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Strong job and household growth across the San Antonio metro will boost demand for apartments this year, tightening vacancy and pushing rents higher. Apartment developers are preparing to build more units in the upcoming quarters thanks to the formation of new households throughout the metro. However, the development of new rental housing will not jeopardize the operations of existing properties and will keep the investors very active in the coming months.
Job creation in the metro is supported by the Eagle Ford Shale, the primary driver of a booming oil industry in South Texas. Exploration and extraction are creating thousands of jobs and bringing billions of dollars to Bexar County. Overall, the economic impact of the Eagle Ford Shale will continue to increase as Kinder Morgan expands its crude and condensate pipeline 31 miles into Karnes County. In addition, plans call for a 400-acre rail park in the South submarket to meet heightened demand for rail-based logistics and warehousing related to Eagle Ford Shale oil production.
As employment opportunities grow, the metro’s population will grow 2 percent by the end of 2013, two times the U.S. population growth rate. Of the roughly 46,000 new residents projected this year, approximately one-quarter will be in the prime renter-age cohort of ages 20 to 34 years.
Firing on All Cylinders
The projected growth has spurred developers to accelerate apartment construction in the market. An estimated 4,000 units will come online in 2013, which reflects a 33 percent increase from the number of units completed in 2012. While the accelerated growth in the northern areas of the metro will attract the most new units this year, development is also increasing downtown.
Along the Broadway corridor, the urban infill story continues to unfold. Apartments underway or planned in the area are geared toward the growing pool of young professionals interested in a live-work-play lifestyle. To date, new projects such as 1221 Broadway, the Vistana and Cevallos Lofts have reportedly had no problem attracting renters, likely due in part to spillover demand from the Pearl community.
Also within the Broadway corridor, grocery stores and other new retail properties will further enhance the area’s appeal in the short term, potentially attracting additional residents. The introduction of new high-end apartments and an influx of educated residents will underpin city officials’ efforts to lure companies downtown.
Year-to-date, significant new renter demand in the market has more than offset an increase in deliveries. At the end of the second quarter, the vacancy rate was 6.4 percent, which reflects a 70-basis point reduction from the end of 2012. Further improvement is anticipated over the balance of 2013, with vacancy forecast to close the year at 5.5 percent.
Meanwhile, elevated demand in the metro supported a 1.8 percent increase in effective rents during the first half of the year. By year-end, further tightening will push effective rents up 2.7 percent over the rate at the end of 2012, pushing the metro-wide average to $833 per month.
While the Iron’s Hot
As property operations improve, investor confidence in San Antonio is rising. Transaction velocity slowed in the first quarter as concerns about the fiscal cliff put a drag on purchasing activity, but deal flow has since accelerated. Rising interest rates may drive some investors to re-evaluate underwriting and force minor re-pricings of deals, but transactions involving local investors — particularly those with substantial cash down payments — should be largely unaffected.
Many investors in San Antonio are targeting value-add, vintage 1980s properties for their upside potential, though demand has intensified across all asset classes thanks to the metro’s strong economic prospects. The median price of properties sold over the last 12 months in the metro area jumped 15 percent, to approximately $58,000 per unit.
Cap rates averaged 7 percent during the same period, but vary significantly by property quality, location and performance. On average, Class A properties trade in the mid- to high-5 percent range, while first-year yields on Class B assets hover around 6 percent.
San Antonio’s position as the commercial center of the vibrant Eagle Ford Shale region will continue to support strong demand for rental housing. The prospect of overbuilding remains a possibility, but projected household formation and the completion of new multifamily units have been well aligned to date.
Combined with the metro’s other strong intrinsic demand drivers, the apartment sector will remain on an upswing for the next several years.
— Moses Siller, senior associate, Marcus & Millichap National Multi-Housing Group