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The San Antonio industrial market’s overall vacancy rate was up 50 basis points quarter-over-quarter at 6.9%, although up only 10 basis points year-over-year.


EXECUTIVE SUMMARY

 

Vacancy remains at 6.9%

The San Antonio industrial market’s overall vacancy rate was up 50 basis points quarter-over-quarter at 6.9%, although up only 10 basis points year-overyear. Class A space ended the first quarter at 16.7% vacancy, up from 14.5% this time last year, based on a total inventory of 14.7 million sq. ft. in 82 existing industrial properties. In addition, overall net absorption went into the red, totaling negative 323,000 sq. ft., down from 1.1 million sq. ft. this time last quarter. There is 5.3 million sq. ft. under construction, with 40% available. Triple net average monthly asking rents registered at $0.50 per sq. ft. in the first quarter, level with this time last quarter and last year.

 

Economic indicators

The Federal Reserve Bank of Dallas reported that San Antonio’s economy grew at a stable pace in February. The San Antonio Business-Cycle Index continued to expand above its long-term average. The unemployment rate declined slightly, and job growth remained steady at a healthy pace over the three months through February. Wages continued to climb, and home sales prices fell. While most data have not captured the impact of the coronavirus outbreak, recent stock prices of San Antonio-based companies show moderate recoveries following sharp declines in February and early March.


MARKET OVERVIEW

 

New supply continues to outpace demand

The San Antonio industrial market has grown to 123.4 million sq. ft., expanding the metro’s inventory by 12.3% or 13.5 million sq. ft. in the last five years. The amount of industrial space delivered to the market during Q1 2019 was 220,000 sq. ft., compared to the quarter’s -323,000 sq. ft. of net absorption—a much wider margin than was seen last quarter. Net absorption is the measure of total square feet occupied in existing buildings, (indicated as a Move-In) less the total space vacated (indicated as a Move-Out) over a given period. The Q1 2020 negative net absorption was comprised almost entirely of warehouse/ distribution space at negative 345,000 sq. ft., positive 1,400 sq. ft. of flex space, and positive 21,300 sq. ft. of manufacturing space.

 

The Coronavirus outbreak

With a considerable amount of the economic growth of the San Antonio metro tied to the leisure and hospitality job sector, growth will likely suffer across the Alamo City. The path both the San Antonio economy and its industrial market sector take will depend on how widely the virus spreads and how long social distancing needs to be maintained. Prior to the coronavirus outbreak, San Antonio had strong economic momentum, and the current statistics largely reflect the environment before the pandemic. San Antonio’s industrial market remains healthy, though a large amount of speculative development has recently delivered, resulting in higher vacancy rates than the historical average.

 

Robots that kill germs

Xenex Disinfection Services makes robots that kill germs with pulses of ultraviolet light—welcome technology during the coronavirus pandemic. Similar technology is apparent at Plus One Robotics, a startup located at Port San Antonio that makes software and equipment that gives warehouse robots advanced vision capabilities to navigate their way around. As millions of Americans are instructed to stay home, warehouse owners are struggling to keep up with deliveries, making the above-mentioned suppliers in high demand. As the number of Americans out of work has grown and the number of endangered small businesses across the country escalating, the chaos has also created an opening for automation firms, moving their growth into high gear. With a rush of orders coming in for its germ-killing robot, Xenex has had to reconfigure and expand its manufacturing space, both to keep up with demand and to maintain social distancing for its 125 employees. The company has increased its manufacturing space from 12,000 sq. ft. to 15,000 sq. ft., and it’s added a second production line. Before the coronavirus crisis, Xenex’s customers included well-known MD Anderson Cancer Center in Houston and the Mayo Clinic in Minnesota. Hospitals and clinics were the company’s foundation and will most likely continue to be.

 

Investment sales activity

Real Capital Analytics data reports the first quarter sales volume for San Antonio industrial properties was $156.4 million compared to first quarter 2019 at $92.3 million. The primary capital composition for buyers in Q1 2020 was made up of 54.5% private investors, and 26.8% REIT/listed. For sellers, the majority was 65.1% private and 21.1% user/ other investors.

 

Two industrial properties in Schertz sold

During the coronavirus pandemic, private investor S&B Detrick LP has purchased the FedEx Freight facility in Schertz, for $25.7 million. The FedEx Freight facility is located at 7012 Farm-to-Market Road 3009, about 18 miles northeast of San Antonio. The 101,000-sq.-ft. facility was acquired from a California-based private investor in a 1031 exchange, according to Stan Johnson Co., which brokered the deal on behalf of the seller. The facility, which sits on nearly 33 acres, was originally built in 1995 as a 77,000-sq.-ft. build to- suit for FedEx and was later expanded. Also, in Schertz, Titan Development Real Estate Fund 1 has sold Building 1 at Titan Industrial Park to Dalfen Industrial. The 187,674-sq.- ft. property was built on a speculative basis facing Interstate 35 between Nacogdoches and Lookout Road. During the course of the coronavirus pandemic, it has become evident that maintaining emergency items is not only vital now, but will continue to be so on a permanent basis going forward. To satisfy customer demand, the construction and lease up of logistics and distribution properties for last mile delivery will only further increase as these current events transform the industrial sector for many years into the future.

 

Leasing activity

The volume of square footage signed during the fourth quarter was at 1.2 million sq. ft.—down slightly from the previous quarter’s 1.4 million sq. ft., although ecommerce and logistics activity continue to be strong in San Antonio. The largest leases signed in Q4 2019— which is comprised of both new leases and renewals— include the H-E-B deal signed for 204,646 sq. ft. in Two Winnco Center in the Northeast submarket; Brandt Engineering and Archpoint Consulting both inking deals in Enterprise Industrial Park III for 95,000 sq. ft. each totaling 190,000 sq. ft. in Schertz; and 91,000 sq. ft. was taken in Logistics Commerce Center in the Northeast submarket. Recent activity reflects the demand for industrial real estate in central Texas, continuing to create the need for industrial space in and around San Antonio.

 

Rent

San Antonio’s industrial market vacancy rate sits at 6.9% as of Q1 2020. With additional space likely coming available in San Antonio, larger industrial tenants will arguably have more leverage than at any time in the last decade with regards to negotiating rental rates, terms, tenant improvements and concessions. Disruptions from COVID-19 will also have an impact on commercial real estate landlords and tenants as difficult decisions are made to adapt to these sudden changes. Many small tenants—particularly retail tenants— have seen revenue drop 50% to 100% in some cases and simply can’t pay their rent. For companies that qualify, the CARES Act recently passed by Congress provides at least two months’ rent and wage relief for companies of 500 employees or less; landlords—many of which are also struggling, as they receive multiple rent relief requests while still having to pay property expenses and mortgage payments—expect tenants who are able to do so to apply for these funds in order to pay rent.


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

 

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