As the exciting year of 2017 draws to a close, let’s review the Commercial Real Estate market, and consider this past year as the prologue to the New Year 2018. Let me begin with the residential market, though.
Interesting things are afoot. Here’s a clue – home sales volume is up, that is the dollar amount of home sales, but the number of homes being sold/purchased is down! What gives? Well, home values are rising at a clip well above inflation, about 5 to 7% per year, every year. That adds up. But the number of homes being sold is lower because new home buyers can’t qualify for the homes they want. They either have to increase their down payment, pay down credit cards to improve their credit scores, or just decide to stay put. Home prices have gone up much faster than incomes to support the higher mortgage payments. So buyers are in a bind. Sellers? They have to find a suitable new house to buy when they sell so if they can’t, they don’t put their home on the market.
San Antonio’s home prices have appreciated over 46% in the past decade and, along with Austin, Dallas and Houston, the state of Texas leads the nation in higher values. In fact, Austin takes the top prize at a whopping 63% price appreciation over the last 10 years.
San Antonio metropolitan area unemployment has declined to a 16-year low of 3.6%, the lowest since 2000! Texas is winning the undeclared war for workers, versus the other states. Indications are our fair city will have net new job creation of nearly 35,000, about 3.5% of our 1,000,000 job base. Remember, most of these jobs are being filled from our local workforce, that is, high school and college graduates. The remainder are in-migrants from other states and regions. This creates demand for new office space, new retail space, and industrial space, too.
Here is a very rough rule of thumb for housing: for every 2 jobs created we need one additional housing unit. Seems reasonable enough since all of those new workers aren’t living at mom’s home but need a new apartment or home to rent or buy. So, this past year we will see about 10,000 new homes built and sold by our local home builders, that is 10,000 new single family living units added to our existing stock, while a lot of pre-owned homes are bought and sold, too. So, if I divide 35,000 by 2, then we need about 17,500 new housing units, using my very rough rule of thumb. If 10,000 are new homes, then the other 7,500 must be apartment units. Thus, we see a lot of new multifamily construction across the city. While we may be adding about 1,000 new living units downtown each year, most of the new development is along IH-10, Westover Hills / Alamo Ranch, along North Loop 1604 and up the I-35 Corridor and New Braunfels. The most reliable data shows we are adding about 8,800 new units to our supply this year. So, we may be overbuilding just a little, which will result in more rent concessions, and a drop in occupancy levels from 93% to maybe 91%, but there will be no collapse, just a little slump for the next year. Local construction lenders have already put on the brakes so, consequently, it is difficult to find new money to start construction. This means we will be stabilized in rents and occupancy by 2019, and the next wave of new construction will begin. This 2 to 3 year cycle is very typical in the multifamily realm and this particular cycle will be muted, almost unnoticeable.
Retail construction is remaining tame, as, again, construction lenders are very cautious on approving new projects. The “retail apocalypse” is rather selective, killing off weak competitors and making stronger competitors stronger. Sure, 10,000 stores were closed in the U.S. this past year, but 14,000 new stores were opened. As always, capitalism is survival of the fittest with the American consumer coming up the winner, every time. In San Antonio, we remain about 93% occupied with rents being flat. The average need for new retail space is for about 600,000 square feet of new construction each year. This year 11 new centers were delivered and 8 more are under construction with dozens planned. We have to provide those 10,000 new home owners and 7,000 new apartment renters someplace to shop, and, of course, this then generates new jobs in the additional 600,000 square feet of new retail space.
Industrial construction has been pretty brisk the past few years with occupancy rates dropping from 93.2% in 2013 to 88.3% now, with a good deal of new construction in the pipeline. TJX (TJ Maxx) is planning a new 1,500,000 square foot distribution center on S.E. Loop 410, and McCombs is planning new construction on IH-10 East. The Schertz industrial area is practically built out with more construction planned along the IH-35 corridor up to New Braunfels, which is also experiencing a building boom of its own. Between 2005 and 2014, developers delivered about 1-million square feet per year to the market, but from 2015 to 2017 it grew to 2-million square feet per year. The demand is for more efficient Class A space, with Class B space growing obsolete.
The San Antonio office market has had net new absorption of an additional 665,000 square feet of new space this year, but deliveries have come to about 1-million square feet, so the occupancy rate has declined. We have 1.18-million square feet of new construction underway at this time with about half pre-leased. This includes the 400,000 square foot Frost Tower downtown, Credit Human’s new building at The Pearl, and several other new office buildings.
On the investment side, I often am asked by buyers to help them find new investments. This is very tough right now. Owners are tending to hold on to their properties much longer, because they are unsure of what they would re-invest in, if they sold. Developers typically want to sell their properties within three years, so they can re-cycle their capital into another new deal, however, new construction costs have skyrocketed because of the increase in land prices, construction materials prices and in labor costs. This in turn has driven rents higher, because the rents have to make sense in these more expensive new projects. Consequently, owners who are selling older properties, perhaps built in the 2000’s, or 1990’s, see the high cost per square foot to buy a new property, and decide against selling the property they already know and understand. Thus, putting together new deals is a little more difficult than in past years. Year 2015 was the biggest year for investment sales, and they have declined somewhat the past two years.
All in all, San Antonio is in a great spot, steadily growing, with only a smattering of overbuilding; no
corrections or crashes on the horizon. Looks like a great New Year ahead. Happy Holidays!
– Steve Raub