Office slowdown sparks new downtown housing ambitions

Downtown Austin leaders are increasingly focused on residential development as a way to stabilize the city’s core, as office vacancy rates remain stubbornly high and some buildings struggle to find tenants at all.

With more than one-fifth of downtown office space currently sitting vacant or available for near-term leases (and some estimates placing that number closer to 26 percent citywide), the Downtown Austin Alliance is turning its attention to underused parcels that could support a greater mix of uses, especially housing.

Jenell Moffett, senior vice president of economic development, marketing and strategic communications for DAA told the Austin Monitor that some pockets of the central city where housing could gain traction include sites along East Fifth Street, the HealthSouth property at 15th and Red River, and parts of the Congress Avenue corridor north of the Capitol.

That shift in focus reflects a broader question about the long-term viability of downtowns that are built largely around traditional office culture. While new towers like The Republic and Waterline continue to deliver, leasing activity has not kept pace. And as some companies shrink their office footprints or sublease space they haven’t even moved into, downtown stakeholders are left searching for a more balanced formula to keep the area economically vibrant.

“What we can say is that downtown most definitely needs an increase in residential population,” Moffett said. “If we are going to support a vibrant retail corridor, if we are going to have a diversity of shops and goods and services, you need a residential population to sort of support that type of economy. Our residential concentration downtown is more around the Rainey District area, around Second Street… not all across downtown.”

Austin’s overall office vacancy rate reached 26 percent in the second quarter of 2025, according to data from Yardi Matrix. That figure places Austin among the most-vacant major office markets in the country, trailing only San Francisco and Houston in the rankings. Downtown is feeling that pressure acutely, particularly in newer, high-end buildings where trophy-class vacancies now hover near 30 percent.

Despite the stark headline number, the picture on the ground is more complex. Internal tracking by the Downtown Austin Alliance places the core’s overall vacancy rate closer to 22 percent, with significant variation based on building type and location. While new construction has outpaced absorption in recent years, leasing activity has not stopped entirely. Some firms are relocating within downtown, opting for smaller footprints or trading up for newer buildings with more advanced infrastructure, outdoor spaces and employee-focused amenities.

The imbalance has more to do with oversupply than a collapse in demand. Developers created millions of square feet of premium office space over the past three years, betting on continued tech growth and the return of in-person work. But return-to-office trends have plateaued, and many companies remain cautious about signing long-term leases, especially as interest rates and operating costs rise.

Meanwhile, nearly 2.7 million square feet of additional office space remains under construction or in the development pipeline, according to data from Franklin Street’s Q1 2025 market report. Without a major uptick in tenant demand, much of that space could remain empty well into 2026, putting downward pressure on rents and further complicating the economics of downtown development.

“Tech hiring has slowed down materially over the past 24 to 36 months and the pipeline of construction was already so robust over the past few years that you find yourself in a position where leasing velocity is down while deliveries of new space is up materially,” said Alex Taghi, Franklin Street’s senior director and occupier services lead for Austin. “You get to a situation where vacancy skyrockets.”

Data shows Austin’s office market has become increasingly polarized, with sharp contrasts between premium “trophy” properties and older buildings. While newly delivered and amenity-heavy towers continue to attract tenants and maintain elevated asking rents, many aging buildings are slipping into what analysts refer to as “structural vacancy”—a long-term condition where space remains persistently unleased, regardless of broader market cycles.

Data from the Downtown Austin Alliance shows trophy office vacancy approaching 30 percent, even as those buildings remain the most competitive in terms of features, location, and visibility. At the same time, older inventory often lacks the design, technology and flexibility that post-pandemic tenants now demand, such as open-air amenities, collaborative workspaces and energy-efficient systems. Without significant reinvestment, much of this stock risks becoming economically obsolete.

Retrofitting these legacy buildings for new uses — whether as residential conversions or updated office space — poses steep financial and regulatory hurdles. Construction costs remain elevated, and the physical configuration of many office properties, particularly their deep floor plates and rigid mechanical systems, make conversion technically complex and cost-prohibitive. Absent strong public-private collaboration or targeted incentives, few owners are pursuing large-scale redevelopment in the urban core.

Meanwhile, suburban submarkets like Northwest Austin are seeing a different dynamic. According to analysis from both Franklin Street and ECR, lower price points and more adaptable floor plans in these areas are drawing renewed attention from opportunistic buyers and tenants seeking value. Some investors are actively repositioning older suburban office buildings for modern use, often with lighter capital outlays compared to downtown redevelopment projects.

Cory Camp, research analyst for ECR, said the presence of “real amenities” has become a defining factor in a company’s decision to lease downtown space. Tenants are no longer swayed by aesthetics alone, and want tangible features to enhance employee experience and productivity. Those include rooftop terraces, on-site fitness centers, collaborative lounges, flexible conference areas, and access to outdoor green space, which are now baseline expectations, not premium perks.

Camp said employers want environments that help entice workers back into the office, especially as hybrid arrangements remain the norm. In Austin’s downtown core, buildings that deliver these types of lifestyle-forward amenities are outperforming less-equipped competitors, reinforcing the divide between new trophy assets and aging inventory that lacks the infrastructure to support modern tenant demands.

“On the landlord side what that looks like is creating common-use amenities that actually are used versus amenities that just kind of are a waste of space and an extra add-on factor that no one wants to actually pay for,” he said. “If you look at some of the newer construction buildings around town there’s this emphasis on hospitality.”

Despite interest in shifting downtown toward becoming a more residentially-balanced district, large-scale office-to-residential conversions remain rare. The barriers are formidable: high land costs make acquisition expensive, many office buildings are poorly-suited for residential retrofits due to structural design, and financial incentives to encourage such transitions are limited or nonexistent. For now, most downtown property owners remain focused on securing commercial tenants rather than fundamentally altering building use.

Looking toward the residential push, Moffett noted roughly one-third of downtown land is publicly owned. She said public parcels could become pilots for affordable housing projects or mixed-use developments to address gaps in the housing market.

“Those probably give us the best opportunity to build something new and different and to be able to attract that different demographic that might need a different price point,” she said, noting the need to work with the city and Travis County on creating partnerships for public land. “We need critical mass to make the retail work. And so some of those vacant areas or those areas that could benefit from a retail mix or just retail in general to bring people down, they need the, the residential population to sort of support that. That conversation will come back to the table.”

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Posted In: Housing, District 9