Last week, news broke that Google had committed to leasing all 35 floors of an under-construction tower in downtown Austin.
Downtown Austin, TexasGetty
Per the Austin-American Statesman, the tower will be nearly 800,000 square feet and could house up to 5,000 people. Conveniently, and not unintentionally I’m sure, the building will be located right beside Google’s existing office in the city’s core at 500 W. 2nd Street. According to 9to5Google, “this would certainly be one of [Google’s] most expansive offices in North America” once the building is completed in 2022.
The news comes less than two months after Apple announced plans to build a massive new, $1 billion campus in the city, which I wrote about here.
Two tech giants committing in a major way to Austin is significant for the city, which in recent years has seen its tech scene explode. Besides being home to a growing number of startups, nearly all the large tech companies have a presence in Austin, including Facebook, Amazon, Apple, Google, Oracle, IBM and Cisco. And that’s had an impact on the city’s office market.
Google committing to take an entire building in Austin’s Central Business District (CBD) is only going to put more pressure on the city’s already tight, and increasingly expensive, commercial real estate market. Austin’s average asking office rent was $43.67 per square foot in the fourth quarter of 2018, up 17.2% from $37.24 in Q4 2017, according to Chicago-based CRE brokerage firm Jones Lang LaSalle. That figure is even higher in the CBD, which had an average direct asking rent of $59.78 in the fourth quarter, JLL says.
Developers are scrambling to keep up with demand. Construction activity at year-end 2018 was up 30.6% compared to year-end 2017, which has also been a large factor in rental rate growth, notes JLL.
Downtown Austin is “the epicenter of Austin’s tech workforce,” says JLL Austin managing director/office tenant rep lead Russell Young. “This recent announcement [by Google] certainly solidifies this notion.”
Scott Studzinski, a partner at tech-focused commercial real estate firm Elevate Growth Partners, says that companies “taking down entire buildings downtown is a new phenomenon in Austin this development cycle.”
“These buildings were supposed to bring supply-side relief, but now this is putting added pressure on both large and midsize companies to better plan their growth, and perhaps, to grab additional space before they had originally planned,” he adds.
With more mature companies taking up so much prime downtown real estate, Studzinski is finding that smaller tech companies are looking outside the CBD and into the city’s transit corridors.
“These areas are now rich with walkable amenities that now rival the CBD, albeit without the parking and scooter headaches,” he added. “We think this trend will continue.”
Aaron Block, cofounder and managing partner of New York-based early-stage PropTech investment, advisory and startup acceleration firm MetaProp, said Google’s planned expansion in Austin is not a surprise and an example of the city’s process of building a critical mass.
“The city is becoming a magnet for mature tech firms. It’s got human capital associated with great universities, tons of young tech and management talent aggregated in one place,” Block says. “And with its lower cost of living, Austin is increasingly more attractive to mature tech companies than New York and San Francisco.”
The news is also the latest in a string of leases that Google has signed in recent months.
The future New York City Google campus offices located at 315 and 345 Hudson Street, as seen in December 2018. (Photo credit: TIMOTHY A. CLARY/AFP/Getty Images)Getty
In January 2019, the company Google signed a 14-year lease on a 584,000-square-foot former mall in West Los Angeles. Also in January, Google leased 190,000 square feet in One Maritime Plaza at 300 Clay St. in San Francisco, according to brokerage firm Cushman & Wakefield. In November 2018, it took 300,000 square feet at the Landmark at One Market (the former headquarters of Salesforce) in the city. Overall, according to the San Francisco Business Times’ Blanca Torres, Google leased more than half a million square feet in San Francisco in 2018.
Google’s leasing activity is not exclusive to the West Coast and Austin. In December 2018, the company said it would invest $1 billion in leasing a new 1.7 million-square-foot campus on Hudson Street in New York City.
The tech giant in 2018 also made headlines for its purchase of Chelsea Market, a 1.2 million-square-foot building in Manhattan, for about $2.4 billion.