South(ern) Comfort: Submarket leads way in San Antonio Industrial year-to-date deliveries

EXECUTIVE SUMMARY

Q3 2023 in Review
By the end of Q3 2023, the overall vacancy rate in the San Antonio industrial market rose 20 basis points quarter-over-quarter, from 5.6% to 5.8%. Net absorption shifted from -24,901 sq. ft. in Q2 2023 to positive 595,967 sq. ft. in Q3 2023. Dixie Flooring & Floors, Inc. and OnTrac move-ins contributed to the third quarter’s positive absorption. Deliveries are at 1.1 million sq. ft., up 47% from the prior quarter’s 749,330 sq. ft. Year-to-date, deliveries are at 5.6 million sq. ft.—with the South submarket accounting for 59% of the space delivered. Lastly, the average monthly rental rate reached $0.70 per sq. ft., a record-high for San Antonio’s industrial market.

San Antonio Economic Update
San Antonio’s unemployment rate remained flat at 3.9% from July to August. The metro’s jobless rate was lower than the state’s rate of 4.1% and slightly higher than the nation’s rate of 3.8%. In August, San Antonio’s labor force increased an annualized 4.5%; these gains offset payroll growth, leading to the steady unemployment rate. The largest gains by sector included: leisure and hospitality (2,677 jobs, 25.6%), other services (371 jobs, 11.3%), and construction (326 jobs, 6.3%). The largest declines by sector included: professional and business services (-1,058 jobs, -7.5%), trade, transportation, and utilities (-878 jobs, -5.0%), financial services (-179 jobs, -2.1%), and manufacturing (-97 jobs, -2.0%).

MARKET OVERVIEW

Net Absorption Turns Positive in Q3 2023
Net absorption—move-ins minus move-outs—increased to 595,967 sq. ft., rebounding from -24,901 sq. ft. in Q2 2023. Year-to-date, net absorption has totaled 1.8 million sq. ft. Warehouse/Distribution space and Flex Space recorded positive absorption of 716,693 sq. ft. and 115,433 sq. ft., respectively. Manufacturing space logged negative absorption of -236,159 sq. ft. Dixie Flooring & Floors Inc., filled 106,356-sq. ft. of warehouse space at 5930-6010 Eisenhauer Road in September. In addition, OnTrac occupied 104,000-sq. ft. of warehouse space at 17670 Four Oaks Lane in July.

The South Dominates Deliveries
Deliveries in the San Antonio industrial market increased to 1.1 million sq. ft., ticking up 47% from 749,330 sq. ft. in Q2 2023. Year-to-date, deliveries are at 5.6 million sq. ft.—with the South submarket accounting for 59% of the space delivered. A master-planned industrial development, Foster Commerce Center, added 651,596 sq. ft. to Q3’s deliveries. Building 2 (406,402 sq. ft.) and Building 3 (295,194 sq. ft.) were completed in August 2023 and are located at 1122 South Foster Road between Interstate 10 and US Highway 87. In addition, a 252,600-sq.-ft. distribution center at the intersection of Dunton Street and North Tayman Street was delivered in September 2023. Construction is at 2.6 million sq. ft., down 10% from 2.9 million sq. ft. last quarter.

Vacancy Rate Increases to 5.8%
The overall vacancy rate in San Antonio’s industrial market rose to 5.8%, increasing 20 basis points from the prior quarter (5.6%). Only 44% of the year-to-date deliveries have been fully leased, contributing to the increase in the overall vacancy rate. Despite the slight increase, the overall vacancy rate has remained relatively stable, averaging 5.5% over the last 10 years. Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 5.6%, 2.1%, and 6.8%, respectively.

Leasing Down 22% Quarter-Over-Quarter
Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 1.4 million sq. ft. during the third quarter—down 22% from 1.8 million sq. ft. in Q2 2023. Year-to-date, leasing activity registered at 5.6 million sq. ft. A transaction within the third quarter included Mega Furniture’s lease renewal on a 101,200-sq.-ft. distribution center at 8627 NE Loop 410 in July 2023.

Investment Sales Trends
Year-to-date, Costar Capital Markets Analytics reports the cumulative 12-month sales volume for 2023 at $38.7 million in the San Antonio Industrial market. With 167 deals completed thus far in 2023, the average transaction price currently stands at $117 per sq. ft. with an average transaction cap rate at 7.7%. A notable transaction in Q3 2023 included Capstar Real Estate Advisors closing on a 490,083-sq.-ft. distribution center at 6851 Cal Turner Drive.

Record-High Rental Rates 
The average monthly rental rate for the San Antonio industrial market reached a record-high $0.70 per sq. ft. in Q3 2023, up 8% year-over-year from $0.65 per sq. ft. The average monthly rate per square foot for Flex space stood at $1.17 per sq. ft., while the rates for Manufacturing and Warehouse/Distribution space were at $0.54 per sq. ft. and $0.63 per sq. ft., respectively. The North Central and Guadalupe County submarkets command the highest monthly average rates at $0.99 per sq. ft. and $0.92 per sq. ft.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618