(Plenty) of Offices in San Antonio

Office Space San Antonio

At 10.1%, the vacancy rate for office space in the San Antonio metro inched up above 10.0% for the first time since Q1 2016. That represents a 20-basis-point increase from this time last quarter and an 80 basis-point jump year-over-year


EXECUTIVE SUMMARY

Vacancy rates remain stable

At 10.1%, the vacancy rate for office space in the San Antonio metro inched up above 10.0% for the first time since Q1 2016. That represents a 20-basis-point increase from this time last quarter and an 80 basis-point jump year-over-year. Meanwhile, the gross average asking rental rate rose year-over-year, growing to $22.84 per sq. ft., up $0.59. Occupancy of the 1 million sq. ft. delivered to the market year-to-date stands at 83.2%, and of the 1.3 million sq. ft. currently, under construction, about half of that space is already spoken for. In addition, there have been 1.8 million sq. ft. of leasing activity year-to-date—which is comprised of both new leases and renewals.

Economic indicators

Growth in the San Antonio economy accelerated in August. The San Antonio labor markets remain very tight, while the seasonally adjusted unemployment rate held at a low 3.1% in August, mirroring the stability of the higher Texas rate at 3.4%, the U.S. rate at 3.7%. Job growth increased over the three months ending in August to a 4.8% annualized rate. Growth was mixed across industries, with construction the fastest-growing sector. Other large industries such as health care and leisure and hospitality realized a net hiring surge, adding a combined 7,500 jobs. Retail trade jobs also grew, lifting the trade, transportation and utility sector. Areas of softness include mining, which declined more sharply over this period, and manufacturing, which reversed moderate gains from earlier in the year.

 

MARKET OVERVIEW

CBD Class A vacancy at 9.4%

The CBD has 3.0 million sq. ft. of Class A inventory tracked in 14 buildings with 284,000 sq. ft. of vacant space (9.4%) as of Q3 2019. Overall vacancy in the suburban office market was at 10.3%, while overall vacancy in the CBD registered at 8.7%. There is approximately 12.2 million sq. ft. of medical office space in the San Antonio market, representing close to 20% of the 61.5 million sq. ft. of total office inventory. The overall vacancy rate for medical office space is 15.3%, within the close range it has remained at since the beginning of 2019.

Frost Tower opens

At the beginning of the third quarter, the new Frost tower officially opened in downtown San Antonio. The opening marked the first high-rise office building built in downtown in a quarter-century. Construction began on the building in the first quarter of 2017, and workers started moving into the new Frost Bank Tower in mid-June, with current occupancy close to 80%. The 24-floor octagonal tower, with a reported price tag of $140 million, is home to tenants Ernest & Young LLP, Insight Global, Norton Rose Fulbright US LLP, and Frost Bank employees occupying the lower half of the building.

First large-scale mass timber project in Texas

The Soto, an office building at Broadway and Eighth streets downtown, is the first large-scale mass timber project in Texas and the fourth in the U.S. The former Cavender Cadillac dealership on Broadway downtown is now the construction site of the 140,600-sq.-ft., six-story office building built of wood instead of the normal concrete and steel construction. The office development is envisioned to include tenant space, a coffee shop, and a high-end restaurant on the ground floor. It also will include 70 underground parking spaces and an arrangement with CPS Energy to share its huge parking structure close by. Advocates of mass timber construction see it as a way to counterbalance greenhouse gases that contribute to climate change, although much is still unknown about the production methods. Completion of the project is scheduled for the first quarter of 2020.

Investment sales activity

Real Capital Analytics data reports office sales volume for Q3 2019 in the San Antonio area at $323.8 million, compared to Q3 2018 at $126.9 million, resulting in a year-over-year quarterly volume change of 155.2%. The primary capital composition for buyers in 2019 was made up of 53.4% institutional investors and 33.4% private investors. For sellers, the majority was 43.3% REIT/Listed, and 37.5% private.

City’s biggest real estate acquisition this year?

In August, U.S. Realty Advisors LLC acquired Ridgewood Park, a two-building complex at 19100 Ridgewood Parkway in the far north-central submarket of San Antonio from Office Properties Income Trust for $198 million, or about $320 per sq. ft. The entire campus, totaling 618,017 sq. ft. of office space, is leased to oil refiner Andeavor, which was purchased by Marathon Petroleum Corp. last year in a deal valued at $23.3 billion according to CoStar data. The campus, which was completed in 2009, includes a lobby connecting a 14-story office tower and a seven-story office tower, as well as an adjacent five-story, 2,300-space parking garage.

Strong leasing activity in Northwest submarket

A few of the metro’s largest leases signed during 2019 include a renewal for Baptist Health System School (66,263 sq. ft.) in the Northwest submarket, GreatCall (51,833 sq. ft.) in the Far West submarket, and Clear Channel Outdoor (37,300 sq. ft.) in the Northwest submarket. The total volume of square footage signed during the third quarter was at 491,000 sq. ft., with the largest concentration—208,000 sq. ft. (42%)—in the Northwest submarket. The northwest side has historically been the city’s hottest office market, although workers, including millennials, continue to gravitate towards downtown. Living and working in an urban, walkable environment is attractive to top-tier talent as the city center is gaining more popularity.

Rents see slight decline quarter-over-quarter

During the third quarter, average rental rates saw a slight reduction, with the overall market dropping from $23.16 to $22.84 per sq. ft. However, rental rates in the Northwest submarket continued to rise, with Class A rates at $26.09 from $23.96 this time last year, an 8.9% increase. As a market indicator, concessions such as free rent and tenant improvement allowances make posted rents less meaningful as net effective rents can change significantly once negotiations begin. All said, with the top-dollar renovations, company relocations, and new Class A buildings being constructed, office tenants want to be where there’s a lot of activity and a mixed-use atmosphere that attracts young professionals and are willing to pay higher rental rates.