San Antonio’s multifamily market has historically been exempt from the fluctuations typical of other Texas cities. While San Antonio has had its share of new deliveries over the years, the multifamily stock has not increased in step with its Texas contemporaries. The traditional engines of the city– hospitality, health care and the military–provide a rock-solid foundation, but do not offer the types of high-paying wages that drive rent growth and new construction. New construction has also been inhibited by a lack of institutional capital flowing to San Antonio because it was perceived as a “low growth” market.
Things, however, are changing. Job growth in industries such as energy, manufacturing, and the financial sector are drawing families to the region like never before, just as long-time San Antonio organizations such as USAA, the Medical Center and the University of Texas—San Antonio (UTSA) continue to expand. As a result of new jobs and a nationwide regression of home ownership rates to more historic levels, San Antonio’s multifamily market is seeing a rapid increase in demand. Developers, both local and national, have begun planning new developments… As of August 2012, San Antonio multifamily properties boast an overall occupancy rate of 92.9 percent. As new units become available, the marketplace swiftly absorbs them: in the past 12 months, the market absorbed 3,048 of 3,338 delivered rental units. With such growth and economic diversification, San Antonio is positioning itself to compete with Texas’ other primary markets for the investment dollars of institutional capital.
Job growth is the most powerful force behind San Antonio’s multifamily growth. The U.S. military has long been one of the region’s largest employers, and San Antonio has been a beneficiary of Base Realignment and Closure (BRAC) activity, which consolidated bases and brought jobs from other military installations to San Antonio. San Antonio is also reaping the rewards of broader regional economic growth, namely the Eagle Ford shale formation to the south. According to a study by the UTSA Institute for Economic Development, drilling at Eagle Ford created about 48,000 jobs in South Texas in 2011 alone. The venture has been a $25 billion boon for Texas, with much of that benefitting nearby San Antonio. This upstream activity is causing downstream activity as well, and the region is attracting a number of young new residents seeking jobs in the growing energy sector. The average age of San Antonio’s population is about 33.7, providing a robust base of families and individuals seeking affordable housing.
Because of this positive regional economic outlook, the health care sector is experiencing high rates of growth. According to the San Antonio Economic Development Foundation, one in six workers in San Antonio is employed in the bioscience and health care industry, and the sector has added approximately 33,000 new jobs over the past decade. As a result of economic diversification, San Antonio boasts Texas’ highest job growth rate and lowest unemployment rate, with job growth expected to hold steady at 3.4 percent through 2015. UTSA’s aggressive expansion program is also driving up the number of students seeking housing in the San Antonio area. Traditionally a commuter school, UTSA is now positioning itself as an in-residence school, with 30,000 students and 125 undergraduate and graduate programs. The school is in the process of adding 15 new graduate-level programs, and has pursued several major construction initiatives to expand their athletic, research and library facilities over the past eight years. Texas A&M has also broadened its footprint in the San Antonio area, establishing its San Antonio campus as a standalone university in 2009.
Approximately seven thousand rental units are under construction in Greater San Antonio. Developers have multiple financing options to choose from, with local, regional and national banks vying to put their money to work at leverage points of 65 to 75 percent of costs. The money is inexpensive compared to historical levels, with loan pricing starting at 2.50 percent over 30 day LIBOR. A lack of equity to fund the remaining costs prevents a rush to overbuilding. Equity investors that feel they have missed the boat on the first wave of construction remain selective in financing future deals.
With job growth looking promising in the coming years, and with the further entrenchment of the major economic drivers in the region, institutional investors have begun to view San Antonio as a more lucrative multifamily market. Pension fund and endowment managers who once viewed San Antonio’s commercial real estate market as a lower yielding market have taken notice and are making investments. The economic developments in the area—and the return on investment on San Antonio multifamily properties—continue to look promising.
— By Brant Smith, Andy Hill, Matt Greer, and Michael Levell, Berkadia Commercial Mortgage