There’s no question that the San Antonio multifamily market has had the reputation of being the steady tortoise in a race against the more nimble Texas hares of Houston, Dallas and Austin. We all know how the fable ends — the hare, confident of an easy win, takes a nap while the tortoise secures victory. Could 2018 be the year that our “slow and steady” hero finds its place at the top of the Texas market performance?
As it stands, the Alamo City is enjoying an apartment occupancy rate of 92.1 percent, which is flat on a year-over-year basis. But given the amount of new supply that entered the market in 2017 — a cycle-high 7,230 units — that’s a remarkable number. We ended 2017 with an average rent of $1.14 per square foot, which is flat compared to third-quarter figures, but that number still represents 3.64 percent growth from the $1.10 average from the fourth quarter of 2016.
Scott LaMontagne, JLL
So what does it mean for the market’s immediate future? The San Antonio construction pipeline continues to be a focal point and as things progressed, there have been some surprises. While 2017 marked the cyclical peak for deliveries, and there has been some negative absorption in recent years, it may surprise many to learn that San Antonio has maintained positive absorption since 2010 by 1,980 units.
Job Growth vs. Absorption
Absorption is accelerating as the ratio of new jobs to units absorbed in San Antonio has been improving. Over the last eight years, the metro has averaged 5.3 jobs per unit absorbed, which is on par with the national average of roughly 5.25.
However in the last two years, that ratio has fallen to 4.55 jobs per unit absorbed, which handily beats the national average and puts San Antonio amongst the elite cities for speed of new unit absorption.
Why is this phenomenon occurring? San Antonio has been experiencing a transformation of sorts via a burgeoning technology sector and the addition of several live-work-play neighborhoods in the Pearl District /Lower Broadway, the RIM, La Cantera and the CBD.
Most important though, is the amount of millennial in-migration that San Antonio is experiencing. This group represents the primary renter segment. Its presence, combined with the addition of a more walkable multifamily inventory, is enabling San Antonio to quickly ascend the ranks of apartment markets.
Coming off a record volume of deliveries in 2017, San Antonio looks to get a breather in 2018. Data sources are projecting approximately 6,000 new units to come on line in 2018, but with labor shortages and weather delays, that number is likely to be whittled down to 4,500 to 5,000 units.
Assuming that San Antonio matches its 2017 employment growth of 31,200 jobs, using the two-year average 4.55 jobs to units absorbed ratio puts our 2018 demand at 6,857 units. If demand materializes, we could show positive absorption of more than 2,000 units. With total MSA inventory at roughly 162,000 units, our occupancy could increase by 1.24 percent to an MSA average of 93.34 percent.
Supply-Side Constraints
Unfortunately, not all of the news is rosy. San Antonio still has some supply-related issues in the I-10/Loop 1604 area, which has 1,800 units across nine new assets that have not yet been leased. There are very few planned starts in the I-10/Loop 1604 submarket, so we should see positive absorption in this area this year. This should give way to rent growth in 2019 as concessions begin to burn off.
The Westover Hills/Alamo Ranch neighborhoods have 1,900 new units in the pipeline. The pace and volume of deliveries in the first half of 2018 are manageable, but absorption may decline during the second half of the year as three new projects begin to lease up.
While new construction often dominates the headlines, the value-add segment in San Antonio continues to roar on. Class B rent growth continues to impress — since 2010, average Class B rents have increased from about $0.81 per square foot to $1.16 per square foot today. More extraordinary is the fact that the Class B segment currently boasts a 94 percent occupancy rate. Not only are the rent increases material, but so too are the increases in pricing of Class B assets.
In 2010, most of the 1980s vintage product traded in the $40,000 to $45,000 range on a per-unit basis. Today, it is common to see $75,000 to $85,000 per-unit trades for pre-renovated properties. And some post-renovated ‘80s assets are demanding price points well north of $100,000 per unit.
With those increases, it’s no wonder that the value-add segment has massive amounts of capital chasing it and remains the hottest ticket in real estate. This segment is clearly outperforming the Class A and merchant-built segment, which has seen its buyer pool become more conservative as the cycle matures.
This year looks to be an opportunity for the San Antonio multifamily market to show considerable improvements. Continued job growth in the mid-to high-2 percent range will be essential to realizing that potential, but it’s just darn hard not to root for that tortoise.
— By Scott LaMontagne, managing director, JLL. This article first appeared in the March 2018 issue of Texas Real Estate Business magazine.