Institutional Capital Doubles Down on San Antonio Industrial Market

For many years, San Antonio’s industrial sector was considered, at best, a lower-tiered secondary market for investment of institutional capital. But over the last 18 to 24 months, this market has seen a major increase in the amount of institutional funds competing for placement.

According to the latest research from JLL, during the last 24 months, institutional buyers have acquired approximately 11 million square feet of industrial real estate in San Antonio. This investment activity translates to more than $700 million in value, inclusive of entity-level transactions. These figures represent nearly a 200 percent increase in the annual volume of sales in San Antonio compared to the previous 24-month period.

Dustin Volz, JLL

The investor pool runs the gamut in terms of where buyers are headquartered. Property owners are fielding demand from institutional capital sources located all over the country, including international capital sources, as investors continue to chase better yield within the red-hot sector that is industrial.

Supply of high-quality product has struggled to keep pace with the growth of institutional demand, mainly because the influx of capital has been so strong in such a short period of time. But the market is still seeing steady growth in the development and absorption of new space, primarily for distribution purposes as third-party logistics providers (3PLs) recognize the market’s viability for regional and statewide distribution of goods.

Strong Fundamentals

Population growth has been the biggest facilitator of new industrial construction in San Antonio, and in turn, the elevated demand for that product from institutional buyers.

Roger Hill, JLL

After being recognized as the fastest-growing city in the country in terms of residents added daily in 2017, San Antonio’s metro area now boasts a population of almost 2.2 million people. San Antonio is now the second-most populous city in Texas behind Houston — assuming Dallas and Fort Worth are measured separately — and the seventh-most populous in the Southern United States.

In addition, the overall size of the industrial market — which currently clocks in somewhere between 45 and 50 million square feet — remains tame compared to those of DFW and Houston. But the relatively unsaturated ratio of square footage to the total population base is encouraging to developers, who still see tremendous potential for more distribution activity along the Interstate 35 corridor as one moves further away from the urban core. Attractive sites for new projects can still be found outside the city — they just tend to need a little extra time in terms of infrastructure development before they become shovel-ready.

As a distribution hub that most immediately services the end-user markets of Central Texas, San Antonio also enjoys several advantages over its primary regional competitor: Austin.

The city’s well-developed infrastructure and highway systems have helped it avoid the traffic and congestion that have come to plague the state capital as its population has exploded over the last decade. Furthermore, the cost of living in San Antonio is significantly more affordable than that of Austin, which appeals to both industrial developers and operators with regard to labor costs.

Given these heightened costs of operating, we are seeing tenants get pushed out of Austin and begin to look for sites or facilities closer to San Antonio. This holds particularly true for users that require spaces upwards of 100,000 square feet and which are coming up on lease renewals.

Other Trends

Industrial rents in San Antonio have displayed steady growth over the last 12 to 18 months, currently clocking in at approximately $5.10 per square foot, with the expectation that another annual increase of about 3 percent is on deck.

Construction starts are also on the rise throughout San Antonio, but whereas the market has historically absorbed about 1 million square feet of industrial space per year, that figure is now closer to 2 million square feet. A push from manufacturers of automotive parts, in addition to more demand from distribution users, has contributed to the stronger pace of absorption.

While the growth in both development and absorption of industrial space throughout San Antonio has not been as spectacular as that of certain primary markets during this cycle, it has been quite impressive given how institutional investors previously viewed this market.

As a result, property owners are facing harder decisions on whether to hold or sell. But the elevated volume of capital is also creating competition for deals and driving up prices. With landlords having more flexibility on their strategies, it will be interesting to see in the coming months how pricing and cap rates respond to the beefed-up demand from institutional buyers.

— By Dustin Volz, senior vice president, JLL, and Roger Hill, senior vice president, JLL. This article first appeared in the June 2019 issue of Texas Real Estate Business magazine. 

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