As we enter the fourth quarter, fundamentals are strong in San Antonio’s industrial market, with direct vacancy tightening and continuing the hot streak it’s been on the past few years.
At the third quarter’s end, the metro’s direct vacancy rate stood at 5.4 percent, down from 6.2 percent during the second quarter and 5.8 percent during 2016.
In fact, that 5.4 percent direct vacancy rate represents a 12-year low. The figure is a far cry from the 9.3 percent direct vacancy registered during the third quarter of 2006 — the last time the market posted a rate above 9 percent.
This d in direct vacancy is particularly noteworthy given that more than 10 million square feet of inventory has been added to the market since that time. The shrinking rate has also coincided with a slight increase in direct average asking rent, which now stands at $5.99 per square foot following a $0.16 quarter-over-quarter increase.
Driving the falling vacancy numbers was an economy that fast-tracked over the summer. The San Antonio Business-Cycle Index increased at its fastest pace since 2016, while the area unemployment rate remained the same and job growth surged. Job growth increased at a 3.6 percent annualized rate during the three months through August. Additionally, the metro’s non-seasonally adjusted unemployment rate remained at 3.7 percent, well below the seasonally adjusted national rate of 4.4 percent and state rate of 4.2 percent.
The star of the industrial sector has been the Northwest submarket, which has cut its direct vacancy rate by more than 50 percent over the past two years, falling from 9.9 percent during the third quarter of 2015 to 4.7 percent today.
The Northwest realized 339,138 square feet of direct positive net absorption during the third quarter of 2017, the submarket’s most productive period for absorption in nearly two years. The direct average asking rent also rose by more than $1.32 per square foot during that stretch.
Not to be outdone, the Northeast submarket has also experienced healthy growth over the past two years, with inventory increasing by nearly 1 million square feet since the third quarter of 2015 and direct vacancy tumbling from 7.8 percent to 6.4 percent. However, despite the decrease in vacancy, the direct average asking rent in the Northeast has held steady at $5.16 per square foot.
Overall, the San Antonio industrial market is robust. But one submarket — Comal — has bucked the trend. The direct vacancy rate in Comal, an area north of Loop 1604, has more than doubled in two years, rising from 4.9 percent to 11.9 percent as nearly 2 million square feet of new product was added.
However, the most recent quarter may have marked a turning point for Comal, as direct positive net absorption of 316,000 square feet helped eliminate a chunk of the empty space. This activity brought the submarket’s vacancy rate down from 14.5 percent to the aforementioned 11.9 percent.
On the investment sales side of the market, our data shows that total sales of major San Antonio industrial properties increased by 293 percent on an annual basis during the first half of 2017.
According to Real Capital Analytics, total transaction volume for that period clocked in around $316.3 million, suggesting that investor interest in this market remains fervent. In addition, industrial properties traded for an average of $66 per square foot — $220 per square foot on the high end, and $54 per square foot on the low side.
On the development front, a 187,000-square-foot building is set to be added to Titan Industrial Park. Following this delivery, the park will consist of seven buildings totaling 1.9 million square feet. The site sits on 125 acres along the San Antonio-Austin corridor, a high-growth area and prime location for industrial operators, next to a warehouse owned by Caterpillar and behind a fulfillment center owned by Amazon.
All told, San Antonio’s development pipeline currently features about 1 million square feet of product under construction, about 25 percent of which is preleased.
Strong fundamentals, as evidenced by the declining direct vacancy rate, combined with low unemployment suggest that this market should continue to exhibit strength as we approach 2018.
By Clare Flesher, managing partner, NAI Partners San Antonio. This article first appeared in the November 2017 issue of Texas Real Estate Business magazine.