San Antonio Office deliveries more than triple quarter-over-quarter.

EXECUTIVE SUMMARY

Q2 In Review
By the end of Q2 2023, the overall vacancy rate in the San Antonio office market rose 70 basis points quarter-over-quarter, from 14.7% to 15.4%. Net absorption turned positive in Q2 2023 at 219,104 sq. ft., after two
prior quarters of negative absorption—primarily due to office deliveries more than tripling quarter-over-quarter. In Q2 2023, office deliveries totaled 797,040 sq. ft., up from 232,037 sq. ft. the prior quarter. Fasken Development’s 717,000-sq.-ft. campus delivered in April 2023 still stands as one of the largest office deliveries in San Antonio so far this year. On the other hand, rent growth in the San Antonio office market has continued to slow down, with the average full-service rate standing at $24.26 per sq. ft.

San Antonio Economic Update
San Antonio’s unemployment rate increased to 4.0% in May 2023, slightly up from 3.8% in April 2023. The metro’s jobless rate beat the nation’s rate (3.7%) but was lower than the state’s rate (4.1%). Professional and business services saw the most growth (3,987 jobs, 33.5%), while leisure and hospitality experienced the largest decline (97 jobs, 0.8%) among the sectors. San Antonio wages also increased by an annualized 3.0% in May 2023—moving the average hourly wage up to $27.94.

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MARKET OVERVIEW

Net Absorption Turns Positive In Q2 2023
In Q2 2023, net absorption—move-ins minus move-outs—increased to 219,104 sq. ft. in San Antonio’s office market. This is a notable increase compared to the two preceding quarters, where net absorption was -388,989 sq. ft. in Q1 2023 and -43,456 sq. ft. in Q4 2022. This increase is partially due to 327,153 sq. ft. of direct space allocated in net absorption in Q2 2023. Year-to-date, net absorption is at -169,885 sq. ft.

The Northwest Submarket Dominates Construction and Deliveries
Deliveries in the San Antonio office market reached 797,040 sq. ft. by the end of Q2 2023. Quarter-over-quarter, deliveries more than tripled from 232,037 sq. ft. in Q1 2023. Year-to-date, deliveries are 1.0 million sq. ft.—with the Northwest submarket accounting for 77% of the space delivered. Fasken Development’s North Rim Campus—a two-building, 717-000-sq. ft. site delivered in April 2023— still stands as one of the largest contributors to San Antonio’s office deliveries in 2023 thus far. Although still strong, office construction decreased 35% quarter-over-quarter from 1.7 million sq. ft. in Q1 2023 to 1.1 million sq. ft. in Q2 2023. The Northwest submarket also leads construction, with 643,417 sq. ft.—or 55%—of all space under development, followed by the South with 200,000 sq. ft. (17%).

Vacancy Rate Increases to 15.4%
The overall vacancy rate in the San Antonio office market is at 15.4%, up 70 basis points from 14.7% in Q1 2023. Class A and Class B properties have vacancy rates of 20.6% and 14.2%, respectively. Class A submarkets with the greatest quarter-over-quarter increases include: Northeast (12.1% to 15.0%), CBD (27.0% to 29.8%), and Northwest (16.3% to 18.1%). Class B submarkets with the greatest quarter-over-quarter increases include: Northeast (47.9% to 50.5%), Northwest (8.9% to 9.6%) and South (2.2% to 2.6%). High-profile move-outs at the end of 2022—such as Rackspace Technology vacating 1.6 million sq. ft. of office space—contributes to the heightened vacancy rates thus far in 2023.

Leasing Down from Previous Quarter
The volume of signed lease transactions during the second quarter—comprised of new leases and renewals—was 545,188 sq. ft., down from a more robust 1.0 million sq. ft. in Q1 2023. Despite the quarter-over quarter decrease, the San Antonio office market has averaged 896,860 sq. ft. annually in leasing activity over the last four years.

Investment Sales Trends
Year-to-date, CoStar Capital Market Analytics reports the cumulative 12-month sales volume for 2023 at $206 million in San Antonio’s office market. With 104 deals completed thus far in 2023, the average transaction
price currently stands at $293 per sq. ft. with an average transaction cap rate at 6.4%. By year-end of 2022, the cumulative 12-month sales volume was $329 million, and 360 deals were completed with an average transaction price of $208 per. sq. ft. and an average cap rate of 6.5%. A notable acquisition within Q2 2023 included Advenir closing on a 109-320-sq.-ft. office complex at 2455 Northeast Loop 410 for $19 million.
Located in the Northeast submarket this property was 100% at the time of sale.

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