San Antonio office market sees modest improvement in absorption and rents, but vacancy remains elevated amid limited construction.

EXECUTIVE SUMMARY

Q3 in Review
San Antonio’s office market demonstrated signs of improvement in Q3 2024, with net absorption turning positive at 122,988 sq. ft., though year-to-date absorption remains negative. Class B space drove much of the quarter’s activity, while Class A absorption stayed flat. The vacancy rate stands at 17.7%, driven higher by companies downsizing and minimal leasing of new speculative construction. Leasing activity picked up, with notable deals, but remains below historic norms, especially for Class B properties. The construction pipeline is limited, with only one medical office project underway, signaling potential increased activity for recently completed projects. Despite these challenges, rent growth was modest, with a 1% quarterly increase, reflecting resilience in Class A rates while Class B rents saw slight declines.

San Antonio Economic Update
San Antonio payrolls increased an annualized 10.1% in August (9,403 jobs). Job gains were driven mainly by government (39.3%, or 5,258 jobs), but also by leisure and hospitality (8.6%, or 989 jobs), education and health services (5.9%, or 863 jobs), manufacturing (17.6%, or 849 jobs), and trade, transportation and utilities (4.7%, or 807 jobs). All sectors experienced monthly growth except for information (-5.3%, or 75 jobs). Year-to-date total nonfarm employment grew 1.5% in San Antonio, slower than Texas (2.2%) but higher than the U.S. (1.4%).
The San Antonio unemployment rate remained 3.8%. The unemployment rate in Texas was higher at 4.1%, as was the U.S. rate, at 4.2%.

MARKET OVERVIEW

Net Absorption Positive for the Quarter, but Still Negative for the Year so Far
Net absorption—move-ins minus move-outs—was 122,988 sq. ft. for the quarter. This was an improvement from the first and second quarters which recorded negative absorption of 12,162 sq. ft. and 263,829 sq. ft., respectively. For the quarter, Class A space had negative 24,819 sq. ft. while Class B was positive 147,807 sq. ft. This quarter was a bit of an outlier from the demand perspective—over the past few quarters, Class A has been essentially flat, while Class B properties continue to struggle from a demand perspective.

Construction Pipeline and Deliveries nearly Nonexistent
There were no new deliveries for the quarter and there is only a single 60,000 sq. ft. medical office property currently under construction. There are some proposed projects, but with so little currently underway, recently delivered construction should see increased activity in the near term.

Leasing Activity Picked Up, but Still Below the Historic Norm
So far in 2024, leasing activity for Class A space is near the year average, while Class B is only about 50% of the norm. Notable large leases include, University Health System leasing 142,500 sq. ft. at 6200 Northwest Pkwy in the Northwest submarket; Guidehouse leasing 107,094 sq. ft. at Westover Hills; 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 17.7%
The overall vacancy rate in San Antonio’s office market is at 17.7%. Over recent quarters 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. Also, sublease space, which has been a drag on the market has decreased significantly over recent quarters and now stands at 410,052 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 Q3 2024 at $69.5 million. For the past year, 54 office properties were sold with an average $218 price per sq. ft. and an average cap rate of 9.7%. 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. The Gordon Hartman Family Foundation sold The MAC at Morgan’s Wonderland, a 165,000-sq.-ft. medical office facility to Dream Finders Homes.

Rent Growth Slightly Up for the Quarter
San Antonio’s full-service average rent stands at $24.29 per sq. ft., which is up 1.0% from the previous quarter’s $24.05 per sq. ft. Asking rents for Class A and Class B space are at $27.16 per sq. ft. and $22.07 per sq. ft., respectively. Despite limited demand over the past few quarters, Class A rates went up about 2.1% over the past year, while Class B rates saw a slight decline.

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