Market fundamentals mixed in early 2024 with vacancy up, but with Class A rates rising

EXECUTIVE SUMMARY

Q2 in Review
By the end of Q2 2024, the overall vacancy rate in the San Antonio office market increased to 17.5%, this is mixed over the past year. Up from last quarter, but down from one year ago. The drop of the last year was not because of positive net absorption but due to the largest vacancy in the market, the former Rackspace headquarters property, which has been sold and is going to be redeveloped into an adaptive reuse mixed-use project. This reduces the amount of direct vacant space by 1,245,000 sq. ft. Net absorption for the quarter was a negative 12,152 sq. ft. While negative, this relatively flat number is an improvement from the negative 263,829 sq. ft. recorded in Q1 2024 and much better than the 389,056 sq. ft. of negative absorption in Q2 2023. Rental rates are split heavily between Class A and Class B properties, with newer Class A rates going up and more commodity type Class B properties continuing to see rate decreases.

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 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

Net Absorption Slightly negative in Q2 2024
Net absorption—move-ins minus move-outs—was a negative 12,152 sq. ft. for the quarter. This was negative but an improvement from the negative 263,829 sq. ft. in Q1 2024. For the quarter, Class A space registered a positive 197,853 sq. ft. of net absorption, but this was outweighed by the negative 210,005 sq. ft. of absorption for Class B properties. The largest move-in for the quarter was the Galen School of Nursing taking 157,470 sq. ft. at 13805 IH-10 W in the Northwest submarket.

Construction Pipeline Decreasing
Deliveries were at 140,000 sq. ft for the quarter, this is higher than the 100,000 sq. ft. in Q1 2024, but less than half (52% below) 290,841 sq. ft. delivered in Q2 2023. The new delivery for Q2 2024 was The Rock at La Cantera, a 140,000-sq.-ft. in the Northwest submarket. Leasing activity for this property and the other recent deliveries at WaterEdge have been minimal, adding to the recent increase in the overall vacancy rate for the market.

Leasing Activity Muted so Far in 2024
Quarterly leasing velocity—comprised of new leases and renewals—stood at 518,250 sq. ft.—down 24% from the last quarter. Notable large leases include, University Health System leasing 142,500 sq. ft. at 6200 Northwest Pkwy in the Northwest submarket, The U.S. Army leasing 95,023 sq. ft. at 4270 Gorgas Circle in the Northeast submarket and Amegy Bank leasing 44,207 sq. ft. at 300 Convent in the CBD.

Vacancy Rate at 17.5%
The overall vacancy rate in San Antonio’s office market is at 17.5%. The total vacancy rate has been trending higher due to a combination of new spec construction with minimal leasing and companies continuing to downsize their footprints when leases have expired. With the construction pipeline down to 60,000 sq. ft. the vacancy rate is expected to flatten out over the next few quarters. Also, sublease space, which has been a drag on the market has decreased significantly over recent quarters and now stands at 568,123 sq. ft., well below the peak level of 1.3 million sq. ft. in Q1 2022.

Investment Sales Trends Remain Subdued
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 at $26.3 million. For the past year, 48 office properties were sold with an average $141 price per sq. ft. and an average cap rate of 9.8%. Notable recent transactions include Sunoco purchasing The Rim, a 321,840 sq. ft. office property in the Northwest submarket. The buyer was leasing 100% of the property prior to the sell and is expected to continue to do so. Also, Dogwood Commercial purchased San Pedro Plaza. This 163,852-sq.-ft office property was 90% occupied at the time of sale, with a few renewals occurring just prior to the closing, which motivated the buyer’s decision to purchase.

Rent Growth Slightly Up for the Quarter
San Antonio’s full-service average rent stands at $24.05 per sq. ft., which is up 0.5% from the previous quarter’s $23.92 per sq. ft. Asking rents for Class A and Class B space are $26.41 per sq. ft. and $22.68 per sq. ft., respectively. Despite limited demand over the past few quarters, Class A rates went up about 2% in the past quarter, while Class B rates saw a slight decline.

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