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The Raub Report September 2014

September 30, 2014

Time for an overview of the commercial market place in San Antonio; subtitled “The stresses and strains of the New Normal.”

Apartment construction has come back strongly since 2012, after the slump of the Great Recession. Occupancy is presently 92.6%, about the same as a year ago, and rents are up 3.6%, adding $30 per month in rent.   In the New Normal, apartment construction is taking up to 40% of the housing market, versus the 20% that has been typical.  With home building steady at about 8,500 to 9,000 homes last year and this year and net new employment growth over 22,000, then we are in balance over all.  The rate of multifamily construction is still healthy but tapering a little.  Lenders and investors are leery of over building and thus are pulling back a bit.  Also, buildable sites are harder to come by.

While inflation is reported to be running about 2%, construction costs are running at an annual increase between 10% and 20%.  The main reasons are that construction materials costs are up and construction labor is in short supply.  At the margins, the construction force is affected by the big employment boom in the Eagle Ford, and there are even stronger construction markets in Austin and Houston along with higher wages.  For instance, in a recent report on office building construction, Austin has over 2-million square feet under construction, while San Antonio is under 900,000.  Houston? 10-million square feet under construction, with industrial, apartments, retail and residential all exploding, too.

This means — rents are going up.  Because of the increasing costs of construction, increasing costs of land, and increasing operating expenses, especially property taxes, then developers must have higher rents so they can afford the construction loan and still be able to pay their investors a reasonable return for taking the risk.  When interest rates increase that will also put upward pressure on construction costs. Yet, rents remain fairly flat in San Antonio.  We have such a small business oriented market, with few major space users, it is difficult for developers to get the pre-leasing they need for new construction, let alone the higher rent rates.  Rates for office and retail must be in the mid-$20’s per square foot, say $24 to $26, to make it possible to build a new building.  Then, the operating expenses will range from $9 up to $12 per square foot, meaning total occupancy costs are in the high $30’s, plus your electricity and janitorial service.  The result is that retail and office companies are trying to find a way to operate in smaller spaces, to lower their leasing costs.  Results – smaller store fronts, more people in less space, and the use of technology solutions to reduce costs.

The industrial market is also expanding, with perhaps 3-million square feet going up in the next year.    Amazon’s 1.3-million square foot building in Schertz has been a big boon to other new distribution facilities.  There is the 900,000 sq. ft. Dollar General development on S. Foster Road at IH-10 East,  Koontz-McCombs industrial park on north Foster Road, and the 500,000 square foot Carrier distribution center on Applewhite Road, across from Toyota; and Toyota itself is bursting at the seams, already exceeding the 200,000 trucks per year for which it was designed.

So, we are not too hot, nor are we cold.  So I guess we are just right – welcome to the New Normal.