TEXAS SNAPSHOT, JANUARY 2007

San Antonio Office Market

Often considered the younger sibling of Texas’ metro office markets, San Antonio of late is emerging with a new identity, complete with strong market fundamentals that are attracting quality new construction and “mega-sized” industrial deals.

In 2006, San Antonio’s office leasing market posted its third consecutive year of positive growth, with third quarter positive absorption of 135,536 square feet. There appears little sign of slow down in 2007. One barometer of the city’s market health is evidenced in the performance of cost competitive Class B office space. With average rents of $17 per square foot—as compared to an average $21 per square foot for Class A space—Class B product is outpacing all other classes and closed the third quarter with 86,187 square feet of positive absorption. This is a clear sign that the market is tightening; that those who were able to move up to Class A space during the soft cycle now must face rents that may require a retreat back to Class B and/or one-story flex space.

As rents rise, San Antonio’s overall office vacancy also has managed to decrease to 13.4 percent, a windfall when compared to the 20-plus percent vacancy it was struggling with just two years ago. This solid performance can be attributed, in part, to increased demand among tenants and investors, who feel less exposed in San Antonio’s stable economic climate as compared to the peaks and valleys of Texas’ larger metros.

A prime example of this is Toyota, who opened a $850 million truck manufacturing plant in San Antonio off of Interstate 35 and south of the downtown Central Business District (CBD). Toyota site selectors not only recognized San Antonio’s large pool of willing workers and its diverse distribution channels that combined rail, shipping, interstate and air, but also its affordability and stability.

Developers have recognized these positive dynamics of San Antonio as well. In the past 12 months, 620,000 square feet of new office space has been initiated in the North Central and Northwest submarkets, where tenants benefit from close proximity to services and retail, good schools and prestigious executive housing. In these markets, developers also have found tremendous pre-leasing success. In North Central, for example, the Union Square II project by Griffin Partners that broke ground in April already is 40 percent leased. Most other new projects are also reaching construction completion with 40 to 50 percent pre-leasing.

San Antonio replaced San Diego as the 7th largest City in the US. Its office market inventory aggregates to roughly 23 million square feet. It has become a highly active environment where, in 2006 alone, more than $330 million in office property traded hands at an average cap rate of 7.5 percent. As for the future, businesses have shown great confidence in the San Antonio economy as they relocate and expand their operations here. Over the next 12 to 18 months, this will no doubt keep the landlord market bright. It should also keep the capital markets responding well to good tenancy and solid market fundamentals as they continue their buying patterns and continue to propel a market that truly is coming of age.

— Bruce Marshall is managing director of Sperry Van Ness’ San Antonio office.

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