While the San Antonio area has not been immune to the effects of the economic slowdown, the city’s location, business-friendly atmosphere, strong labor force and low cost of living continue to create a thriving environment for warehousing, logistics and manufacturing companies. One of those companies, Caterpillar Inc., recently completed the construction on the 260,000-square-foot first phase of its manufacturing facility in Schertz that will supply components to the company’s assembly plant in nearby Seguin. Also in Schertz, Sysco Corporation is close to completing a 635,000-square-foot distribution facility in an effort to consolidate and expand its operations in Central Texas. These and other new additions continue to make local headlines, but what really had the industrial market buzzing during most of the first half of 2011 was the activity generated by the Eagle Ford Shale oil and gas play.
As with many south and central Texas markets, industrial activity in San Antonio’s MSA has been positively affected by the Eagle Ford Shale, a 24-county oil and gas play stretching from the Texas-Mexico border to well east of San Antonio. With its central location along the northern edge of the Eagle Ford Shale, San Antonio has attracted the attention of major energy industry firms, that have acquired space for regional offices and warehouses, along with nearly 600 acres of land in the area. Three of these companies, Halliburton Co., Weatherford International Inc., and Baker Hughes have recently made major land purchases in and around South Bexar County. With activity surrounding the Eagle Ford Shale expected to continue and local officials further positioning San Antonio as a new energy hub, the second half of 2011 should provide a fertile environment for additional energy related growth in 2012.
Through the past quarter, we have seen overall industrial activity increasing at an accelerating rate. The primary cause for this uptick seems to be a host of encouraging economic trends reported on both a local and national level. The recent surge of tenants appears to be from companies that had been sidelined and cautious since mid last year. They needed more space but were hesitant to pull the trigger in an uncertain economy. It seems that businesses have a better sense for where the economy is and where it is headed, and they are starting to move while the market is still in their favor.
On the investment side, sale velocity has also seen a steady increase over the past year. Investors that had been on the fence during the recession are starting to jump back into the market with both feet. We have seen a healthy mix of institutional buyers, private investors and users all becoming more active. There has even been a hint of 1031 exchange funds coming back into the market. Investors are taking notice of San Antonio’s resilience through the recent downturn and are looking at local opportunities with more confidence than before.
Developers are also beginning to cast their vote of confidence in the city. New industrial development in the San Antonio MSA had been stagnant for much of the past 2 years, with no major speculative projects in the pipeline. Two primary barriers had halted new development in the city. First, there have been several large blocks of space given back to the open market due to tenant relocation, consolidation and movement into owner-occupied spaces. This has created an increase in the supply side of the equation that is not favorable to new development. Second, there has been a wide gap between market rental rates and rates needed to justify the cost of new construction partly due to the increase in available space. While rates are climbing back up to a more stabilized level, the depressed rent levels and concessions we had seen into early 2011 were significant challenges to developers’underwriting. As the concessions continue to decrease and rates continue to climb, the expectation is that developers will start easing back into the market as the year progresses. In fact, announcements are already beginning to trickle in from established industrial owners in the market regarding new development plans, with a couple of projects already under construction.
As activity levels continue to rise in the industrial arena and vacancies continue to be absorbed, the outlook for San Antonio’s continued growth and prosperity look very optimistic as we move into the end of 2011 and look forward to 2012.
— Rob Burlingame, CCIM, is a senior associate with CB Richard Ellis, Inc.