J. Michael Watson, Vice President and Regional Manager, Marcus & Millichap
Positive economic indicators in the San Antonio metro area are bolstering commercial real estate operations. Companies are expanding or relocating to San Antonio, attracted by the diverse economy and skilled workforce.
Over the past year, all major employment sectors contributed to job gains. San Antonio recovered all of the jobs lost during the recession some time ago and there is no sign of slowing down. One of the strongest economic contributors is the extraction of oil and natural gas in the Eagle Ford Shale south of San Antonio, which generates thousands of jobs and billions of dollars in output.
Heightened production in shale is boosting construction. Recently, Republic Midstream announced a $400 million pipeline and terminal system at Eagle Ford Shale. Additionally, the expanding government sector is fueling job growth due in part to the region’s extensive military operations.
As employment prospects grow and a comparatively low cost of living draws new residents to San Antonio, demand for rental housing is strengthening. With single-family home prices on the rise, the renter pool is growing as the gap between owning and renting widens.
Effect on Multifamily Sector
Capitalizing on these trends during 2014, multifamily developers will deliver one of the largest additions to inventory in several years. New apartments will be heavily concentrated in the urban core and the outer suburbs of the metro area near established employment hubs.
Despite a rise in completions, a drop in multifamily permit issuance indicates a slowdown in future deliveries. In the near term, supply will outpace demand for apartments, resulting in higher vacancy and modest rent growth through the remainder of the year.
Though the booming economy and rent growth are attracting buyers to the San Antonio apartment market, investors are becoming somewhat cautious of overbuilding.
Despite the flattening of deal flow following several periods of steady growth, transactions nonetheless remain elevated because of increased access to acquisition financing.
Asset prices are also rising, which will encourage owners to bring their properties to market. The potential of rising interest rates, as well as the likelihood that some lenders will eventually fulfill their allocations to the multifamily sector, will motivate buyers and sellers in the coming months.
Retail Prepped for Expansion
A rise in new jobs and strong household formation are contributing to retail sales growth and driving space demand. Retailers are following rooftops and filling vacancies near developing residential communities, particularly in northern San Antonio. Though completions will increase this year, new inventory will remain below pre-recession levels and more than 90 percent of space is pre-leased.
Walmart is one retailer that has expanded rapidly over the last several years in this market and will attract additional tenants looking to locate within an anchored shopping center. Healthy net absorption will outpace the rise in completions, further tightening metro-wide retail vacancy.
Though improving fundamentals are sustaining investor interest in retail assets, a gap between seller and buyer expectations exists, hampering a significant boost in sales activity. The majority of listings consist of quality assets in prime locations, while buyers are scouring the market for value-add opportunities that provide higher returns. Single-tenant assets with lengthy lease commitments garner strong interest from out-of-state buyers seeking safety plays.
The economic growth in this market is also relieving pressure from office property operators as leases are renewed and space is filled by the growing employment base. As a result, office vacancy is at its lowest level in five years.
In the Class A office sector, vacancy has tumbled more than 650 basis points since the most recent peak in the first quarter of 2012. During the span, several submarkets in the northern region of the metro have posted improvement above 600 basis points.
Growing demand has spurred development in northern San Antonio. The first phase of WestRidge at La Cantera broke ground early this year and is fully leased. Three other Class A buildings are planned for the office park, and over several years of development they will total more than 500,000 square feet.
New Projects Underway
Several other large developments larger than 100,000 square feet are underway in the area. Heavily pre-leased new inventory and strong absorption will pull down metro-wide vacancy and encourage operators to lift asking rents in the months ahead.
Demand for office assets in the San Antonio market will strengthen through the end of the year as property operations advance. Local buyers dominate the market, with many of these investors seeking value-add properties in key employment hubs, though these listings are a challenge to find as fundamentals improve. Buyers in search of value-add deals may find more opportunities in medical office assets near major medical facilities.
Rising employment, household formation and strong retail sales are supporting strengthening fundamentals for commercial property types. Rising demand is trimming vacancy and motivating developers to ramp up production. Demand will outpace completions in the office and retail sector, but a slight oversupply in the multifamily segment will push up vacancy in the short term.
An optimistic outlook is sustaining heightened buyer interest in the San Antonio real estate market. Buyer demand is outpacing a limited amount of for-sale inventory, boosting competition for assets and lifting property values.
— By J. Michael Watson, Vice President and Regional Manager, Marcus & Millichap. This article first appeared in the October 2014 issue of Texas Real Estate Business magazine.