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San Antonio Office Q3 Cover

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San Antonio among strongest Office markets in the U.S.


EXECUTIVE SUMMARY

LEASING VOLUME GROWS IN Q3
The San Antonio office market is showing signs of increased demand, as leasing volume grew in the third quarter by 45% quarter-over-quarter to 700,000 sq. ft. Unlike other major metros in Texas, San Antonio hasn’t seen large fluctuations in demand or increases in sublease space, which has kept vacancies steady over the last ten years. Vacancy has remained between 9% and 11% during the past decade, which has been beneficial during the economic slowdown.

SAN ANTONIO ONE OF THE STRONGEST OFFICE MARKETS IN THE U.S.
The National Association of Realtors identified 10 markets as having the strongest office market conditions as of third quarter 2021, including the Alamo City. The city met the requirements out of 390 commercial real estate markets. Like most major Texas metros, San Antonio has recovered from the pandemic at a healthier pace than most, regaining 82% of its lost jobs since Q1 2020. In addition, all of its lost jobs are expected to be recovered in Q4 2021, according to Oxford Economics. San Antonio’s gross domestic product (GDP) level exceeded its pre-pandemic peak in Q2 2021 and has grown 1% since Q4 2019. GDP is expected to grow 2.3% per year, on average, over the five years to 2027, which is above the U.S. expected growth rate of 2%.

San Antonio Office Quarterly Data Graphs

 


MARKET OVERVIEW

NET ABSORPTION REMAINS POSITIVE
Net absorption ended Q3 at positive 389,000 sq. ft. This has been a welcome turnaround compared to this time last year at negative 2,000 sq. ft. The amount of total office inventory that is being marketed for lease is at an availability rate of 14.8%, down from 15.1% in Q2 2021. The difference between this figure and the vacancy rate reflects expected future move-outs. The overall vacancy rate in the CBD is at 9.9%, although the availability rate is at 13.7%. A wider margin holds true in Class A space in the CBD at 14.5% vacancy, compared to 22.3% availability.

CONSTRUCTION ACTIVITY
San Antonio has 1.2 million sq. ft. underway (73% preleased), representing 1.8% of inventory, on top of the 645,000 sq. ft. (67% preleased) that delivered during 2021. There is 878,000 sq. ft. of proposed projects that have been announced, although they have not broken ground yet. The amount of construction underway and in the pipeline has been on average about 1.2 million sq. ft. over the past decade. Of the 13 buildings under construction, the range in size varies from the Jefferson Bank headquarters at 230,000 sq. ft. to smaller medical office buildings at 30,000 sq. ft.

INVESTMENT SALES ACTIVITY
Among the notable Q3 2021 office sales in San Antonio were Boyd Watterson Asset Management acquiring Lincoln Center for an undisclosed amount. The 8-story building located at 7800 W. IH-10 in the Northwest submarket is 157,933 sq. ft. and was 83% occupied at the time of the sale. The seller was Primera Partners. Real Capital Analytics data reports the cumulative monthly sales volume for the first nine months of 2021 for San Antonio office properties was up $266.2 million compared to the same time period in 2020 at $247.7 million. The San Antonio office market’s primary capital composition for buyers so far in 2021 was made up of 78.3%private investors, 12.6% institutional, and 9.1% user/other. For sellers, the majority was 80.1% private investors, and 14.2% institutional investors.

LEASING ACTIVITY TICKED UP
Quarterly leasing velocity—which is comprised of both new leases and renewals—grew to 700,000 sq. ft. during the third quarter—up slightly from 691,000 sq. ft. year-over-year. Top transactions during the third quarter included Medtronic renewing their lease in September for 145,025 sq. ft. at Overlook at the Rim in the Far Northwest submarket; a new lease for 80,312 sq. ft. at Port San Antonio in the South submarket in July; University Health inking a deal for 40,544 sq. ft. Wonderland of the Americas in the Northwest submarket in July; and Pure Energy taking 31,828 sq. ft. at 231 E. Rhapsody Drive in the North Central submarket in September.

WHAT TESLA’S AUSTIN EXPANSION MEANS FOR SAN ANTONIO
Electric vehicle maker Tesla is moving its corporate headquarters from Palo Alto, California, to Austin. The company made the announcement in Austin, where it is building a $1.1 billion manufacturing plant. Site selection and economic development experts believe Tesla’s move to Austin will cause more auto industry and tech-related companies to look to the Interstate 35 corridor and as far south as San Antonio as they search for new locations. San Antonio is home to Toyota Motor Manufacturing Texas Inc. and is where Navistar is nearing completion of its commercial truck assembly facility. San Antonio is well positioned for upcoming opportunities of site-seeking companies interested in the I-35 corridor whether directly or indirectly linked to Tesla.

AVERAGE ASKING RENTS
San Antonio’s overall full-service average rates are at $23.90 per sq. ft., up 1.5% from this time last year at $23.55, and down slightly quarter over quarter. Overall asking rates for Class A space are averaging $27.50 and Class B are averaging $21.84 per sq. ft. During the past ten years, average annual rent growth has been somewhat flat at 2.3%, with a peak year in 2019 at 6.5%. In the wake of the pandemic and the uncertainty surrounding remote work, there may be some softness in rent growth over the near term, although over the long term, the outlook should be optimistic.


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


Additional Research from NAI Partners

San Antonio Office | Quarterly Report | Q2 2021
San Antonio Office| Monthly Market Snapshot | September 2021

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