San Antonio industrial market maintains record rental rates amidst growth

EXECUTIVE SUMMARY

Q1 in Review
By the end of Q1 2024, the overall vacancy rate in the San Antonio industrial market rose 300 basis points year-over-year from 5.3% to 8.3%. Due to an uptick in vacant sublease space, net absorption was soft for the quarter. Outside of negative sublease absorption, the direct net absorption rate remained positive. Forward-looking indicators like leasing activity and the construction pipeline indicate mixed market fundamentals are likely over the next few quarters. Still, the average monthly rental rate (NNN) held steady at $0.70 per sq. ft.—a record-high for the metro’s industrial sector.

San Antonio Economic Update
The San Antonio unemployment rate ticked up to 3.9% in February. This matches the 2023 high of 3.9% reached in October. The jobless rate was the same in the region, the state and the U.S. San Antonio payrolls increased an annualized 2.3% in February (2,249 jobs). Job gains were driven by government (9.7%, or 1,416 jobs) and construction (5.8T, or 314 jobs). All other sectors experienced positive monthly growth except mining (-4.5%, or 27 jobs), education and health services (-2.8 %, or 427 jobs), and trade, transportation and utilities (-1.3%, or 225 jobs). Year-to-date total nonfarm employment grew 0.2% in San Antonio compared with gains of 3.1% in Texas and 1.9% in the U.S.

MARKET OVERVIEW

Positive Net Absorption in Q1
Net absorption—move-ins minus move-outs—was negative 174,091 sq. ft. for the quarter. This number is slightly misleading as the negative absorption was largely the result of over 500,000 sq. ft. of new vacant sublease space. Direct net absorption remained a healthy 344,776 sq. ft. For the sublease negative net absorption, the majority of that was due to Amazon vacating 350,000 sq. ft. at 8210 Aviation Landing. Notable move-ins for the first quarter include Ross Dress For Less taking 152,880 sq. ft. at in the Northeast submarket at E Loop 1604 and Simwon America taking 150,212 sq. ft. at Brooks Global Crossing in the South submarket.

Deliveries Top 1 Million Sq. Ft. But Down 72% from Last Year
By the end of Q4 2023, deliveries in the San Antonio industrial market increased to 3.4 million sq. ft., surging year-over-year from 1.2 million sq. ft. Year-to-date deliveries reached 9.1 million sq. ft.—a record-high for the metro’s industrial sector—slightly above the prior year-to-date statistic of 9.0 million sq. ft. The South submarket secured its lead, accounting for 4.2 million sq. ft. (47%) of deliveries by the end of 2023. Some of the most notable completions in 2023 included a 560,660-sq.-ft. distribution center at 810 Rosillo Creek Boulevard (South submarket) in March 2023, and a 528,040-sq.-ft. distribution center along Interstate Highway 10 Frontage Road in November 2023. Construction is at 3.7 million sq. ft., 60% down from 9.4 million sq. ft. the prior year. Over the prior three years, construction averaged 7.0 million sq. ft. annually.

Vacancy Rate Increases to 8.3%
The overall vacancy rate in San Antonio’s industrial market is 8.3%. Quarter-over-quarter, the vacancy rate increased 70 basis points from 7.6%. Year-over-year, the vacancy increased 300 points from 5.3%. The increase in the total vacancy rate was primarily due to a roughly 500,000 sq. ft. increase in vacant sublease space and about 700,000 sq. ft. of new vacant construction that was delivered to the market in early 2024. Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 4.8%, 2.7%, and 10.0%, respectively.

Leasing Down 44% Year-Over-Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 1.1 million sq. ft.—27% down from 1.5 million sq. ft. in Q4 2023. Notable leases signed in early 2024 include The Home Depot signing a lease for a yet-to-be-built 400,000 sq. ft. distribution property in the South submarket at 15720 Old Corpus Christi Rd and Mercado Libre signing a lease for 122,824 sq. ft. at Foster Commercial Center, also in the South submarket.

Investment Sales Volume Down But Prices Holding Firm
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q1 2024 at $26.7 million. Over the last year, 101 industrial properties were sold with an average price of $111 per sq. ft. and an average cap rate of 8.5%. Notable transactions in the first quarter included the Phelan Development sold the Mid City Industrial Park, a three-property industrial park totaling 352,890 sq. ft. to the Welcome Group. Electronic Data Carriers occupied one of the three buildings at the time of closing. The remaining facilities were 100% vacant. Also, Calfrac sold 11226 IH-10 E, a 76,355-sq.-ft. industrial property to Stream Realty. The property was 100% vacant at the time of sale.

Record-High Asking Rent
The average monthly rental rate (NNN) for San Antonio’s industrial market remained flat at $0.70 per sq. ft. –a record-high for the metro’s industrial sector—3% up from the previous year’s $0.68 per sq. ft. The average monthly rate per square foot for Flex Space stood at $1.17 per sq. ft., while Manufacturing and Warehouse/Distribution Space rates were at $0.53 per sq. ft. and $0.64 per sq. ft., respectively. The Guadalupe County and North Central submarkets command the highest overall monthly average rate at $0.97 per sq. ft., followed by the Northwest submarket at $0.95 per sq. ft.

Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]