Minimal New Development Spurs Investment in San Antonio Retail
Sterling Organization sold Grandview Shopping Center in San Antonio for $21.9 million after acquiring it in 2012 for $11.1 million. These kinds of deals represent the thriving investment market for the metro's stabilized retail properties.
As the real estate world addresses the uncertain future of brick-and-mortar shopping, the market for retail investment in San Antonio remains strong.
The recent bankruptcies of physical merchandisers such as Toy “R” Us, Radio Shack, Rue 21 and Payless Shoes — to name but a few — have proven that retailers must adapt their strategies to an ever-changing environment.
In San Antonio, however, a historically low volume of new retail development and decreasing vacancy rates, combined with strong fundamentals, have attracted and secured more retail investors than ever before.
San Antonio’s thriving economy is supported by steady job growth — 25,000 jobs have thus far been added in 2017, according to the City Employment Statistics survey. The Bureau of Labor Statistics put San Antonio’s unemployment rate at 3.7 percent as of August 2017, versus the national average of 4.5 percent.
Often referred to as Military City, USA, San Antonio is home to Joint Base San Antonio, which includes Fort Sam Houston, Lackland Air Force Base and Randolph Air Force Base. These military installations alone employ roughly 90,000 people and have an estimated $27 billion impact on the local economy.
These statistics, coupled with the market’s steady job and population growth, have continued to attract a wide variety of retail investors from across the country.
Dearth of Development
A slowdown in retail development is also coming into play. Since 1982, San Antonio has seen an average of 2.25 million square feet in annual retail deliveries, according to CoStar. The city delivered 4.6 million square feet in 2007 and 2008, but scaled back development to an annual average of 1.5 million square feet of deliveries from 2009 to 2016.
However, just 600,000 square feet of new retail space has been delivered in 2017. If this pace of development continues through the fourth quarter, the city will have its lowest rate of new retail construction since 1992. Projected deliveries for 2018 are estimated to be even lower.
Notable deliveries include Shaenfield Ranch Crossing, a 42,000-square-foot shopping center located along the northwest stretch of N. Loop 1604, and two H-E-B grocery stores, one at the intersection of Loop 1604 and Bulverde Road and the other on Alamo Ranch Parkway.
Due to the uncertainty surrounding traditional brick-and-mortar retail, the city has seen less big box development on a speculative basis, making the majority of new retail projects service-oriented neighborhood shopping centers or owner-user buildings. The decline in development also enabled retail tenants to absorb the exorbitant amount of space that was delivered before the recession and eat away at the existing vacancy.
San Antonio’s average retail vacancy rate from 2005 to 2012 was 7.2 percent. As the city recovered from the recession, vacancy rates continued to drop. Retail vacancy now stands at a healthy 4.6 percent, compared to the current national average of 5.1 percent. With the limited amount of available space and declining volumes of new development in the pipeline, future vacancy rates are expected to drop even more. Rental rates, in turn, are expected to increase.
For all of these reasons, the San Antonio retail market is currently attracting investors in record numbers. The average annual sales volume in San Antonio between 2005 to 2010 was approximately $80 million. This average volume increased to $226 million per year from 2011 to 2016. Last year in particular turned out to be a record-setting year for San Antonio, with the metro posting a total volume of retail sales of approximately $338 million.
There were a few notable transactions that boosted the volume in 2016, including Blackstone’s $123 million acquisition of Rio Can’s shopping center portfolio, which included Alamo Ranch, Ingram Hills Shopping Center and Arbor Park Shopping Center. This transaction, along with Sterling Organization’s $80 million purchase of Park North Shopping Center, accounted for about 60 percent of the total sales volume citywide.
2017 looks to be another strong year for retail investment, with $154 million in sales through the third quarter. The fourth quarter has gotten off to a strong start as well, with Mimco Inc.’s purchase of City Base Landing from Prudential, a deal valued at $41 million by Bexar County.
This year has been highlighted by the sale of three large grocery-anchored centers: Blackstone’s purchase of Lincoln Heights Shopping Center from Alecta (approximately $74 million); Component Capital’s purchase of Lone Oak Shopping Center from RPD Capital (valued at $8.8 million by Bexar County); and Sterling Organization’s sale of Grandview Shopping Center (approximately $21 million) to a private investor.
To recap, the outlook for the San Antonio retail market is promising. With the decline of new retail development and the already-low vacancy rates, San Antonio retail rents are expected to increase, thereby increasing investors’ returns.
Consequently, as the metro capitalizes on these features while continuing to add more jobs and people, demand for retail properties will likely continue to strengthen, driving the value of San Antonio’s shopping centers higher.
By Bradley Suttle, director, San Antonio Commercial Advisors. This article first appeared in the November 2017 issue of Texas Real Estate Business magazine.