Developers look beyond pandemic, protests and see a bright future for the Austin office market

Two weeks ago, as Texas continued its pandemic reopening plan but before mass protests against police violence erupted in downtown Austin, a $275 million deal fell through.

Ryman Hospitality Properties announced May 22 that it would not purchase Block 21, a mixed-use real estate development that includes ACL Live at the Moody Theater and the W Austin, from Stratus Properties, forfeiting a $15 million nonrefundable deposit.

"In the current capital markets and economic environment caused by the COVID-19 pandemic, we have determined that it is not in the best interest of our shareholders to focus our resources and capital on this project at this time," Ryman CEO Colin Reed said in a press release.

In the wake of COVID's arrival in Austin—and after more than a decade of strong sustained growth—the local office real estate market contracted. But experts say that the city is poised to recover, even if office space looks different post-pandemic.

"I think what you'll see in Austin is short-term paralysis as a result of the freeze in the venture market," said Ryan Bohls, a director focused on office tenant representation for NAI Partners' Austin office.

But in the longer term, Bohls believe Austin's strong relationships with what he calls "the four horsemen"—Amazon, Apple, Facebook and Google—will sustain the city's office market, especially as they and other tech companies seek to expand their reach into cities outside of the coastal areas hit harder by the pandemic.

The city's diverse economy—which includes big tech as well as the University of Texas at Austin, Ascension Seton and most recently the U.S. Army—is what helped it rebound after the 2008 recession.

Ben Tolson, a principal for Aquila Commercial, believes that diverse economy will carry the city through this crisis as well. "I just feel very, very positively about how our city's positioned relative, again, to much of the nation," he said.

While data is limited, initial reports indicate that market activity picked up toward the end of May. As more workers return to their offices, companies will likely reevaluate their needs.

Richard Paddock, who oversees HPI's Austin office portfolio, said he is hearing from tenants and companies that most are incorporating a work-from-home strategy into their business plans. But this does not mean office space is obsolete.

Paddock anticipates some companies will downsize, which may reduce the overall occupied square footage across Austin's office market. "But it still yields velocity," he said.

Other companies may realize they want more space, either to accommodate social distancing or because of trends that predate the pandemic.

Research published in the Harvard Business Journal found that denser offices resulted in less meaningful interaction among employees—and therefore less productive collaboration.

Open-floor plans were on their way out before COVID-19, Tolson said, as companies moved to "de-densify" their spaces and improve productivity. "That's going to be accelerated as a result of this," he said.

There was also a trend in Austin toward neighborhoods such as East Austin, Mueller and Parmer Lane, where office space is cheaper, parking easier and commutes shorter. "Austin has a tremendous amount of really well positioned mid-rise [and] low-rise opportunities," Tolson said.

While working from home may outlast the pandemic, Bohls said major employers will continue to use top-tier offices—with prime locations, walkable amenities and perks—as a recruiting tool, "especially for technology companies that use real estate to lure top talent."

And what about the protests downtown?

"The effects of the civic unrest are largely going to be confined to first-floor retail occupiers," Bohls said.