San Antonio’s overall vacancy rate fell to 12.6% in Q1 2017, a decrease of 10 basis points quarter-over-quarter and 180 basis points year-over-year. Net absorption stood at 50,285 sq. ft. as of the quarter’s end—on the heels of the more than 1.0 million sq. ft. San Antonio absorbed during 2016.
Another notable storyline in San Antonio is the increased amount of Class A office space being built, which has contributed to a rising rental rate that has remained above $24 per sq. ft. since this time last year. It is projected that some deliveries in 2017 will be speculative construction, although demand is expected to outpace supply, driving down vacancy and boosting a robust pace of rent growth.
San Antonio Economy
Growth in the San Antonio economy continues at a steady pace. The unemployment rate (not seasonally adjusted) ticked up to 4.2% in February, up from 3.9% in January and above 3.6% a year ago. San Antonio remains below the Texas rate of 5.1% and the U.S. rate of 4.9%.
Job growth in San Antonio increased by 6,200 jobs over the month in February. Education and Health Services had the largest monthly gain of 3,000 jobs. Government, mainly led by colleges and school districts, posted monthly growth of 1,600 jobs; while Leisure and Hospitality added 1,500 jobs. Trade, Transportation, and Utilities had the largest drop, losing 1,000 jobs.
The San Antonio market kicked 2017 off with more than 500,000 sq. ft. of office space being leased, more than double that amount (1.2 million sq. ft.) in new office space under construction, and a vacancy rate that fell to 12.6%. Additionally, the quarter ended with net absorption totaling 50,285 sq. ft., largely due to Texas A&M moving out of the 77,648 sq. ft. it had at Brooks City Base. Also notable was the groundbreaking of the new 23-story 460,000-sq.-ft. Frost Tower building located at 111 W. Houston. This is the first high-rise building to be built in the central business district since 1989. The tower will include approximately 430,000 sq. ft. of office space, a wraparound parking facility at its base, 20,000 sq. ft. of ground floor retail, and 10,000 sq. ft. of tenant amenity space, including a fitness center and lounge. The tower is scheduled to be finished in early 2019.
Over the past few years, millions of sq. ft. of new space have been added to the market and yet Class A vacancy rates continue to fall while asking rates have risen by more than 2% in the last three months. The driver behind these rising rental rates and low vacancies is the city’s steady growth in the key areas of population, jobs, and the economy. This growth will continue to cause vacancy rates to tighten, while rental rates will continue to rise until the newly constructed properties like Frost Tower and other suburban projects enter the market. Our prediction is that we will then see landlords increase concession packages such as rental abatement and improvement allowances. As rental rates continue a steady northern climb, more projects will continue to come on line. With more than one million sq. ft. moving through San Antonio’s office market development pipeline, only time will tell whether the market will be able to absorb the additional space and what the long-term effect will be.
NAI Partners | San Antonio
San Antonio ended the first quarter of 2017 with 50,285 sq. ft. of net absorption. Class A properties represented positive 166,966 sq. ft. of that total, and Class B properties were responsible for negative 102,508 sq. ft.
Largely contributing to the negative absorption was Texas A&M San Antonio moving out of 77,648 sq. ft. at Brooks City Base (located at 2601 Louis Bauer Dr. in the South submarket) as its five-year lease ended in December. With no immediate replacement tenant, the space became vacant at the start of 2017. Faculty, staff and students relocated to the Main Campus at One University Way, about nine miles away. Move-ins contributing to positive absorption took place predominantly in the Northwest submarket. There were numerous leases at Callaghan Tower (8023 Vantage Dr.) ranging from 1,200 sq. ft. to 10,000 sq. ft. and several lease transactions totaling over 26,000 sq. ft. at 6243 W. Interstate 10.
Vacancy and Availability
The growing need for San Antonio office space has continued into 2017. The citywide office space vacancy rate fell in the first quarter of 2017 to 12.6%, a decrease of 10 basis points quarter-over-quarter. The availability rate, which measures the total amount of space being marketed for lease, dropped to 15.9%, a reduction of 50 basis points from the previous quarter’s 16.4%.
The highest availability rate in the city was 23.6%, for Class A properties in the Northeast submarket. Northeast has under 1.0 million sq. ft. of inventory, and no construction in the pipeline. Currently, Class A buildings in the overall San Antonio office market have a much higher availability rate than Class B properties (20.2% for the former; 13.8% for the latter). New office construction, especially in the Northwest submarket, has helped modernize some of San Antonio’s Class A inventory. Tenant demand for first-class higher-quality buildings will give landlords more leverage when negotiating lease terms and rental rates.
The market saw overall gross rates, which include real estate taxes, insurance, maintenance and any fees typically included in a lease agreement, fall $0.06 per sq. ft. quarter-over-quarter to finish at $21.06 per sq. ft. at the end of Q1 2017. Class B rates also dropped from $19.33 per sq. ft. quarter-over-quarter to $19.03 per sq. ft. Meanwhile, Class A product rose $0.53 per sq. ft. to $24.69 during the same period.
Construction & Deliveries
There is currently 1.2 million sq. ft. under construction in the San Antonio office market, with about 490,000 sq. ft. available for lease. Recent activity includes Security Service Federal Credit Union’s plans to move into its new 270,000-sq.-ft. campus, currently under construction at 14880 I-10 W. and expected to be completed in the second quarter of 2017. Additionally, Vista Corporate Center at 13805 I-10 West was delivered to USAA in January, with occupancy of its 157,400-sq.-ft. lease targeted for July 2017.
San Antonio’s Historic Design and Review Commission recently approved three major office developments totaling 1.23 million sq. ft. CPS Energy’s future headquarters at 530 McCullough Ave. and Silver Venture’s plans to redevelop the Sarma site at 1801 Broadway St. are both scheduled to begin construction this year. Meanwhile, the first new office tower to be constructed in downtown San Antonio since 1989, Frost Tower at 111 W. Houston, broke ground in March and is set to deliver in early 2019. The 23-story, 460,000-sq.-ft. high-rise will be anchored by Frost Bank, occupying 250,000 sq. ft.
As demand for San Antonio office space continues to increase, the tight leasing market can make deals harder to find. A total of 532,666 sq. ft. was leased in the overall San Antonio market during Q1 2017. Class A space fulfilled almost 206,000 sq. ft., while Class B space realized about 288,000 sq. ft. Overall activity was down quarter-over-quarter from 788,544 sq. ft., and year-over-year from 749,873 sq. ft. Notable tenants that signed lease agreements this year include Wells Fargo, with 45,935 sq. ft. at 51 Technology Center, and Accenture, with a 45,137-sq.-ft. expansion at 10931 Laureate Dr. Both of these transactions occurred in the Northwest submarket, where 60% of all leasing activity took place.