TEXAS SNAPSHOT, AUGUST 2006

San Antonio Multifamily Market

The San Antonio multifamily market currently is seeing the solidification of good business dynamics in well positioned B and C class properties.  As interest rates increase and certain sub-markets offer more employment options, such as developments in the Southeast, Southwest, and Northeast submarkets, these trends are likely to continue. The North Central and Northwest new construction of Class A properties will experience moderate short-term difficulty in leasing as infrastructure in retail, highway construction, and business growth is not completely finalized. Beyond a 9- to 12-month window, these occupancies should begin to rise.

Specific retail developments and employers will help shore up development on the north side of Loop 1604. For example, the Rim development on the northwest side containing a Bass Pro Shops and the expansion of UTSA should help the IH-10/Loop 1604 interchange submarket. In addition, the finalization of the Santikos shopping center The Legacy, which includes a Best Buy and Sportsman’s Warehouse, the new Super Target off 281 and the opening of Washington Mutual headquarters will be tremendous for North Central San Antonio. City Base Landings’ completion on the southeast side will offer services never before seen in that specific submarket, including a Sam’s Club.

For multifamily construction, conventional developers for the most part have abandoned the traditional thought process of bringing state-of-the-art Class A property to the market. The new creation is a Class A with fewer amenities. These properties offer location and standard services as the selling feature as opposed to upgrades in the apartment. The thought is to attract the tenant not interested in the hassle of home ownership or the transient tenant who is in San Antonio for educational purposes or short-term business assignments. These tenants meet credit and income requirements but do not necessarily have the resources to place themselves in permanent living near the high-growth areas. Also, the barrier to entry in Stone Oak and more seasoned neighborhoods, such as Alamo Heights and Olmos Park, prohibit housing purchases.

“Accelerating demand will allow owners to raise rents in 2006. Asking rents are forecast to gain 2.7 percent to an average of $655 per month, while effective rents should increase 3.3 percent to an average of $621 per month this year, according to Marcus & Millichap’s June 2006 Apartment Research Report. I think these are accurate with the exception to well-positioned Class B and C properties. If an investor has moderately renovated a property and has input certain steps such as tenant screening and potential rubs system, the increase for effective rents should be greater. Vacancy should stay true to form, with a slight reduction in physical occupancy to roughly 93 percent. Concessions will erode this slightly to bring effective occupancy in the 90 percent range.

For the consistent investor, conventional wisdom dictates parties interested in investments in Northwest or North Central San Antonio as they have access to proven retail, education and employment opportunities. While the cap rates are compressed currently, the lower middle class tenants bode well for true long-term returns. For the investor willing to take an educated gamble, any reasonable investment in the South Side, Downtown, or North East submarkets could have tremendous upside as these markets have less new investments and are in a positive transition. The economics of each submarket should allow for the median incomes to increase yet the immobility of the blue collar, bread-and-butter San Antonio tenant will dictate the need for multifamily living.

As the nature of investments is reviewed across the board, San Antonio should continue to garner interest. The barrier to entry is minimal compared to other urban areas. The cost per unit on the purchase of a Class B or C property is below the national average. The consistent nature of the tenant base and the type of employers entering the areas in manufacturing, financial services and medical bode well for the future.

One concern for San Antonio is how access to technology has changed the landscape for investors. The resources have allowed for a boom in the “smallest big city in the U.S.” but this same technology will guide potential investors to third-tier markets like Corpus Christi, Laredo and El Paso. These markets could potentially become competition to San Antonio. The near future saving grace for San Antonio will be newfound familiarity with the city by investors, tenant mix and extensive job growth.

— Brandon Lo Porto is an associate in the National Multi-Housing Group as well as a founding member of the Marcus & Millichap San Antonio office.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.