Let’s Make Gold Bricks in 26′!

Perhaps you have heard about our K-shaped Recovery on the financial news.  This is the term used to indicate that the upper end of the market is getting better, i.e. the upward arm of the K, while the lower income portion of our society is not doing as well, that the lower arm of the K is headed lower.  It seems that the K-shaped recovery is for commercial real estate, too.

Offices

For example, in office buildings, the best properties, the Class A, are staying leased up and prospering while the Class B and Class C are continuing to decline.  This is true across the country and also in San Antonio.  The newest office buildings in the Pearl District are well-leased at 90% occupancy.  However, older properties along Loop 410 for instance are not doing as well, at only 79% occupancy. This probably means when you count maintenance costs, they are barely breaking even, or not.  So, these older properties muddle along or decline, until someone can buy them cheaply enough that they can invest the money needed to turn them around, attract better tenants and higher rents.  Not every building can be turned around, though, because of location and physical structure.

Office to Residential

Some investors are turning old office buildings into residential properties.  For example, the iconic Tower Life Building which remained in the same hands for decades with little renovation.  Now it is in the hands of very capable real estate operators, Ed Cross and Jon Weigand, with an assist from McCombs Enterprises, but it is taking them years to put in the renovations and lots of tax subsidies.  This grand dame of the River Walk will eventually be made great again, but it doesn’t happen without lots of work and capital.  Another turn-around is the Nix building.  Formerly, a major hospital, then vacant for some years, the plans to turn it into apartments and ground floor retail seem to finally be moving forward.   Both these properties enjoy incredible location in downtown San Antonio on the River Walk.  Office buildings without this advantage will not be easy to turn around and regain useful prosperity.

Multifamily

Then, there is the multifamily sector in San Antonio, which had a building boom from 2021 to 2024.  Units built in 2021 were 7,237; 6,763 in 2021; 5,461 in 2022; 6,036 in 2023; 7,058 in 2024 and falling a bit to 5,921 in 2025.  This pales to the overbuilding in Austin which saw 21,500 units built in 2024 and 15,000 in 2025.  Austin’s vacancy rate bottomed at 4.16% in August 2021 and now has spiked to over 10%.

Rent Concessions

In San Antonio, now, 70% of apartments offer rent concessions.  The newest properties are in the lease-up phase, offering concessions and brand-new finishes to attract new tenants so they are doing okay.  The developers are well funded with cash reserves and deep pockets. However, older properties are losing those same tenants and must offer concessions to keep their occupancies from slipping too much. When you lose occupancy and then give up income on the remaining occupied units, your income really suffers and can put the Landlord underwater with paying his mortgage.  This has happened at the lowest end of the spectrum, the Class C units.

Foreclosures

In September it was reported that 64 properties were behind on paying their water bills. Foreclosures in Class C apartments have risen when the owners will not or cannot come out of pocket to keep the property afloat when the income is less than the expenses.  Many of these owners are syndicated investment groups sponsored by inexperienced operators and can’t make the bridge from a slowdown back to better times.  Apartments need to be renovated every three years, costing a good deal of money to maintain their rents and tenancy.  Otherwise, they become affordable housing in the bad sense.   Additionally, if the owners need to refinance, they may have to come out of pocket because the appraised value of the property dropped along with the incomes, while mortgage interest rates have increased.  We are now at the end of this cycle and that is where the greatest pain is for the weaker properties. Ouch.  Who said real estate is passive investing?

K-Shaped Recovery

So here is our K-shaped recovery again, with new multi-family properties faring well, the middle doing okay, and the lower end suffering.   Lenders pulled in the reins in 2024, so the number of construction starts dropped from 7,058 in 2024 to 5,921 in 2025.  Developers will develop whenever the banks are willing to lend them money; fish gotta swim, birds gotta fly. The lenders determine the market pace, and all recognize that it takes roughly 18 months to build an apartment and another year to lease up.  So, the slower pace in construction pipeline in 2025 and 2026 will allow us to catch up in 2027 because of a shortage of new units. This will cause occupancies to increase and thus rents go back up.  The cycle keeps turning.

Retail Stands Strong

Turning to retail we have the bright spot, because it continues to be so expensive to build compared to the rents that can be earned, there has not been overbuilding in this sector of commercial real estate. Alex Tatem, of Foresite Commercial Real Estate, reports that prices for “closed deals in San Antonio have remained in line with last year’s pricing.”  While the slow volume of sales in the first half of the year has picked up, it appears, however, that 2025 will still be 50% lower in sales volume versus 2024. Generally, retail investors are better capitalized and more patient.  Instead of trying to sell into a weak market they seem to prefer to wait for lower interest rates and more eager buyers before they put their stabilized properties on the market.

Gold Bricks in 2026

All-in-all the market analysts and commentators I follow see 2025 as the transition year out of the slow down phase influenced by higher interest rates, higher inflation and over-building. The latter half of 2025 seems to be starting a healthier period of more investor activity, a better borrowing environment and, hopefully, less uncertainty than what characterized the first half of 2025.

We survived ’25, so now it’s time make gold bricks in ’26!