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Supply and Demand Shape Vacancy of San Antonio’s Office Market

December 2016 I Vol. 2, ISSUE 14 I Download PDF

Executive Summary
As with most goods and services in a free market economy, the supply and demand for office space can greatly shape the overall strength of the office market in San Antonio. Supply is measured in terms of the square feet (sq. ft.) of rentable building area (RBA) of stock inventory and new deliveries. The metric for demand is net absorption, which is also measured in terms of sq. ft. of RBA. In turn, vacancy is a collective metric of supply and demand, measuring empty office space on the market in sq. ft. of RBA, whether or not that space is leased or for rent. Here, we examine current and historical changes in the supply and demand of office space in the San Antonio market, and how they have shaped levels of vacancy.

Figure 1 shows net absorption, deliveries, and vacancy for the San Antonio office market from 2006-2016. New deliveries and strong absorption in 2006 and 2007 led vacancy to decrease from 15.4% to 12.5%. However, as new deliveries continued and demand diminished, vacancies increased from 13% in 2008 to 17.7% in 2012. Since 2012, the supply of new deliveries has remained modest and relatively constant, between 400,000 and 600,000 sq. ft. per year. Meanwhile, recent demand from 2013-2015 has been increasing from lows of only 179,000 sq. ft. of positive net absorption in 2011 and negative net absorption of -323,000 sq. ft. in 2012. In fact, current indications are that 2016 will close out the year with exceedingly strong net absorption of more than 1.5 million sq. ft. With steady supply and increasing demand, San Antonio’s office market has seen its vacancies decline from 17% to the current level of 13.2% as Q4 2016 nears its end. Additionally, as a result of the tightening between supply and demand, it is reasonable to expect rents to begin increasing, particularly if vacancies continue their steady downward roll.

Motivation
In a free market economy, the performance of goods and services hinges on their supply and demand. In commercial real estate, supply is measured by stock inventory and new deliveries of construction, while demand is measured by net absorption, all of which are reported in units of square feet (sq. ft.) of rentable building area (RBA). Construction and deliveries of new buildings drives up stock inventory of office space. Net absorption is the key metric for demand of office space, measuring changes in occupied inventory over a period of time. Positive net absorption occurs when there is an increase in occupied space; negative net absorption occurs when there is a decrease in occupied space. In turn, vacancy measures empty stock inventory in the office market, whether or not that space is leased or for rent. Vacancy is a collective metric of supply and demand, measuring empty office space based on changes in existing stock inventory, new deliveries, and net absorption. Here, we examine current and historical changes in the supply and demand of office space in the San Antonio market, and how they have shaped levels of vacancy.

Stock Inventory, Construction and New Deliveries
As of late Q4 2016, the stock inventory of the San Antonio office market is 36.5 million sq. ft. of Class A and B buildings. Figure 2 plots the addition of new deliveries and buildings under construction per year from 2006 through 2016. “RBA Delivered” refers to completed construction that occurs during a given time period, while “RBA Under Construction” refers to space under construction that has not yet been completed. Stock inventory plus new deliveries determine the supply side of the office market. Buildings under construction exceeded 1.2 million sq. ft. from 2006 to 2008, resulting in new deliveries of 850,000 sq. ft. to more than 1.4 million sq. ft. from 2006 to 2009. Following 2009, however, construction and new deliveries have remained lower, around 400,000 sq. ft. to 600,000 sq. ft., suggestive of less demand to warrant new construction projects.

Net Absorption
Despite lower than historic levels of construction and new deliveries, recent trends are suggestive of a strengthening office market as demand for office products continues to increase. Figure 3 plots quarterly net absorption for each year from 2006 to late Q4 2016. Historical demand was strong in 2006 and 2007, but declined from 2008-2012, with a record low of -323,000 sq. ft. of negative net absorption in 2012. However, since 2012, there has been an upward trend in ever increasing demand for office products, with net absorption from 500,000 sq. ft. and 860,000 sq. ft. in 2013 and 2014 to more than 1.5 million sq. ft. year-to-date in 2016.

Vacancy
Vacancy at one point in time equates with vacancy at the prior point in time plus new deliveries at that prior time point plus net absorption at that prior time point. In this way, vacancy is a collective measure of supply and demand of office real estate. As such, changes in vacancy should reflect underlying dynamics in new deliveries and net absorption. Figure 4 shows vacancy of office space per quarter per year from 2006 through late Q4 2016. During the strong years of 2006-2008, tightly coupled supply (Figure 2) and demand (Figure 3) led to vacancy decreasing from 15.4% to 12.7%. However, as the market began to soften, and supply exceeded demand, vacancy increased steadily from 12.7% in 2008 to more than 17% in 2012 and 2013. Beginning in 2014, however, vacancies have been slowly and steadily declining as demand catches up with supply. In fact, 2016 has seen vacancies decrease three points, from 16.2% to a current 13.2%. If demand continues to increase and vacancies continue to fall, then San Antonio’s office market will quickly transition to higher rents, representing an opportunity city ready for new construction.

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