FEATURE ARTICLE, DECEMBER 2005

2006 Broker Outlook

San Antonio

The San Antonio office market has experienced a solid year in terms of both the volume of transactions and net absorption. From the perspective of representing corporate users of office space (tenant representation), San Antonio is seeing not only the expansion of business but also a healthy amount of activity resulting from new entities coming into the market. In fact, leasing activity is up approximately 21 percent over this time 1 year ago.

The most significant blocks of space on the market have been almost entirely backfilled. Earlier this year, Washington Mutual vacated 100,000 square feet of space at McAllister Plaza (formerly known as Washington Mutual Plaza). Tesoro Petroleum has leased 84,893 square feet of the space.

Another division of Washington Mutual has taken over 405,000 square feet of space at MCI's campus in San Antonio. The conversion of the MCI campus in far north San Antonio to the new facility for Washington Mutual will have a significant impact on that submarket. Washington Mutual will create more than 2,000 high paying jobs at this site. This job growth will have far reaching impact on the entire trade area.

Office absorption year-to-date has exceeded approximately 245,000 square feet. This positive absorption marks the seventh consecutive quarter of positive absorption for the San Antonio office market. Leasing activity has been steady with corporate users understanding that quality space is being leased at a brisk pace and does not stay on the market long.  

R.L. Worth & Associates is in the process of completing the next phase of its highly successful development off Interstate 10 in the Northwest submarket. This project, located off DeZavala and Hausman roads, is an expansion of the company's single-story, multi-building project. Already home to Biodynamic Research Corporation, Martin Marietta and The University of Texas at San Antonio, this new phase is significantly pre-leased.

The former Providian Call Center, 4300 Centerview, contains more than 93,000 square feet of space. Stream Realty purchased this facility located off Loop 410 and Callaghan Road in the near Northwest submarket. With parking ratios in excess of 10 per 1,000 square feet, this property is poised to land a major back office user or call center.

Historically speaking, San Antonio's office market has benefited from numerous major tenants either expanding current operations or bringing new business to the city. Tesoro Petroleum expanded outside of its owned facility in the North Central market by leasing at McAllister Plaza. Clarke American renewed its 84,000-square-foot lease in the Northwest submarket in the Clarke American Building. The National Security Agency leased the former Sony Plant in the far Northwest submarket, which contained more than 469,000 square feet. Additionally, Rackspace Managed Hosting expanded its existing space at 9725 Datapoint in the city's Northwest submarket by more than 50,000 square feet. All of the leases were long term in nature.

This year saw continued growth in the North Central (US Highway 281 in and through Loop 1604) and Northwest (Interstate 10 to Loop 1604 West extending to State Highway 151) submarkets. These areas are expected to continue their strong, consistent patterns of increase through 2006 — mainly due to continued job growth and pent-up demand, particularly in the far Northwest market.

Corporate users are trending toward newer, value-driven properties whether single-story or mid-rise. These properties allow users to benefit from lower overall occupancy costs, high parking ratios, convenience to their employee base and high-quality tenant improvements and amenities.

Continued job growth will be the driving factor behind improving the market in 2006. There is continued softness in the central business district, and for the overall market to show a marked improvement in 2006, a dramatic paradigm shift must occur in this submarket in order to remove its high vacancy rate.

In 2006, several factors are expected to affect the market: the increase of suburban value buildings, most notably in the far North Central submarket and the far Northwest submarket; vacancies will continue to trend downward; San Antonio will be further seen as an extremely attractive destination for office users due to the strong momentum created in the market during the past 3 to 4 years; rental rates will rise moderately as vacant space is taken off the market; and corporate users with headquarters on the West and East coasts will see San Antonio as a viable alternative to the high occupancy costs they are experiencing in their current locations.

— Russell T. Noll, CCIM, CPM, is Managing Director, Tenant Advisory Services, for Transwestern Commercial Services in San Antonio.

The San Antonio market is working on all cylinders, and the outlook for 2006 is very bright. As the fastest growing city in Texas and the third-fastest in the nation, the Alamo City will continue to experience record-breaking single-family residential growth. At the same time, the multifamily market also will grow upon the completion of more than 9,000 apartment units currently under construction. Occupancy levels are expected to soften slightly as new supply outpaces demand, but lease-up and stabilization will be achieved quickly.

The commercial sector continues to reflect healthy growth and improvement. The office market (23 million square feet) experienced nearly 245,000 square feet of positive net absorption through the third quarter of 2005 and currently stands at 84 percent occupied. Controlled speculative construction and an increased demand for space will support a slow and steady march toward improvement throughout 2006.

The industrial market (21.5 million square feet) registered more than 281,000 square feet of positive net absorption through the third quarter of 2005 with two-thirds occurring within distribution warehouse properties. The industrial market currently stands at 85 percent occupied with nearly 1 million square feet of speculative industrial space added to inventory through the third quarter. In addition to the 2 million-square-foot Toyota plant and adjacent Supplier Park, another 1 million square feet of speculative industrial space currently is under construction and is set to come on line by the end of the year or early in 2006. Developers are banking on increased demand from prospective Toyota suppliers as well as logistics firms.

Dominating the retail market was the completion of General Growth Properties' The Shops at La Cantera. The 1.2 million-square-foot open-air regional mall features 120 shops including new retailers to the market such as Neiman Marcus, Nordstrom, Tiffany's and Burberry, as well as familiar favorites like Dillard's and Foley's. Based on nearly 4.7 million square feet of retail projects currently underway, retail development will continue to dominate in 2006. Five major power centers are currently under construction: City-Base Landing (Hill-Granados/South), Brooks Corner (Development Strategies/South), The Legacy (Santikos/Far North), Westover Market Place (David Berndt Interests/West), and The Rim at La Cantera (Thomas Enterprises/Northwest). In addition to City-Base Landing, Hill-Granados is ready to kick off construction of Park North, a power center located at Loop 410 and San Pedro, otherwise known as Main-on-Main in San Antonio. The new center will take the place of what was once the site of Central Park Mall.   

San Antonio's historically stable job growth and economy, led by biomedical/healthcare, hospitality and military, will be expanded upon the completion of the Toyota manufacturing plant in the fall of 2006 and further diversified by the recent addition of Washington Mutual and National Security Agency.  

— Kim Gatley is the director of research at REOC Partners in San Antonio.

©2005 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.