Industrial indicators tempered
San Antonio’s industrial market loosened a bit during Q4, with the overall vacancy rate increasing to 6.0%, a rise of 50 basis points quarter-over-quarter—and year-over-year. In addition, net absorption took a dive to negative 76,705 sq. ft. as of the quarter’s end, compared to an impressive 1,024,077 sq. ft. at the end of the third quarter. Over 1.4 million sq. ft. delivered in 2017 with an additional 1.0 million sq. ft. currently under construction. The average asking rate per sq. ft. has been steady in 2017 for Warehouse/Distribution and Manufacturing space, although Flex space has seen a drop from an all-time high in Q1 2017 of $10.40 per sq. ft. to end the year at $9.23.
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.
Net absorption pulled back in fourth quarter
At the end of the fourth quarter, net demand decreased to negative 76,705 sq. ft., a significant drop from positive 1,024,077 sq. ft. last quarter and moving back to the red zone last seen at the beginning of the year. The amount of space delivered to the market in Q4 2017 stood at 418,000 sq. ft., assisting in adding more vacant square footage to the market and raising rates. San Antonio’s industrial vacancy rate, measuring all space not currently occupied by a tenant, rose to 6.0%, up from 5.5% quarter-over-quarter and year-over-year. Among the major property types, Warehouse/Distribution ended the quarter at 5.6% vacancy, Manufacturing closed unchanged at 5.3% of unoccupied space, and Flex space finished at 9.9% vacancy.
The major move-ins contributing to positive net absorption in 2017 include Total Products occupying 263,930 sq. ft. of space in Pan Am Distribution Center at 3323 IH-35 N., in the Northeast submarket; and 147,840 sq. ft. of space absorbed by Southern Warehouse & Distribution in Interchange East Distribution Center at 5010 Stout Drive, in the South submarket. The major move-outs during 2017 involve ProBuild moving out of 176,570 sq. ft. at 9901 Doerr Lane; XPO Logistics, Inc. vacating 74,400 sq. ft. at 1511 Cornerway Blvd; and Buell’s Inc. leaving 65,106 sq. ft. at 816 N. Main St.
Construction pipeline remains steady
There is currently 952,664 sq. ft. under construction in the San Antonio industrial market, with a large amount, or 67% of that space in the Northeast submarket. The largest projects underway at the end of the fourth quarter were Gateway 10 Business Park – Building 1, a 179,655-sq.-ft. facility with expected delivery in June 2018. Gateway 10 broke ground on the 108-acre mixed-use business park along I-10 and Foster Road, combining 75 acres of industrial/warehouse space with 33 acres of retail/commercial space; and Cornerstone Industrial Park – Building 3, a 144,137-sq.-ft. facility in the Northeast submarket that is 65% pre-leased. A proposed project in the works is planned for the Interstate-35 corridor between San Antonio and Austin, one of the fastest-growing regions for industrial spec construction. Recent announcements have included new spec development in the City of Buda in the Hays County submarket, scheduled to break ground on 600,000 sq. ft. of industrial space in 2018. Initial construction on the project will include a 300,000-sq.-ft. building projected to begin early in the year. The complex is going up on a 30-acre parcel of grassland just east of I-35, near the U.S. Foods distribution center in Buda, south of Austin. The developer, Exeter Buda Land LP, is said to plan to invest between $7 to $14 million into the project, creating 50 jobs for the area.
Investment sales and leasing activity
Real Capital Analytics data reports year-to-date industrial sales volume in the San Antonio area at $415.5 million, resulting in a year-over-year change of 44.7%. The buyer composition is made up of 41% private, 29% cross-border, 12% public listed/REITs, 10% user/other, and 8% institutional. Another positive sign for the San Antonio industrial market is the Brooks Development Authority acquisition of 8303 S. New Braunfels Ave. in San Antonio, a one-building industrial/warehouse property totaling 239,990 sq. ft. from Mission Solar Energy. The property was 100% occupied by Mission Solar Energy LLC and OCI Solar Power at the time of the partial sale-leaseback.
Leasing activity slowed during the fourth quarter with a total of 822,000 sq. ft. in the San Antonio industrial market. This is in comparison to 1.0 million sq. ft. leased throughout Q3 2017. Warehouse/Distribution space dominated at 682,000 sq. ft., followed by Flex space fulfilling 131,000 sq. ft., and Manufacturing space realizing 9,300 sq. ft. These amounts are down from this time last quarter and equal to year-over-year. The largest lease signings occurring in 2017 included the 214,536-sq.-ft. lease by Ace Mart Restaurant Supply at 9850 Doerr Lane in the Comal County submarket; the 187,500-sq.-ft. deal inked by Visionworks at Tri County 35 Business Park II – Building B also in the Comal County submarket; and the 147,840-sq.-ft. lease completed by Southern Warehousing at Interchange East Distribution Center-Building 1 in the South submarket.
Asking rates up from last quarter and last year
The industrial market saw overall NNN average asking rates rise $0.07 per sq. ft. quarter-over-quarter to finish at $5.77 per sq. ft. at the end of Q4 2017. The North Central submarket has the highest prices for industrial space at $8.51. The average rate for Flex space is currently highest in the Northwest submarket, at $11.80 per sq. ft.; Manufacturing rates peak at $4.89 in the Comal County submarket; and Warehouse/Distribution space is at its high point at $7.07 in the North Central submarket.
Manufacturing is a big deal in San Antonio. Based on a study by Trinity University, San Antonio’s manufacturing sector had an overall economic impact of $40.5 billion in 2016. In addition, with 1,544 companies counted as manufacturers in San Antonio, the sector employed 51,904 people with an average salary of $57,507, and close to $3 billion in wages and salaries last year.
Director of Research
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