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Raub Report October 2015

November 2, 2015

San Antonio is known as the steady real estate market – neither big boom nor bust. So it goes.

Prices of investment properties are continuing to increase, but the supply of available, attractive properties is not plentiful.  As mentioned in previous Reports, owners are sitting on their properties and are reluctant to sell.  The question is, “If I sell, into what then do I reinvest the money?  The stock market scares me.  I am better off with a property I know, then taking a chance on a new property I don’t know.”   Prices of properties are remaining high, as occupancies increase, rents increase and values increase along with them.  Then, too, the supply of new construction entering the market is not large.  Banks remain tight on construction money and require substantial pre-leasing, usually in the 60% range.  Generally, preleasing only comes when there is a national tenant or tenants looking to expand their footprint into new areas of developing housing markets.  So, overbuilding is not in the cards at this point.  In fact, a lot of new retail buildings are single tenant buildings with long term leases.  Retail building developers, for example, will only complete 700,000 square feet of new space this year, which is less than half of what was built in 2014. So retail space is getting very tight, as what is built is being occupied.

The City has trumpeted this to be the Decade of Downtown.  Well, half way in, it seems to be working.  Starting with Mayor Hardberger’s Museum Reach and Mission Reach River projects, and then the Pearl Brewery renovation, the downtown has come alive.  The City has provided tax incentives which have helped, but don’t worry about overbuilding downtown.  So far 4,300 units have been built, occupancies are exceptionally high and rents have increased at least 25% in the past five years. Rents are beginning to exceed $2.00 per sq.ft.

Compare this to the suburbs, where $1.00 per square foot is average in Class B apartments.   But then, with land prices in the suburbs being so high, it isn’t possible to build an affordable Class B apartment, despite the high demand.

What about interest rates?  They will go up, eventually, some day, probably … But, this is already priced into commercial real estate, as the large institutions have taken this into account in their purchases.   What about the fall in oil prices?  This affects Houston far more than the diversified San Antonio economy; we only have a 3% exposure to the oil industry. And besides, Houston is still growing but just more slowly. What about a global economic slowdown?  San Antonio will create an additional 30,000 jobs this year, about a 3% growth rate, and above the national average.  Where are these jobs coming from?  Business and professional services lead the pack. We have a big city, and over 85% of the growth comes from within, not from corporations moving here. We actually have a very healthy manufacturing sector, too.  Aren’t we overbuilding offices along Loop 1604?  Maybe, for a short time, but it is the only place we are building new office space for this vibrant metropolis.