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At 7.4%, San Antonio’s average industrial vacancy rate saw a 90 basis-point increase quarter-over-quarter, and is up 190 basis points year-over-year. At the end of the third quarter, San Antonio had 6.5 million sq. ft. of vacant industrial space for direct lease and 258,000 sq. ft. of vacant sublease space.


EXECUTIVE SUMMARY

Industrial market vacancy inches upward

At 7.4%, San Antonio’s average industrial vacancy rate saw a 90 basis-point increase quarter-over-quarter, and is up 190 basis points year-over-year. At the end of the third quarter, San Antonio had 6.5 million sq. ft. of vacant industrial space for direct lease and 258,000 sq. ft. of vacant sublease space. Additionally, the San Antonio industrial market posted its first negative quarter of net absorption since Q2 2012, tallying negative 234,000 sq. ft.—down significantly compared to Q3 2018’s positive 363,833 sq. ft. The vacancy rate for Class A properties is at 18.5%, up from 12.0% this time last year. The overall monthly average asking triple-net rent has steadily grown to its current rate of $0.51 per sq. ft., up from $0.49 a year ago—a 3.4% increase.

Economic indicators

Growth in the San Antonio economy accelerated in August. The San Antonio labor markets remain very tight, while the seasonally adjusted unemployment rate held at a low 3.1% in August, mirroring the stability of the higher Texas rate at 3.4%, the U.S. rate at 3.7%. Job growth increased over the three months ending in August to a 4.8% annualized rate. Growth was mixed across industries, with construction the fastest-growing sector. Other large industries such as health care and leisure and hospitality realized a net hiring surge, adding a combined 7,500 jobs. Retail trade jobs also grew, lifting the trade, transportation and utilities sector. Areas of softness include mining, which declined more sharply over this period, and manufacturing, which reversed moderate gains from earlier in the year.

Broker’s Perspective

The overall San Antonio Industrial market continues to report robust growth. Even with a record amount of new construction going up at 1.48 million sq. ft., San Antonio’s diversified economy, substantial population growth and healthy unemployment rate of 3.3% have all been contributing factors driving demand for space in the region. Concessions remain at a nominal level while rental rates continue to hold between $5.00 and $6.00 per sq. ft. per year for distribution space, depending on size and location.

The dominant share of new development continues to position itself on the I-10 and I-35 corridors of the metro, providing for both citywide and regional distribution to San Antonio and the greater South Texas region. New leasing activity has been focused within industries such as building products, food-grade distribution, consumer goods, and last-mile logistics. All considered, we believe the overall trends and metrics provide for a healthy lease-up for these new projects, allowing demand to keep pace with supply.

Lastly, the automotive sector continues to flourish in San Antonio, successfully competing on a national level to land the recently announced Navistar manufacturing campus—as well as landing a new manufacturing plant for one of Toyota’s primary suppliers, Aisin. Both recent wins point towards San Antonio providing a strong skilled labor force, as well as being strategically positioned less than 200 miles from Mexico—a major factor in the automotive supply chain. 

Cody Woodland
Vice President
NAI Partners

MARKET OVERVIEW

New supply continues to outpace demand

The San Antonio industrial market has grown to 84.7 million sq. ft. in the last five years, expanding the metro’s inventory by 15.2%. Supply has outpaced demand for the last six quarters in the Alamo City’s industrial market. The amount of industrial space delivered to the market during Q3 2019 was 868,000 sq. ft., compared to the quarter’s negative 234,000 sq. ft. of net absorption—one of the widest margins ever recorded. Net absorption is the measure of total square feet occupied in existing buildings, (indicated as a Move- In) less the total space vacated (indicated as a Move-Out) over a given period of time. The Q3 2019 net absorption was comprised of negative 135,000 sq. ft. of Warehouse/ Distribution space, negative 94,000 sq. ft. of Flex space, and negative 5,600 sq. ft. of Manufacturing space.

Significant move-ins and move-outs

In Q3 2019, positive influences on overall net absorption include noteworthy move-ins involving 79,947 sq. ft. of space occupied by Knight Aerospace Products at 3606 SW 36th St. in the South submarket; 57,348 sq. ft. of space absorbed by MyGrant Glass at 4825 Eisenhauer Road in the Northeast submarket; and 50,000 sq. ft. of space occupied by Smurfit Kappa Group at 7030 Old Pearsall Road in the South submarket. Negative effects on overall net absorption involve 162,871 sq. ft. added back to the market from Acadian Crossing Logistics at 1331 N. Pine St. in the Northeast submarket; 102,485 sq. ft. vacated at 4958 Stout Drive in the South submarket; and 80,000 sq. ft. at Industrial Park Distribution Center—Rittiman East Building 8 vacated in the Northeast submarket.

Advances for automotive manufacturing in the San Antonio area

Urban Land Institute’s latest survey of U.S. cities ranked San Antonio No. 24 for real estate prospects in 2020 as several automobile manufacturers are making investments in San Antonio. Navistar, a commercial truck manufacturer plans to build a $250 million manufacturing facility that will create 430 jobs, according to a statement from Gov. Greg Abbott. Navistar’s proposed manufacturing plant would build Class 6-8 vehicles, which can transport up to 33,001 pounds. The company’s investment in developing next-generation trucks comes at an uncertain time for the commercial trucking industry, as the rise of autonomous, self-driving trucks approaches. The location for Navistar’s proposed plant was not disclosed except that it is along Interstate 35 with plans to break ground in 2019 and anticipates production will begin at the end of 2020. In addition, Toyota plans to invest $391 million to expand its San Antonio truck assembly plant and Japan-based Aisin, one of Toyota’s suppliers, will spend $400 million to build a plant in Cibolo, which is about 25 miles northeast of downtown San Antonio. The Aisin deal is said to create 900 jobs and is the company’s first investment in Texas. In Seguin, Guadalupe County, there is another manufacturing development underway. Continental Structural Plastics, which makes composite components for vehicles, is scheduled to break ground on a plant that will employ 200 employees. The company supplies auto manufacturers worldwide, including Toyota.

Investment sales activity

Real Capital Analytics data reports the third quarter sales volume for San Antonio industrial properties was $33.5 million compared to third quarter 2018 at $16.6 million, resulting in a year-over-year quarterly volume change of 101.4%. The primary capital composition for buyers in Q3 2019 was made up of 58.5% institutional investors, and 37.7% private. For sellers, the majority was 38.6% private investors, and 26.8% institutional. In the third quarter, AEW Capital Management acquired the two-building, 235,000- sq. ft. Lanark Distribution Center from TA Realty. Building 1 at 610 Lanark Dr. is 147,376 sq. ft. and 26% leased. Building 2 is 88,044 sq. ft. and 90% leased. The sale by TA Realty was part of an 8.3 million-sq.-ft., 96-property logistics portfolio for $1.04 billion in two separate transactions. The Lanark Distribution Center deal was part of the transaction including the portfolio’s 28 Texas-based properties.

Leasing activity

The volume of square footage signed during the third quarter was at 873,000 sq. ft.—down from the previous quarter’s 1.6 million sq. ft.—and down 35% from this time last year (1.3 million sq. ft.), although ecommerce and logistics activity continue to be strong in San Antonio. The largest leases signed in Q3 2019—which is comprised of both new leases and renewals—include the Convermex USA deal signed for 90,000 sq. ft. in Rittiman West Industrial Park in the Northeast submarket; XPL inked a deal at 17750 Lookout Road for 75,000 sq. ft. in Comal County; and 70,000 sq. ft. was taken at 1120 N. Foster Road in Pan American Logistics Center in the South submarket. Recent activity reflects the demand for industrial real estate in central Texas, continuing to create the need for industrial space in and around San Antonio.

Asking NNN rates remain steady

Monthly rental rates for the entire market on average are at $0.51 per sq. ft., as of the third quarter of 2019, unchanged from the previous quarter, with an increase from $0.49 per sq. ft. at this time last year. The monthly average rate for Flex space is currently at $0.93 per sq. ft.; Manufacturing rates are at $0.39; and Warehouse/Distribution space sits at $0.46. The North Central and Northwest submarkets currently have the highest monthly overall average rates at $0.71, and $0.70 per sq. ft., respectively, followed by Guadalupe Co. submarket at $0.53. As new projects with high quality space are delivered to the market, coupled with the rising costs to developers, rental rates could continue to increase in the future.


Leta Wauson
Director of Research
[email protected]
tel 713 275 9618

 

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