Office market holds steady
The San Antonio office market average vacancy rate rose to 12.3% in Q2 2017, an increase of 30 basis points quarter-over-quarter—though a 50-basis-point decline year-over-year. The increase is driven in part by new construction delivered vacant. Despite the additional space and bump up in vacancy, full-service asking rents increased $0.30 per sq. ft. q-o-q to close the second quarter at $21.81 per sq. ft. This also marks a $0.73-per-sq.-ft. increase from one year ago. Net absorption decreased to negative 34,070 sq. ft. as of the quarter’s end, down from 150,908 sq. ft. at the end of the first quarter. Additionally, San Antonio’s leasing activity stood at 500,000 sq. ft., down from the previous quarter’s 698,172 sq. ft., and from 1.0 million sq. ft one year ago. The amount of space under construction remained around 1 million sq. ft. from the end of the first quarter of 2017, while the amount of space delivered was 150,000 sq. ft.
San Antonio Economy
Economic indicators in San Antonio displayed moderate advances in May. Jobs increased at a restrained but progressive stride, while the unemployment rate dropped to its lowest point this year. The San Antonio unemployment rate fell for a second month to 3.8% in May, below the national rate of 4.3% and state rate of 4.8%. However, growth in the labor force has been somewhat slower so far this year at 1.0%, compared with 3.2% in 2016. Regarding the number of people in San Antonio, the metropolitan area ranks No. 3 among U.S. cities for the largest one-year population increase from July 2015 to July 2016, according to the U.S. Census Bureau. Meanwhile, New Braunfels ranked No. 9 on the list of cities with more than 50,000 residents that had the highest growth rate over that one-year period.
Increased supply with steady demand nudging vacancy up
The 153,495-sq. ft. of new supply completed in Q2 2017 delivered to the San Antonio office market 100% available for lease. Net demand has slowed from the pace it was at in 2016, causing a slight uptick in vacancy. All told, the San Antonio office market is still strong. A testament to the market’s strength is the recent announcement of the upcoming groundbreaking of Pinnacle Oaks, Phase One, a $100 million, 450,000-sq.-ft. business park located on 21 acres at 4830 N. Loop 1604 W. The park, named Pinnacle Oaks Tech Center, will include three Class A office buildings and one flex building. The first phase will include an 80,532-sq.-ft. single-story building scheduled to be completed by the end of Q1 2018. In addition, San Antonio’s Historic Design and Review Commission recently approved three major office developments totaling 1.2 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.
Net absorption in the red only two quarters out of the past 23
San Antonio ended the second quarter of 2017 with negative 34,070 sq. ft. of net absorption. Class A space represented negative 57,940 sq. ft. of that total, and Class B space was responsible for positive 20,026 sq. ft. This marks only the second time in the previous 23 quarters that negative overall absorption was tallied. The major move-ins contributing to net absorption in Q2 2017 include 45,935 sq. ft. of space occupied by Wells Fargo, at 1560 Cable Ranch Road in the Northwest submarket; 26,282 sq. ft. taken at 816 Camaron in the North Central submarket; and 20,000 sq. ft. of space absorbed by MCCI Medical Group at 711 Navarro St. in the CBD. The major move-outs during the second quarter of 2017 involve the former SSFCU building with 65,040 sq. ft. of space vacated at 16300 La Cantera Parkway; and 29,000 sq. ft. of direct space plus 13,000 sq. ft. of sublease space left 4350 Lockhill Selma Road in the Northwest submarket.
Construction projects underway have available space
There is currently about 1 million sq. ft. of space under construction in the San Antonio office market, with about 400,000 sq. ft. available for lease. Ongoing activity includes the first new office tower to be constructed in downtown San Antonio in 20 years, Frost Tower at 111 W. Houston, which 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., with 150,000 sq. ft. of space still available. Meanwhile, Security Service Federal Credit Union 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 summer of 2017.
Port San Antonio has broken ground on Phase I of Project Tech, a $20 million, state-of-the-art technology complex that will contain companies championing San Antonio’s growing cybersecurity community. The project will deliver a 90,000-sq.-ft. facility that is expected to house numerous cybersecurity firms. The property, which is scheduled for a 2018 completion date, will secure a larger office development that could cover up to 500,000 sq. ft. across 17 acres. The large military presence in San Antonio includes Department of Defense cybersecurity operations that have attracted private-sector firms. These companies are working for military clients and have gradually utilized their cybersecurity know-how in the commercial sector. Officials say there are around 1,000 people that work in cybersecurity at Port San Antonio today, with the potential to bring hundreds of new jobs once all phases of the project are complete.
Leasing activity remains steady
Second quarter leasing activity has remained relatively steady from the first quarter at about 500,000 sq. ft. Class A space fulfilled 195,000 sq. ft., while Class B space realized about 258,000 sq. ft. Year-over-year leasing activity is down notably from 1.0 million sq. ft. Significant lease agreements signed in the second quarter include Hulu retaining a long-term 60,000-sq.-ft. lease at 4511 Horizon Hill Blvd. at Fountainhead Park, in Northwest San Antonio. Hulu will initially occupy 45,000 sq. ft. on the third floor in the fall of 2017, and is expected to take over an additional 14,000 sq. ft. on the second floor a year later. Wells Fargo inked a deal for 45,935 sq. ft. at 151 Technology Center – Building A in the Northwest submarket; and a 20,000-sq.-ft. deal was signed by MCCI Medical Group at Travis Park Plaza in the CBD. The two submarkets with the most leasing activity this quarter were the Northwest submarket at 250,000 sq. ft.; and the North at 154,000 sq. ft.
Average full-service asking rate reaches all-time high
The market saw overall full-service average rates continue to rise at $0.30 per sq. ft. quarter-over-quarter to close at $21.81 per sq. ft. at the end of Q2 2017. Class A rates rose at $25.29 per sq. ft. quarter-over-quarter, compared to Q1 2017 at $24.66 per sq. ft. A larger upturn took place from a year ago when Class A average rates were at $24.05, an increase of $1.24. Class B rates rose to $19.73 per sq. ft. quarter-over-quarter, compared to Q1 2017 at $19.53 per sq. ft., a $0.20 increase.