TEXAS SNAPSHOT, JULY 2005

San Antonio Office Market

As vacancy increased and the amount of surplus space peaked in 2002 and 2003, the San Antonio office market’s pipeline of speculative development slowed dramatically. However, in 2004, a slow and steady improvement in the overall market allowed developers to proceed with a handful of projects. New construction has been limited mostly to smaller niche projects. Some buildings have been conceived, constructed and at least partially occupied by the developers; two examples of this are Quarry Heights, developed by R.L. Worth & Associates, and Orion Partners’ Rogers Ranch. Remaining sensitive to economics and staying aware of the softened market conditions, developers have taken care not to flood the market with excessive space; in effect, they are constructing projects strategically located in high growth areas.

Citywide, Class A rental rates currently are ranging from $18 to $25.50 per square foot; the average is $20.68 per square foot on a full-service basis. Downtown, the average rental rate is $21.16 per square foot, while in the suburbs, the rate averages $20.51 per square foot. Across the board, San Antonio’s direct vacancy rate stands at 17.6 percent as of the first quarter 2005, and approximately 623,000 square feet of sublease space is being marketed, resulting in an overall vacancy of 20.3 percent. For Class A properties, the direct vacancy rate is 13.5 percent, and with roughly 166,000 square feet of ancillary sublease space on the market, the overall vacancy rate sits at 15.7 percent.

Several significant developments are underway in the San Antonio office market. In 2004, new construction coupled with the redevelopment of two historic buildings on the Fort Sam Houston army base created more than 567,000 square feet of inventory in the overall market; this number represents more than double the total amount built in 2002 and 2003.

A private partnership between Orion Partners and Weston Solutions has renovated The North Beach Pavilion, encompassing 121,000 square feet, and the former BAMC (Brooke Army Medical Center), which includes 209,000 square feet, in order to create the Offices at Fort Sam. These buildings are not restricted to government-based tenants, and the space offers the protection and security of a military base for those who desire it. However, the rental rates are at a higher premium, directly contributing to the 24-cent increase in the citywide average over the last year.

R.L. Worth & Associates, along with partners Hurd Enterprises and Kopplow Construction, has developed Quarry Heights, inspired by the desire for a new office location for their own companies and related business partnerships. The five-story, Class A office building encompasses 104,000 square feet, and it came on line more than 90 percent leased; it was the largest new project completed last year.

In the first quarter of 2005, two buildings totaling 113,000 square feet were completed at The Terrace at Concord Park. These two buildings are the only significant speculative office development expected to come on line all year, featuring 20,950 square feet in Building 1 and 90,500 square feet in Building 4. At the same project, a second phase is planned including an additional 48,600 square feet in two more buildings.

Although speculative development has been limited, the majority of construction that has taken place over the past 3 years has been located in the North Central submarket. The emerging Far North submarket, which includes the master-planned community Stone Oak, has experienced tremendous residential growth over the last decade. This rapid growth gave way to ancillary retail development, followed closely by corporate facilities such as the MCI Campus and the Clear Channel Communications facility.

Currently under construction in the Far North sector are several projects including Shavano Center, a three-story, 30,000-square-foot project, and La Arcata, a 98,000-square-foot building. In addition, the expansion of North Central Baptist Hospital and anticipated construction of a Methodist Hospital have facilitated a flurry of medical office development.

Local developers Concord Corporation, R.L. Worth & Associates, Koontz McCombs, Orion Partners and Atlee Development have constructed a majority of San Antonio’s office development in the last few years. Recently, though, Dallas-based Griffin Partners broke into the market and made plans to build a six-story, 129,000-square-foot second phase at Union Square, which is located along U.S. Highway 281 near the San Antonio International Airport.

Last year, a majority of the gross leasing activity in the San Antonio office market was horizontal, as tenants moved from one building to another in attempt to better location or lower overhead. In addition, many firms remained in a holding pattern over the past couple of years as the national economic recession trickled into the San Antonio economy; however, now the market is seeing steady job growth, a stable local economy and improvements to the national economy, which have prompted some firms to take advantage of the pent-up demand for expanded space. Overall, absorption has been spread thinly across a variety of tenants.

Several major leases have been signed recently: Rackspace Hosting signed a 122,000-square-foot lease at 9725 Datapoint, located at Interstate 10 and Wurzbach; Clarke American has leased 84,000 square feet at 10931 Laureate, which is situated at I-10 and Huebner; at Fountainhead Park One, located at IH-10 and Medical, American Intercontinental University has signed on for 65,000 square feet; State Farm Insurance has leased 54,000 square feet within Terrace at Concord Park on Sonterra Boulevard; and lastly, LifeRe has signed a 25,000-square-foot lease at CityView, which also is located at I-10 and Huebner.

In the short-term future, the Far North sector will continue to see the majority of development. However, the West sector is experiencing a tremendous amount of residential growth, which makes it the area to watch over the next decade. Local developer Marty Wender has led development efforts in the Westover Hills area, which retains more than 4 million square feet of corporate campus facilities such as World Savings and Loan, JP Morgan Chase, Hartford Insurance, Capital Group and First Health.

The San Antonio office market has not enjoyed so much activity or gathered so much attention since 1968, the era of Hemisfair. While Toyota’s entrance in the market does not directly effect the office sector, the entire city has benefited from what has been referred to as the “Toyota Effect.” In general, a spotlight is shining on the city, and companies as well as investors have taken note.

— Kimberly Gatley, Director of Research, REOC Partners, Ltd.

©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.