REOC San Antonio
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Kim_Gatley
Kim Gatley
S
enior Vice President & Director of Research at REOC San Antonio

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REOC San Antonio Releases 3Q16 Office Market Update

Source: REOC San Antonio/Xceligent

Source: REOC San Antonio/Xceligent

Topping office market news, two large leases inked in the third quarter will take two new empty Northwest buildings off the market when San Antonio-based financial services company USAA occupies Westridge Two at La Cantera (129,000 sf) and Vista Corporate Center (150,735 sf), which is set to come online next quarter. USAA’s expansion further strengthens the San Antonio office market by reducing the overall vacancy rate and validating continued development.

Other notable leases included Booz Allan Hamilton (22,160 sf) at Weston Centre in the downtown market and Centene Management (21,116 sf) at One51 Office Centre in the Far West sector. In all, San Antonio’s office market experienced 391,324 square feet of positive net absorption in the third quarter which bumped the year-to-date total to 841,500 square feet, putting the market on track to top a million square feet by year-end which is double San Antonio’s historical annual average.

Overall, demand outpaced new supply which caused the citywide vacancy rate to tighten to 15.6% compared to 18.6% last quarter and 18.0%. Improvement came despite the addition of more than half a million square feet of new office space delivered over the past twelve months including two office buildings totaling more than 100,000 square feet delivered in the third quarter. Crownridge Office Building (43,500 sf) and the build-to-suit for Bank of San Antonio (57,000 sf) were both added to the Northwest submarket and came online with pre-leasing in place.

Among Class A buildings, the citywide vacancy rate improved compared to last quarter moving from 13.3% to 11.7%, which is down compared to 12.4% recorded in the same quarter of last year and substantially lower than the Class B and C markets recorded at 17.0% and 22.4%, respectively. Looking ahead, the Class A vacancy is expected to fluctuate as nearly 524,000 square feet of new office space moves through the development pipeline led by Landmark One (164,531 sf) which has yet to sign any pre-leasing. In addition to Vista Corporate Center, which will be filled by USAA, other projects will also come online with significant pre-leasing already in place such as The Oaks of University Business Park 4, which will accommodate an expanding WellMed.

Improved vacancy rates continue to support increased rental rates but a significant factor behind climbing rents relates to skyrocketing property taxes which are included in the cost of operating a building. Office properties closed the third quarter with a combined citywide average quoted rental rate of $23.87 per square foot on an annual, full-service basis. In general, the citywide average rent is up $1.29 per square foot compared to a year ago reflecting higher rental rates quoted for new product and increased operating expenses. Of course, quoted rents vary by location; the Far North Central sector, for example, commands an average $28.12 – the highest average asking rental rate in the city. On average, the cost for renting Class A office space stands at $27.86 while the average rent for Class B space stands at $21.92.

Investment activity took a jump in the third quarter – a turn of events after the summer doldrums. The largest sale transaction recorded was the The Pyramid Building (218,696 sf) which was purchased by SA Loma Roja Real Estate LLC. A near second-largest sales transaction was the Milam Building (201,851 sf) purchased by Weston Urban.

Investors are attracted to the solid market fundamentals and San Antonio’s ability to attract new companies which supports expansion of existing employers and lure new company relocations. Over the past twelve months ending September, the San Antonio-New Braunfels region gained 21,100 new jobs for a moderate 2.1% annual job growth rate and currently stands with an unemployment rate of 4.1% which compares favorably to the Texas rate of 4.9% and the U.S. rate of 4.8%.

Click to download REOC San Antonio’s complete 3Q 2016 Office Market Report

 

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