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The San Antonio industrial market’s overall vacancy rate was up only 10 basis points quarter-over-quarter at 6.8% and increased by 80 basis points year-over-year.


EXECUTIVE SUMMARY

 

Vacancy remains at 6.8%

The San Antonio industrial market’s overall vacancy rate was up only 10 basis points quarter-over-quarter at 6.8% and increased by 80 basis points year-overyear. Class A space ended the second quarter at 19.2% vacancy, up from 18.5% this time last year, based on a total inventory of 14.3 million sq. ft. in 86 existing industrial properties. In addition, overall net absorption registered 591,000 sq. ft., down from 1.7 million sq. ft. this time last quarter. There is 4.3 million sq. ft. under construction, with about half of that available for lease. Triple net average monthly asking rents recorded $0.52 per sq. ft. in the second quarter, up from this time last quarter at $0.50 and up from last year at $0.51 per sq. ft.

 

Economic indicators

The Federal Reserve Bank of Dallas reported that San Antonio’s metro unemployment rate ticked down to a still elevated 11.8% in May, lower than the state and national rates of 13.0% and 13.3%, respectively. Despite employment growth in May, San Antonio net jobs declined an annualized 28.3% in the three months ending in May. All sectors experienced losses. The leisure and hospitality sector shed the most jobs at an annualized 73.5% (-40,520 jobs, not annualized). The health and education services fell 33.8% (-16,840 jobs) and professional and business services declined 23.1% (-9,170 jobs). Since early May, consumer spending (measured by credit and debit card spending) in San Antonio has improved more than in the state. However, as of mid-June, spending in San Antonio was down 6.9% relative to January 2020.


MARKET OVERVIEW

 

New supply outpaces demand

The San Antonio industrial market has grown to 126.4 million sq. ft., expanding the metro’s inventory by 14.1% or 15.6 million sq. ft. in the last five years. The amount of industrial space delivered to the market during Q2 2020 was 753,000 sq. ft., compared to the quarter’s 591,000 sq. ft. of net absorption—a close margin. 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 Q2 2020 net absorption was comprised almost entirely of warehouse/ distribution space at positive 639,000 sq. ft., positive 37,000 sq. ft. of flex space, and negative 83,300 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.

 

Navistar breaks ground on manufacturing facility

Construction has begun on commercial truck and bus maker Navistar’s more than $250 million manufacturing facility in San Antonio. The 900,000-sq.-ft. plant, located near Interstate 35 off U.S. Highway 281, is projected to bring more than 600 jobs to the San Antonio area. Navistar’s new plant will have the capacity to produce Class 6-8 vehicles, which range from mid-size trucks and school buses to semi tractor-trailers. Vehicle production at the facility is scheduled to begin early 2022.

 

Coffee Tech will build its headquarters in Seguin

Instant coffee startup, Coffee Tech Industries will build its $56 million headquarters on a 33-acre site south of U.S. Interstate 10 between 8th Street and Guadalupe Street in Seguin. The company plans to make instant hot coffee and cold brew to sell directly to businesses. The area of the future coffee manufacturing plant, which has been dubbed as the Rio Nogales Industrial Park, is also home to Niagara Bottling’s plant and a CPS Energy gas plant. The site is also home to the future United Alloy Inc. and Continental Structural Plastics Inc. plants. The state-of-the-art instant coffee manufacturing facility, where coffee will be processed, dried and bulk packaged, is scheduled to begin late 2020 with operations beginning by 2022, reported Seguin’s Economic Development Corporation.

 

Investment Sales activity

Real Capital Analytics data reports the second quarter sales volume for San Antonio industrial properties was $26.0 million compared to second quarter 2019 at $49.2 million. The primary capital composition for buyers in Q2 2020 was made up of 54.2% private investors, and 23.3% institutional. For sellers, the majority was 63.6% private and 17.9% institutional.

Leasing activity

The volume of square footage signed during the second quarter was at 1.8 million sq. ft.—up from the previous quarter’s 1.4 million sq. ft., while ecommerce and logistics activity continue to be strong in San Antonio. Top transactions during the second quarter included Rainbeau Clothing Co. signing a deal for 109,271 sq. ft. at 6417 Tri County Parkway in Comal County; Southern Warehouse & Distribution inked a deal for 90,155 sq. ft. at 1331 N. Pine St. in the Northeast submarket; and Fiesta Warehousing & Distribution took 66,468 sq. ft. at 5000-5050 South Drive in the South submarket.

 

Rent

San Antonio’s industrial market vacancy rate sits at 6.8% as of Q2 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 unexpected changes. However, not all these statistics should be viewed as negative—especially if you are an industrial tenant with an upcoming lease expiration. Yes, the average “asking” rate has increased, with the triple net average monthly rents at $0.52 per sq. ft., but while landlords will continue to ask for higher rental rates, the actual transacting rental rates are decreasing. Landlords are having to get aggressive on rates and concessions in order to stay competitive.


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

 

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