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Raub Report November 2016

November 21, 2016

In Politics there is a phrase, “October Surprise.”  Now there is a new one –“The November Surprise.” How will this affect commercial real estate in San Antonio?  It will be good.  The expectation is that we will see a positive change for small businesses; for example, the stocks of small capitalization companies were among the strongest performers in the stock market.  In San Antonio we have thousands of small businesses and a great deal of office, retail and industrial leasing depends on the growth of local companies.  If a new administration does things that encourage growth, or even just eliminates some of the headwinds for mom-and-pop businesses, job creation will accelerate.  This means more demand for lease space, more housing and an even better local economy.

Right now we are doing pretty well in San Antonio.  Apartments are 93% occupied having absorbed most of the 7,100 units that have come on line the past year. Retail is doing well, with power centers and malls practically fully leased.  Neighborhood centers are being built to match the growth of new population centers, and no over-building there.  Office space is usually absorbed at the rate of about 350,000 square feet a year, however in the past year 1,200,000 square feet was absorbed.  There is presently an over-supply along IH-10 and Loop 1604, but the owners are strong and will muscle through as the current economic growth will fill those spaces in the next year or so.  Industrial space is also at high occupancies.

While we are far along in this cycle, there is no sign of dangerous over-building.  There is a lot of money chasing investment deals but less so compared with 2015.  Actually, there was a lot of selling last year as some investors raised cash to be ahead of what they foresaw as an impending decline.  No decline has occurred at this point and all of the sellers found willing buyers as good prices.  So now that “dry powder” wants to be put to work.  However, the stock of available for-sale commercial real estate is somewhat limited and this is keeping prices fully valued.  The impending rise in interest rates has been factored in over the past year, so it is not a surprise and will not have a big impact on values.  It will affect financing, raising the interest expense on properties and lowering net income.  But rates have certainly been “lower longer” than anyone imagined, so all good things must come to an end.

Speaking of headwinds for small businesses, notice your property tax bill lately?  Over the past two years residential valuations have risen over 20%, and commercial rates have risen over 40% on average, and some have doubled.  This is due to the State Comptroller requiring the Bexar County Appraisal District to do a better job of valuing properties at Fair Market Value.  This “adjustment” has resulted in an enormous tax increase for property owning citizens and a “windfall” for school districts and the city.  I have asked my city councilman and the mayor about this and both evaded the question!  Don’t hold your breath for a lower tax rate to compensate.  Because most small businesses rent space and most have to pay higher expense reimbursements when the property taxes go up, the result is it makes it harder for the owners to make ends meet.  Job growth is thereby stymied by taxes like ObamaCare and higher property taxes.  If governments want to help small business owners create more new jobs, they should stop taking the money out of their pockets that they need to hire more employees. Taxes have consequences: whatever you tax you get less of.