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Urban Renaissance: San Antonio Office Market Gains A New Identity

Construction of Frost Bank Tower, the first Class A office property to be developed in downtown San Antonio in 20-plus years, has major implications for the metro's office market.

Construction of Frost Bank Tower, the first Class A office property to be developed in downtown San Antonio in 20-plus years, has major implications for the metro's office market.

Regional investors have always described San Antonio as a steady market with desirable economic indicators.

But with the impending delivery of a Class AA office tower and a growing tech presence, the city is on the brink of emerging as a national contender for commercial real estate investment.

Historically, San Antonio has posted strong employment figures that have kept it firing on all cylinders and ready for business. The San Antonio-New Braunfels MSA has experienced seven straight years of job growth. The metro’s unemployment rate has dropped 10 basis points quarter-over-quarter to its current level of 3.7 percent, a figure that strongly outperforms the national average of 4.5 percent.

By comparison, the MSA’s 10-year average unemployment rate was 5.5 percent and the nation’s 7 percent.

Leah Gallagher, Transwestern

Leah Gallagher, Transwestern

As new investors analyze the San Antonio office market’s history, they should consider the similarities and differences between San Antonio and other major Texas metros. Assessing the last peak-and-valley metrics from 2007 through 2010 provides insight into how the market reacts to a changing economy.

Vacancy Rate Stabilizes

The vacancy rate for Class A office properties in San Antonio peaked in 2009 at 16.7 percent, while vacancy rates in Austin, Dallas-Fort Worth (DFW) and Houston topped out at 19.4 percent, 18.6 percent and 14.1 percent, respectively.

However, the subsequent rental rate correction in San Antonio was much more severe relative to other metros. San Antonio’s office market experienced a 16 percent reduction in asking rates, compared to the 2- to 4-percent adjustments seen in Houston, DFW and Austin.

This dramatic rate reduction occurred when Class B properties in the CBD experienced 330,000 square feet of negative absorption in 2009 and dropped rates substantially. Absorption of Class A office product in the CBD followed suit during this period.

San Antonio’s vacancy rate has since remained relatively stable, with significantly fewer dramatic peaks and valleys than vacancy trends in Austin or Houston.

Source: Transwestern

Source: Transwestern

One Project, Big Impact

Now, this stable office market is about to experience some very exciting changes that will represent defining moments in its history.

Currently under construction is the first high-rise office building to be developed in downtown San Antonio in 30 years: Frost Bank Tower. Delivery of the 450,000-square-foot building is currently slated for March 2019.

The transformation of San Antonio’s skyline will not be the only change. CBD tenants will need to adjust to a new landlord-friendly market, as many have been paying Class A office rents ranging from $19 to $29 per square foot, full-service gross, for the past decade.

Based on these figures, we expect rates for space at Frost Bank Tower to command at least a 50 percent premium over today’s top Class A rental rates.

Setting a new high-water mark for rental rates will provide CBD landlords the opportunity to draft off of Frost Bank Tower’s rates through capital improvement plans, and allow other landlords to be the value alternative to rate-sensitive tenants that wish to remain in the CBD but are more concerned with occupancy costs.

Although it will be the premier office building in San Antonio, Frost Bank Tower is still considered a traditional office asset. Meanwhile, the demand for open, collaborative and edgy office space — especially from tenants in tech-related industries — is increasing nationwide as workforce trends change.

With San Antonio recently named the fourth-best metro for millennials and some journalists dubbing it “the new Austin,” we expect this pattern to manifest itself throughout the metro.

Future Outlook

During the past four years, one local investor has amassed more than 650,000 square feet of office product in San Antonio’s central core with plans to create working environments that are attractive to many of the firms relocating to San Antonio from Austin and the West Coast.

In addition to this strong relocation activity, San Antonio also offers entrepreneurs opportunities to find incubator space and align with local nonprofits as means of fostering growth.

Companies such as Geekdom, VelocityTX and EpiCenter, which offer coworking spaces and incubation services for startups, have become the face of San Antonio’s dedication to providing entrepreneurs the resources to thrive. Equally important is the fact that the services offered by these firms help retain the highly valuable commodity of human capital within the city.

The urban renaissance in San Antonio is in full swing and CBD office demand is on the rise. Bolstered by strong tourism, the CBD features convenient access to hotels, retail and restaurants.

In addition, the recent delivery of 1,058 multifamily units during the past 12 months — combined with 585 units under construction and 983 units proposed — has the potential to truly transform San Antonio into an 18-hour city.

Looking ahead to 2018, we expect the Alamo City to continue to develop a competitive edge by positioning itself as a vibrant, affordable place to live and work, and as a metro that offers amenities that appeal to different generations.

By Leah Gallagher, San Antonio city leader, Transwestern. This article first appeared in the November 2017 issue of Texas Real Estate Business magazine. 

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