Rates plateau as new construction pushes the market further into neutral conditions

EXECUTIVE SUMMARY

Q2 in Review
Warehouse/Distribution continues to drive San Antonio’s industrial market—while leasing activity and absorption for Flex and Manufacturing properties remained muted. While leasing activity and absorption have picked up over the past quarter, new construction deliveries outpaced move-ins and the vacancy rate increased from 8.3% to 8.6% over the past quarter as a result. The construction pipeline remains elevated at 6.2 million sq. ft., only down 3% from the 6.4 million sq. ft. that was under way in Q2 2023. Average asking rates remained unchanged for the quarter and year at $0.70 per sq. ft.; this is an all-time high for the market.

San Antonio Economic Update
San Antonio payroll job growth picked up in May and wages and retail sales tax revenue rose, while unemployment ticked down to 3.6% from 3.7% in April. In 2024, the unemployment rate has hovered in the 3.5 to 3.7% range, not trending up or down. The unemployment rates in both Texas and the U.S. were higher at 4.0%. San Antonio payrolls increased an annualized 2.3% in May (2,220 jobs). Job gains were driven by other services (7.3%, or 251 jobs), construction (6.7%, or 361 jobs) and mining (4.7%, or 27 jobs). All other sectors experienced positive monthly growth except information (-3.2 percent, or 46 jobs) and financial activities (-1.7%, or 140 jobs). Year-to-date total nonfarm employment grew 1.1% in San Antonio compared with gains of 2.8% in Texas and 1.9% in the U.S.

MARKET OVERVIEW

Positive Net Absorption in Q2
Net absorption—move-ins minus move-outs—is at 442,673 sq. ft., up from the negative absorption of 174,091 sq. ft. in Q1 2024. Both flex and manufacturing properties have seen very subdued activity over recent quarters, with almost all the leasing activity concentrated in Warehouse/Distribution properties. Notable recent move-ins include The Reynolds Company taking 132,000 sq. ft. at 6413 Tri County, Bob Mills Furniture taking 114,369 sq. ft. at 17975 I-35 and Mako Freight subleasing 112,205 sq. ft. Cornerstone Logistics Crossing.

Construction Deliveries and Construction Pipeline Remain High
By the end of Q1 2024, deliveries in the San Antonio industrial market increased to 1.7 million sq. ft., this is up 52% over the past quarter and 126% higher than the 749,330 sq. ft. completed in Q2 2023. The under-construction pipeline has decreased 3% over the past year, but still remains above the norm at 6.2 million sq. ft.

Vacancy Rate Increases to 8.3%
The overall vacancy rate in San Antonio’s industrial market is 8.6%. Quarter over quarter, the vacancy rate increased 30 basis points from 8.3%. Year over year, the vacancy increased 310 basis points from 5.5%. Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 5.5%, 3.2%, and 10.2%, respectively. With only 41% of construction pipeline pre-leased, the total vacancy rate is expected to increase moderately over the next few quarters.

Leasing Up 6% Over the Past Quarter
Quarterly leasing velocity—comprised of new leases and renewals—stood at 1.2 million sq. ft.—up 6% from 1.1 million sq. ft. in Q1 2024. The Warehouse/Distribution sector accounted for almost all of the recent leasing activity (92%), with limited activity for Flex and Manufacturing properties. Recently signed leases included The Home Depot signing a lease for 400,000 sq. ft. at AJRP Building 1 and Mesa Solutions signing a lease for 186,324 sq. ft. at 5935 Eisenhauer Rd Building 2.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 at $33.3 million. Over the past year, 109 deals were completed in San Antonio’s industrial market with an average transaction price of $117 and an average cap rate of 8%. So far in 2024, large national portfolio sales that include industrial properties in San Antonio have accounted for most of the sales transactions. The only other notable sale was Greenpoint Partners’ purchase of 647 N WW White Rd. This property is a 232,681 sq. ft. property that was built in 1966 and was 100% vacant at the time of the sale. Greenpoint intends to repurpose the property into a truck terminal facility.

Record-High Asking Rents Remain Unchanged
The average monthly rental rate (NNN) for San Antonio’s industrial market held steady at $0.70 per sq. ft. –a record-high for the metro’s industrial sector—but was flat with the quarter and year over year. The average monthly rate per square foot for Flex Space stood at $1.07 per sq. ft., while Manufacturing and Warehouse/Distribution Space rates were at $0.57 per sq. ft. and $0.65 per sq. ft., respectively. The Guadalupe County and Northwest submarkets command the highest overall monthly average rate at $0.97 per sq. ft., followed by the North Central submarket at $0.90 per sq. ft.

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