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San Antonio Bank Of America Plaza Commercial Real Estate Economic Data and Information

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EXECUTIVE SUMMARY

Stable office market to close out 2017

San Antonio’s overall vacancy rate rose slightly to 10.0% in Q4 2017, an increase of 10 basis points quarter-over-quarter and 40 basis points year-over-year. Net absorption remained positive at 297,047 sq. ft. as of the quarter’s end, up from 172,321 sq. ft. as of Q3 2017, although down from 718,523 sq. ft. this time last year. Year-to-date deliveries totaled 1,351,397 sq. ft. with an occupancy rate around 90%. Full-service asking rents dipped by $0.10 per sq. ft. quarter-over-quarter to close Q4 at $21.71; with a larger decrease of $0.25 per sq. ft. year-over-year—although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator. Brokers report net effective rents dropping significantly once negotiations begin. San Antonio’s leasing activity dipped slightly to 452,000 sq. ft., down from the previous quarter’s 606,000 sq. ft., and 790,000 sq. ft. a year ago. The amount of space under construction ended 2017 at 892,205 sq. ft., with 375,589 sq. ft. delivered in Q4 2017, including buildings that are primarily owner-occupied.

Economic momentum in the local economy into 2018

The San Antonio economy continued to grow at a steady pace in November, as the San Antonio Business-Cycle Index increased with above-trend growth as jobs grew and the area unemployment rate stayed at an exceptionally low level. Jobs increased at a strong 5.2% annualized rate in November, slowing from 5.4% in October. As for unemployment, the seasonally adjusted rate for the San Antonio metro remained steady at a minimal 3.8% in November, down from a recent high of 4.1% in August. Meanwhile, the state rate continued to decline to 3.8%—the lowest rate since 1975 when data became available, and the national rate held steady at 4.1%. Recent economic momentum suggests that San Antonio will take 2017’s strong pace of growth into 2018, the city’s Tricentennial, 300th anniversary.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information


MARKET OVERVIEW

San Antonio remains resilient

Of the almost 1.4 million sq. ft. of new supply delivered in the San Antonio office market during 2017, only 25% of that space is available for lease. Annual net demand is on par at 1 million sq. ft., compared to year-to-date 2016 at 1.5 million sq. ft., with only a slight uptick in vacancy. All told, the San Antonio office market remains robust. Local experts reflect that long-term growth has been unaffected by the oil and gas downturn. Over the past decade, San Antonio jobs have in large part grown at a faster pace than the state rate, averaging 2.1%, compared with Texas’ 1.6%. This is primarily due to the relative stability of San Antonio’s core industries during state and national economic downturns, despite its proximity to the Eagle Ford Shale, which saw a sharp decline in drilling rigs. The rise in the rig count from 35 in October 2016 to 98 in May 2017, along with the subsequent decline to 77 in November, similarly had little direct impact on regional job growth. Growth was mixed across industries, with some smaller sectors such as information, manufacturing, financial activities and other services seeing declines. Leisure and hospitality posted the largest increase, as accommodation and hospitality services growth remained strong following Hurricane Harvey. Construction and mining also grew at a rapid rate; meanwhile, large industries such as health care and government grew at a modest pace.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

Positive net absorption for 21 consecutive quarters

San Antonio ended the fourth quarter of 2017 with positive 297,047 sq. ft. of net absorption. Class A space represented 407,241 sq. ft. of that total, more than making up for negative 32,510 sq. ft. of Class B space. This marks the twenty-first consecutive quarter of positive absorption, beginning with Q2 2014. Three factors have been drivers in the city’s regeneration: the rally from the recent recession; the city’s expansion of the River Walk; and the Pearl Brewery redevelopment. In addition, there are commitments to the growth of the convention center and Hemisphere Park.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

Strong job growth has increased demand for new office construction

There is currently close to 900,000 sq. ft. of space under construction in the San Antonio office market, with about 511,000 sq. ft., or 57% available for lease. Ongoing activity includes the 462,000-sq.-ft. Frost Tower at 111 W. Houston, set to deliver in early 2019 and already 63% leased; and Farinon Business Park, building 2 with 102,699 sq. ft. scheduled to deliver in September 2018 with 53% of its space preleased. Security Service Federal Credit Union moved into its 270,000-sq.-ft. campus, at 14880 I-10 W. in the fourth quarter of 2017, meanwhile, Kallison Square in San Antonio is scheduled to begin construction during the spring of 2018. The $83 million mixed-use project will be located at the southwest corner of Flores and Dolorosa streets in San Antonio. The project will include 45,000 sq. ft. of office and retail space, as well as 305 multifamily units, and is scheduled to be completed in mid-2020.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

Demand for commercial real estate is strong

Real Capital Analytics data reports office sales volume for the prior 12 months as of November 2017 in the San Antonio area at $754,155,594, resulting in a year-over-year change of 90%. The buyer composition is primarily private at 47%, 19% institutional, 18% user/other, and 16% REIT/listed. The most significant transaction during 2017 for the San Antonio office market was the acquisition by USAA Real Estate, of the Bank of America Plaza at 300 Convent St.; a 28-story 533,171-sq.-ft. office building, from Clarion Partners JV Griffin Partners. The property was built in 1983 in the Downtown CBD submarket, with a prior sale in December 2014 with a rumored sales price of $100 million.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

Leasing activity decreased slightly during the fourth quarter with a total of 452,357 sq. ft. leased in the overall San Antonio market, a drop of about 154,000 sq. ft. from last quarter. This is in comparison to 790,000 sq. ft. leased this time last year. Class B space led the way at about 263,000 sq. ft., followed by Class A fulfilling 176,000 sq. ft. The largest lease signings occurring in 2017 included the 77,648-sq.-ft. deal inked in Brooks City Base Park at 2601 Louis Bauer; and the 58,876-sq.-ft. lease signed by Hulu, in Fountainhead Business Park at 4511 Horizon Hill Blvd., located in the south and northwest submarkets, respectively. On the expansion front, San Antonio-based CaptureRx executed a new lease in September 2017 to expand into the currently under renovation San Antonio Light building at 420 Broadway, with a scheduled move-in date of August 2018.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information

Office rents remaining steady with an inflow of new product

Full-service asking rents dipped by $0.10 per sq. ft. quarter-over-quarter to close Q4 at $21.71, although as a market indicator, concessions such as free rent and tenant improvement allowances make posted rents less meaningful as net effective rents can drop significantly once negotiations begin. Class A rates saw a decrease of $0.38 at $25.32 per sq. ft. quarter-over-quarter, compared to Q3 2017 at $25.70 per sq. ft. A significant rise took place from a year ago when Class A average rates were at $24.21, an increase of $1.11. Class B rates rose to $19.71 per sq. ft. quarter-over-quarter, compared to Q3 2017 at $19.60 per sq. ft., an $0.11 increase. With the top-dollar renovations, company relocations, and new Class A buildings being constructed, tenants seem to be willing to pay higher rental rates.

San Antonio Quarterly Report Q4 02017 Commercial Real Estate Economic Data and Information


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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