 2007 to 2017 in computer and mathematical occupations alone, marking a 50% increase over 10 years. At the same time, the city-proper population grew from 756,000 to 950,000. Based on current growth trends, the tech labor pool will increase by another 46% through 2028, with the overall population estimated to reach at least 2 million across the metro.
Our study on the evolution of the Austin office market over the past 20 years was compiled starting from Yardi Matrix data. We analyzed Austin sales recorded up until October 10th, 2018, in which completed office properties at least 50,000 square feet in size traded for a minimum of $5 million per transaction. In the case of mixed-use office buildings, we only considered data regarding properties that are at least 50% office space. Distressed sales were not included. Portfolio deals were counted as a single transaction, and we only factored in portfolios that include properties located within the Austin market. Yearly sales volume totals include ownership stake, controlling interest and remaining interest deals, depending on the case.
For 2014 to 2018 construction totals, we looked at properties that are at least 50,000 square feet in size, encompass at least 50% office space, and were completed within the Austin office market up to October 10th, 2018. The green office space shown includes properties that are both certified and proposed for green certification (LEED, EnergyStar, and other certifications). “Green Share SqFt” represents the share of green square footage out of the total square footage of new properties built each year.
Data on employment growth was based on BLS information regarding “Computer and Mathematical Occupations” (BLS group code: OCC_CODE: 15-0000). Tech Employment forecast through 2028 was calculated using Microsoft Excel’s forecast function. Forecast function definition: The FORECAST(x, known_y’s,known_x’s) function returns the predicted value of the dependent variable (represented in the data by known_y’s) for the specific value, x, of the independent variable (represented in the data by known_x’s) by using a best fit (least squares) linear regression to predict y values from x values. In our case the known y’s= 2007-2017 yearly values & known_x’s = yearly number of employees in the ‘Computer and Mathematical Occupations’ sector. Based on the known values, we can forecast the future x values based on linear regression, but this, of course, assumes that future growth will be fairly similar to past growth.