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EXECUTIVE SUMMARY
SAN ANTONIO AVAILABILITY
Overall space availability, which includes current, sublease, and future vacancy, is at 14.9%. The CBD ended Q2 2022 with an availability rate of 19.1%, followed by the North Central submarket at an 18.5% availability rate, and in the third position, the Northeast submarket at 15.2%. The difference between this figure and the vacancy rate reflects expected future move-outs. Delivered supply (149,506 sq. ft.) outpaced demand, represented by net absorption (-21,908 sq. ft.), during Q2 2022. With current projects under construction at 1.2 million sq. ft., and proposed projects estimated at 2.4 million sq. ft. during 2022 and 2023, demand will need to increase for the availability rate to have an opportunity to decrease gradually.
SAN ANTONIO’S ECONOMY REMAINS POSITIVE
The San Antonio unemployment rate increased in May to 4.0%. The metro’s unemployment rate is above the U.S. jobless figure of 3.6% but below the state rate of 4.2%. San Antonio payrolls expanded an annualized 2.1% (5,800 jobs) over the three months ending in May. Among the major sectors, mining led growth with an increase of 11.3% (162 jobs). It was followed by manufacturing, up 10.6% (1,340 jobs), and financial activities, up 7.6% (1,745 jobs). Sectors that posted declines were construction (-6.8%, or 1,035 jobs), trade, transportation, and utilities (-1.0%, or 499 jobs), and professional and business services (-0.7%, or 255 jobs). With the increase in May employment, San Antonio has gained approximately 148,700 jobs since the lowest point of the pandemic in April 2020 and surpassed pre-pandemic employment.
MARKET OVERVIEW
NET ABSORPTION REGISTERS NEGATIVE IN Q2
The San Antonio office market registered a negative 22,000 sq. ft. of net absorption as the disruptions from COVID-19 continue to plague some return-to-office policies. However, long-run demand drivers are positive because San Antonio’s low cost of doing business makes it an ideal metro for back-office operations. It’s also positioned to become a national cyber security hub, with significant investment by the University of Texas at San Antonio, Department of Defense, City of San Antonio, and other institutional and private-sector players. Regardless, landlords are put into a situation where there are minimal obstacles to supply, so new additions to the city’s ever-expanding portfolio of office space generally keep vacancies from reducing too much.
CONSTRUCTION ACTIVITY
San Antonio has 1.2 million sq. ft. underway (68% preleased), representing 1.8% of total inventory, on top of the 344,000 sq. ft. delivered so far in 2022. In addition, there is 2.4 million sq. ft. of proposed projects that have been announced for 2022 and 2023, although they have yet to break ground. The amount of construction underway and in the pipeline has been, on average, about 1.3 million sq. ft. over the past decade. The range in size of the 9 buildings under construction varies from North Rim Corporate Campus at 550,000 sq. ft. in the northwest submarket and Jefferson Bank headquarters at 280,000 sq. ft. in the Northeast submarket to medical office buildings ranging from 95,000 sq. ft. to 30,000 sq. ft.
INVESTMENT SALES ACTIVITY
Real Capital Analytics data reports the quarterly sales volume in Q2 2022 for San Antonio office properties was $292.3 million compared to the same time in Q2 2021 at $168.4 million, an almost 75% increase. Value and growth — particularly regarding office-using jobs and population — have likely played a major role in investors’ eagerness to buy assets there. Investors typically pay between $100 per sq. ft. and $200 per sq. ft. for the vast majority of assets, depending on the occupancy, quality of the asset, and location. Properties with good highway access located in San Antonio’s northern path of development—in submarkets like North Central, Northwest, and even Far Northwest—tend to command the highest prices. The San Antonio office market’s primary capital composition for buyers in 2022 was made up of 88% private investors and 10% institutional. For sellers, the majority were 52% private investors, 21% REIT/listed, 16% institutional, and 10% user/other investors.
LEASING ACTIVITY
Leasing velocity increased by about 15% quarter-over-quarter, registering 648,000 sq. ft. in Q2 2022 versus 564,000 sq. ft. in Q1 2022. Significant lease transactions so far in 2022 include a lease for 88,520 sq. ft. in One International Centre in the North Central submarket; Spectrum signing a deal for 69,000 sq. ft. of office space at 11826 Tech-Com in Crosswinds Technology Park in the Northeast submarket; and 27,247 sq. ft. was taken at 911 N. Central Parkway in Brookhollow Park in the North Central submarket.
OVERALL VACANCY RATE AT 11.8%
The overall vacancy rate in the San Antonio office market is 11.8%, up 30 basis points quarter over quarter from 11.5% and up 100 basis points year over year from 10.8%. The highest vacancy rate by submarket and class is the CBD Class A at 26.6% vacancy, followed by the North Central Class A at 19.9%, and the third-highest ranking is the North Central Class B at 16.3%. Home of the Pearl, San Antonio’s premier development, and much of the city’s northern suburbs, North Central San Antonio is a large and bifurcated submarket. The submarket (at least the more suburban areas) could see growth constrained by nearby Northwest San Antonio. Tenants don’t just want an adequate building anymore; they want amenities, and it’s difficult to compete with Northwest San Antonio’s appeal, including La Cantera, the Rim, and the economic activity around the University of Texas at San Antonio.
HIGHEST OVERALL ASKING LEASE RATES
Full-service average rates are at $24.63 per sq. ft., up 2.9% from this time last year, pushing the metro San Antonio office market to its highest overall asking lease rate. Asking rates for Class A space are averaging $29.21, and Class B averaging $21.74 per sq. ft. The asking rate is what is officially quoted for any given building and will differ from the ‘bottom line’ actual rental after negotiations, known as the effective rate. The CBD ($26.68 PSF) and North Central ($25.03 PSF) submarkets currently have the highest monthly overall average rates, followed by Northwest ($24.20 PSF). Submarket differences in factors such as property mix, degree of accessibility, and availability of amenities influence variations in office rent price and vacancy rates.
Leta Wauson
Director of Research
[email protected]
tel 713 275 9618