Impacted by excess deliveries and slower absorption.

by admin

While the San Antonio office market has not been as directly impacted by the national economic slowdown as other markets, it is being impacted by excess deliveries and slower absorption overall. This has led to slightly lower effective rents and a rise in vacancy rates. Previously stable markets, in general, are holding level occupancies; however, there are several pockets where the vacancy rate exceeds 20 to 30 percent. This is primarily a result of newly constructed space that is not being absorbed, rather than tenants moving out of existing office space. Many would anticipate a larger reduction in rents with the current vacancy levels, but rents have not declined to the extent one would expect in a down market, as newer buildings continue to market their space at higher rents and existing stable building owners have declined to reduce rates to any significant degree.

Two transactions in particular have impacted the San Antonio market in a very positive fashion. The sale of the 150,000-square-foot 300 Concord Plaza, Tesoro’s old headquarters, to Whataburger, which is relocating its home office to San Antonio from Corpus Christi, is worth noting. This transaction subdued concerns of the impact this vacancy would have had on the North Central submarket and brought good news with the relocation of approximately 250 jobs to San Antonio. The second transaction of significance was the leasing of the Overlook at the Rim, a 148,500-square-foot, Class A office project, to Medtronics, which dramatically reduced the vacancy level of the far Northwest submarket and brings roughly 1,400 jobs to San Antonio.

There are a number of businesses circling the San Antonio office market, but no additional companies have made a firm commitment to date. Of interest is the number of inquiries from companies in California, who are attracted to the overall growth and stability of the San Antonio market and who are considering relocating to Texas. Part of their attraction comes from the area’s lower taxes, central time zone, stable and less expensive energy, low cost of doing business, Southern climate, inexpensive land and pro growth government.

Development activity in the San Antonio office market has transitioned from a state of active growth to a holding pattern. While planned projects have been put on hold, there are a few developments where construction had already commenced and, hence, construction continues.

The delivery of Tesoro’s new corporate headquarters, RidgeWood Park, a 2-million-square-foot, master-planned office park, is also impacing the local market. It will become a beacon for new or expanding companies attracted to the Far North Central submarket and provide Tesoro with significant growth opportunities. Across town, the office space of Eilan, a 120-acre mixed-use development in the Far Northwest, will have a substantial effect depending on how long it will take for the added space to be absorbed. If absorption occurs at a slow pace, it will certainly add to the high vacancy levels already in that area as a result of recent deliveries.

As far as overall growth and development, San Antonio’s Far North Central office submarket has been and will continue to be the hotspot for the next few years. This is primarily due to the amount of higher valued residential space in the area and the growth of a new hospital district. The Far Northwest submarket, however, is not far behind in overall activity and its long-term potential remains very good. It will need to increase the number and density of higher valued housing in order to drive the growth of services. Additionally, the Far West submarket should not be discounted, as it is attracting data centers and large corporate users more than any other area in town. Long term, this will become the hot spot for growth in San Antonio.

The market appears to be stabilizing for occupier users. Capital is being made available to these users primarily through the Small Business Administration for expansions and acquisitions of properties for their business uses. The liquidity of the market and turnover of money is the largest concern. As lenders continue to tighten the qualifying criteria for investment borrowers, less investment sales are taking place. The lack of “arms length” transactions done under a normal business environment, coupled with the sale of troubled or distressed assets, shows a much larger decline in values than may actually be transpiring. With the lack of a clear ‘bottom” to the market values will continue to be negatively impacted. We are turning the corner on more positive growth, but not on a dime, and while San Antonio will fair better than most markets, we still have some work and smart planning to do.

— Ernest Brown is executive vice president and managing director of Grubb & Ellis Company’s San Antonio office.

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