San Antonio Office market construction remains consistent.
EXECUTIVE SUMMARY
SAN ANTONIO AVAILABILITY AT PEAK RATE
Overall space availability, which includes current, sublease, and future vacancy, is at 15%. The North Central submarket ended Q1 2022 with an availability rate of 19.6%, followed by the CBD at an 18.0% availability rate, and in third place, the Northeast submarket at 14.1%. The difference between this figure and the vacancy rate reflects expected future move-outs. Delivered supply has outpaced demand, represented by net absorption, in all but one quarter (Q3 2021) since Q4 2019. With current projects under construction at 1.4 million sq. ft., and proposed projects estimated at 2.4 million sq. ft. during 2022 and 2023, demand will have to increase for the high availability rate to have an opportunity to decrease gradually.
SAN ANTONIO’S ECONOMY IS MAINLY POSITIVE
The metro’s unemployment rate remained stable in February at 4.1%, one of the lowest rates since the start of the pandemic. For comparison, the state’s jobless rate fell slightly to 4.7%, and the nation’s rate fell to 3.8%. San Antonio’s labor force expanded an annualized 7.5% in February, well above Texas’ gain of 3.4% and the nation’s gain of 2.3%. San Antonio payrolls expanded an annualized 5.5% (14,430 jobs) in the three months ending in January. Among the major sectors, health and education services (13.4%, or 5,269 jobs) led three-month growth, followed closely by leisure and hospitality (12.6%, or 3,954 jobs). Industries that posted contractions the past three months were manufacturing (-8.1 %, or 1,082 jobs) and government (-3.3%, or 1,444 jobs). In March and April 2020 combined, 138,332 jobs were lost in the metro as the pandemic hit. As of February 2022, all jobs had been recovered, and employment was 0.3% above pre-pandemic levels.
MARKET OVERVIEW
NET ABSORPTION REGISTERS NEGATIVE IN Q1
The San Antonio office market registered a negative 675,208 sq. ft. of net absorption as the disruptions from the Delta and Omicron variants continue to plague some return-to-office policies. In Q4 2021, USAA, which employs 19,000 in San Antonio, announced will sublease portions of its downtown office on Convent Street, approximately 421,000 sq. ft., as the pandemic-era trend toward remote work continues. In addition, over 90,000 sq. ft. was added to the market in The Grant & Kress Building at 305-315 E. Houston Street. The recently redeveloped buildings downtown were listed for sale earlier this year.
CONSTRUCTION ACTIVITY
San Antonio has 1.4 million sq. ft. underway (70% preleased), representing 2.1% of inventory, on top of the 200,000 sq. ft. that have been delivered so far in 2022. There is 2.4 million sq. ft. of proposed projects that have been announced for 2022 and 2023, although they have yet to break ground. The amount of construction underway and in the pipeline has been, on average, about 1.3 million sq. ft. over the past decade. Of the 12 buildings under construction, the range in size varies from the Jefferson Bank headquarters at 280,000 sq. ft. to medical office buildings ranging from 80,000 sq. ft. to 30,000 sq. ft.
INVESTMENT SALES ACTIVITY
Real Capital Analytics data reports the cumulative monthly sales volume as of Q1 2022 for San Antonio office properties was $172 million compared to the same time in Q1 2021 at $59 million, an almost 200% increase. Value and growth — particularly regarding office-using jobs and population — have likely played a major role in investors’ eagerness to buy assets there. The San Antonio office market’s primary capital composition for buyers in 2022 was made up of 68% private investors and 28% institutional. For sellers, the majority were 45% private investors, 28% institutional, and 28% user/other investors.
LEASING ACTIVITY
Leasing velocity slowed by about 40% quarter-over-quarter, registering 542,000 sq. ft. in Q1 2022 versus 913,000 sq. ft. in Q4 2021. Significant lease transactions so far in 2022 include Spectrum signing a deal for 69,000 sq. ft. of office space at 11826 Tech-Com Suite 100. The property known as the Crosswinds Technology Park is located in the northeast submarket. Also, UT Health leased 20,000 sq. ft. at 5109 Medical Drive. The property is located at South Texas Medical Center, which is in the northwest submarket.
OVERALL VACANCY RATE AT 11.7%
The overall vacancy rate in the San Antonio office market is 11.7%, up 130 basis points quarter over quarter from 10.4% and up 100 basis points year over year from 10.7%. The highest vacancy rate by location and class is the CBD Class A at 29.4% vacancy, followed by the North Central Class A at 19.7%, and the third-highest ranking is the North Central Class B at 17.4%. Home of the Pearl, San Antonio’s premier development, and much of the city’s northern suburbs, North Central San Antonio is a large and bifurcated submarket. The submarket (at least the more suburban areas) could see growth constrained by nearby Northwest San Antonio. Tenants don’t just want a decent building anymore; they want amenities, and it’s difficult to compete with Northwest San Antonio’s lures, including La Cantera, the Rim, and the economic activity that revolves around the University of Texas at San Antonio. The vacancy rate for medical/office space is 14.3%, down from 14.9% in Q4 2021 and down from 16.2% this time last year. The total amount of medical office inventory in San Antonio is 10.1 million sq. ft.
HIGHEST OVERALL ASKING LEASE RATES
Full-service average rates are at $24.56 per sq. ft., up 7.5% from this time last year, pushing the metro San Antonio office market to its highest overall asking lease rate. Asking rates for Class A space are averaging $29.30, and Class B is averaging $21.81 per sq. ft. During the past ten years, average annual rent growth has been somewhat flat at 2.3%, with a peak year in 2019 at 6.5%.
Leta Wauson
Director of Research
[email protected]
tel 713 275 9618
Additional Research from NAI Partners
San Antonio Office | Quarterly Report | Q4 2021
San Antonio Office| Monthly Market Snapshot | March 2022