Asking rent nears all-time high even as vacancy persists at elevated levels in San Antonio Office market

EXECUTIVE SUMMARY

Q3 In Review
By the end of Q3 2023, the overall vacancy rate in the San Antonio office market remained flat from the previous quarter at 15.3%. Net absorption dipped slightly into negative territory at -19,109 sq. ft., as the metro is still recovering from past and recent move-outs such as Rackspace (-1.2 million sq. ft.) in Q4 2022, and WellMed (-189,492 sq. ft.) in Q3 2023. Year-to-date, net absorption is at -164,093 sq. ft. The Northwest submarket has reclaimed a majority of developments, accounting for 79% of the year-to-date deliveries and 64% of construction underway. Year-to-date, deliveries total 1.1 million sq. ft. Office construction is at 968,681 sq. ft., across 9 buildings, with 310,363 sq. ft. (32%) available for lease. Leasing activity increased 3% from 438,038 sq. ft. in Q2 2023 to 450,457 sq. ft. Lastly, the average asking rent increased slightly to $24.41 per sq. ft.

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

San Antonio Office Deal & Broker Spotlight 
San Antonio CRE experts Lindsey Tucker and Kyle Kennan arranged a 2,200-sq.-ft. office lease with Auravia Wellness and Positive Soul Holistic Therapy in San Antonio, located at 14701 San Pedro Avenue. Mrs. Tucker and Mr. Kennan represented the landlord, Grand Slam Holdings, Ltd. in the transaction.

The Northwest Submarket leads the way in Construction and Deliveries
During the quarter, the Northwest submarket once again controlled office supply in San Antonio— accounting for 64% of construction underway and 79% of year-to-date deliveries. Office construction is at 968,681 sq. ft., across 9 buildings, with 310,363 sq. ft. (32%) available for lease. Deliveries are at 22,000 sq. ft., down from 797,040 sq. ft. in Q2 2023. Year-to-date, deliveries totaled 1.1 million sq. ft. Located in the Northwest submarket, a 22,000-sq.-ft. office space (Building 5) at 4318 De Zavala Road was recently completed in September 2023.

Negative Net Absorption in Q3 2023
Net absorption—move-ins minus move-outs—fell into negative territory at -19,104 sq. ft., plummeting from 232,942 sq. ft. in Q2 2023. Year-to-date, net absorption is at -164,093 sq. ft., During the third quarter, WellMed moved out of The Oaks at University Business Park—a three-building complex totaling 189,492 sq. ft. Building 2 (44,005 sq. ft.), Building 3 (80,439 sq. ft.) and Building 4 (65,048 sq. ft.) are located in the Northwest submarket on Network Boulevard, and were prominent contributors to the third quarter’s negative net absorption. In addition, San Antonio’s office sector is still recovering from past significant move-outs such as Rackspace (-1.2 million sq. ft.) in Q4 2022. which accounted for a majority of the metro’s negative net absorption over the past 12 months. As a result, San Antonio is likely to see improved fundamentals once these move-outs shift out of the city’s trailing 12-month absorption figure.

Leasing Activity Up 3% Quarter-Over-Quarter
Quarterly leasing velocity—which is comprised of new leases and renewals—stood at 450,457 sq. ft.—up 3% from 438,048 sq. ft. in Q2 2023. Year-to-date, leasing activity registered at 1.9 million sq. ft. In Q3 2023, Bridgehead IT signed a lease for 15,280 sq. ft. of office space at 1355 South Central Parkway in September, and Oracle inked a deal for 17,464 sq. ft. of office space at 613 Northwest Loop 410 in August.

Vacancy Rate Remains At 15.3%
The overall vacancy rate in San Antonio’s office market remained flat from the previous quarter at 15.3%. Class A and Class B properties have vacancy rates of 21.4% and 13.8%, respectively. The Northeast submarket recorded the greatest overall vacancy rate increase from 34.4% to 36.0%. The South submarket noted the greatest overall vacancy rate decrease from 12.4% to 9.4%.

Investment Sales Trends
Year-to-date, CoStar Capital Analytics reports the cumulative 12-month sales volume for 2023 at $192 million in the San Antonio office market. With 140 deals completed thus far in 2023, the average transaction price currently stands at $267 per sq. ft. with an average transaction cap rate of 6.9%. A notable transaction in Q3 2023 included QPM Enterprises, closing on two buildings in August 2023. Building 1 (Tech Ridge I) encompasses 72,474 sq. ft. of office space at 12668 Silicon Drive and Building 2 (Tech Ridge II) contains 46,265 sq. ft. of office space at 12672 Silicon Drive. Located in the Northwest submarket, this acquisition was 100% leased at the time of sale.

Rent Increases To $24.41 Per Sq. Ft.
The San Antonio office overall full-service average rate stands at $24.41 per sq. ft., up slightly from the previous quarter’s $24.26 per sq. ft., and the previous year’s $24.09 per sq. ft. Asking rates for overall Class A and Class B space are at $27.46 per sq. ft. and $22.50 per sq. ft. respectively. Submarkets with the highest quarter-over-quarter increases in asking rates include the CBD at $36.23 per sq. ft. (1%), and the Northwest at $24.42 per sq. ft (2%).

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