Office Market Outlook – Q4 2022
At the end of 2022, as interest rates climbed and the prediction of a recession loomed, shifting market conditions have resulted in increased vacancy and sublease levels. During this time, many technology companies enacted hiring freezes, and layoffs, and engaged in efforts to reduce their real estate footprint and shed underutilized office space. For instance, tech giant, Meta announced their plans to sublease the 589,000 square feet at Sixth and Guadalupe and eliminate 222 positions in the Austin area. In a report analyzing sublease space on the market, 44.2% of sublease space in Austin has been given back by the tech sector.
Within the office sector, we are also seeing the persistence of remote work, resulting in 15% less office use on a per-employee basis for the foreseeable future. Before the pandemic, when calculating space requirements, you’d need 150-200 square feet per employee. Now, employers are shifting away from that perspective and preferring a more collaborative design with amenities aimed at the return of in-person work. This trend has led to the “flight-to-quality” movement, as many companies are opting for amenity-rich higher quality spaces. As a result of this trend, experts predict the vacancy gap between newer and older offices will widen. Vacancies for office space built in the 2010s continued to fall over the past decade to a low of roughly 7% in the third quarter of 2022, while vacancies in older buildings have continued to rise.
Austin has seen the sixth-highest increase in space up for sublease since the third quarter of 2019 (+201%). As we may fear the obvious surge in sublease space, we should also look at how a slowdown could positively affect our market and where we might see the light at the end of the tunnel. Despite a large amount of sublease availability, there’s still a strong demand for office space in Austin from companies looking to relocate, expand, and renew. There’s a unique opportunity for companies looking to lease space at a competitive rate with shorter lease commitments. Also, amid the fears, Austin employment percentages have shown positive net growth. According to the Bureau of Labor Statistics employment in metro Austin has increased 5.4% year-over-year compared to the nationwide job growth of 3.7% over the same period.
As we head into 2023, we know that it’s hard to predict what the rest of the year holds. But while the region as a whole may not be completely insulated from any challenges, Austin is in a solid position to be able to continue to outperform many other parts of the county. We’re still seeing continued job growth, low unemployment rates, and business relocation demand, which will carry on throughout the year.