With the corona virus threatening, perhaps this is a good time to take the temperature of Commercial Real Estate, and in San Antonio especially. We started the year in a very healthy market condition. While banks are flush with lending capacity, the foreclosure rate is extremely low. For example, back in the RTC days of the late 1980’s The Foreclosure Report would run over 1,200 new postings every month, however, at this time postings for commercial properties were under 10 per month.
Unprecedented Interest Rates:
Because of the virus news and the accompanying threat to the health of our economy, the FED just reduced interest rates by a ½%, to between 1 and 1.25 percent. The Real Estate Center Research Staff at Texas A&M said, “This is the Fed’s first rate cut since last year, when it reduced its key short-term rate three times for a total of 75 basis points. It is also the first time the bank has cut its key rate between policy meetings since the 2008 financial crisis and the largest rate cut since then.” So, that is very proactive for the FED, but also lowers their ability to deal with any other future issues. If the economy stays healthy through this corona flu-season (now of unknown length), the lower interest rates really make real estate an even more attractive asset to own. You can borrow on a commercial property at near 4% now. If your mortgage was at 5%, and you go down to 4%, assuming a 6.5% Cap Rate, on a really nice property, you doubled your cash on cash return.
The other threat is that Russia and Saudi Arabia have declared war on Texas! By that I mean, they caused the collapse in the price of oil to try to put U.S. shale production out of business. As you know, shale oil produced in the U.S. mostly comes from Texas. We survived the Alamo, dang it! We can survive this attack, too!
Well, anyway; job growth has been solid in our fair city averaging 2.6% since 2010, at 2.3% last year and projected to be 2.5% this year, which equates to about 26,000 new jobs this year. So Virus or no, San Antonio is expected to grow at this same very steady and healthy rate over the next 20 years, when we are projected to add more than 1,000,000 new folks to our current 2.6-million population in the metropolitan area, which includes New Braunfels and Boerne.
Let’s put that in perspective: We had 14,000 new homes sales last year, just barely keeping up with demand. There are about 4 homes per acre, so that means 3,500 acres of land was developed, just for homes, excluding retail centers, office buildings and even apartments, to keep it simple. There are 640 acres in a square mile, so in 2019 we developed nearly 11 square miles of land, just to keep up. Now this is in 50 and 100 acre tracts scattered across the metro area. We will develop that much land annually and then some every year for the foreseeable future. Where are these people coming from?