TEXAS SNAPSHOT, JULY 2006

San Antonio Office Market

Most of San Antonio’s office development is in the North Central and Northwest market sectors, according to Vicki Cade, a vice president with the office and private capital investment groups in Grubb & Ellis Company’s San Antonio office. “The majority of the new developments have been single-story or two-story flex properties (“dressed up” tilt wall construction) with high parking ratios,” Cade says. “We have also had a number of office condominium projects constructed with buildings ranging in size from 4,000 square feet to 10,000 square feet or so. Typically, these buildings are offered for sale or lease with the majority of the buildings being purchased by users taking advantage of today’s attractive financing packages. That being said, our office market has finally firmed up enough to justify rates allowing for the construction of two new Class A office buildings with traditional Class A finishes and amenities. Both buildings are located in the North Central submarket where office demand is very high.”

These new buildings, according to Cade, are having a positive impact on the office market in San Antonio. The first building, Union Square II, is under construction and will add approximately 130,000 square feet of Class A space to the North Central market. The second property, La Arcata, which will feature 100,000 square feet, is located further north of Union Square II in the Stone Oak area. “Expanding tenants in this area are taking advantage of these opportunities,” Cade says. “This will in turn open up opportunities for other tenants as space is vacated in our older Class A buildings. We expect that the space offered by both Union Square II and La Arcata will be easily absorbed, as the North Central submarket is a highly desired area for office users. There are a number of other office developments that have been announced in this area and/or are on the drawing board. As long as developers keep construction at a pace consistent with demand, our market should continue to be on the upswing.”

In the Stone Oak area, since Methodist Hospital will be constructing a new hospital campus and the existing Baptist Hospital in this area has also expanded, there has been and continues to be a flurry of medical office development, Cade says. “This Stone Oak area features many of San Antonio’s higher-end residential developments and residential growth has been occurring at a rapid pace,” she says. “Numerous new retail centers have already opened in this area. They are fully occupied with tenants paying some of the highest rates in the city. Currently, several new retail developments are under construction at this time as well as many new retail centers on the drawing board. All of this activity has caused land prices to skyrocket in this niche market.”

San Antonio’s new office developments are being built by developers that are already active in the marketplace. As for new developers, Equastone has recently entered the market with acquisitions of One International Center and Tetco Tower, two Class A office buildings constructed in the mid 1980s. Thomas Enterprises also is entering the San Antonio retail development market with its first retail project, The Rim, which is located at IH-10 and 1604. “At build-out, this project will bring approximately 2 million square feet to San Antonio with a combination of big-box retailers, entertainment and specialty stores,” Cade says.

At the current time, there is no major tenant absorbing the majority of San Antonio’s office space; however, when Washington Mutual selected San Antonio in late 2005 for a large office campus in Stone Oak, this was a significant win for San Antonio. “Washington Mutual purchased the former MCI Worldcom Campus (20855 Stone Oak Parkway) which consists of more than 400,000 square feet with room for expansion,” Cade says. “Washington Mutual anticipates hiring 2,000 people by year-end 2006. With the upbeat economy, many of San Antonio’s residential developers, oil and gas companies and engineering firms are expanding.” For example, Tesoro Petroleum and Pape Dawson have both leased large increments of expansion space in the North Central submarket.

Class A rental rates in San Antonio currently range from $19.00 to $27.00 per square-foot on a full-service basis. “As of the end of the first quarter 2006, our citywide office vacancy rate was 16.4 percent; Class A vacancy was 12.2 percent; Class B vacancy was 17.3 percent; and Class C vacancy was 21.7 percent,” Cade says.

In the near future, the Westover Hills 151 corridor is one that is poised for growth. Already many corporate campuses are in this area such as The Capital Group, QVC Network, CitiGroup, Chase Bank, Takata Seat Belts, Maxim Semiconductors and World Savings. Baptist, Christus Santa Rosa and Methodist Hospital Systems have all selected sites along 151 and have announced plans for new hospital campuses in this area. Worth & Associates, a local developer, has begun construction of a 200,000-square-foot multi-tenant office project. “Since this 151 corridor is not over the acquifer, many developers are now looking at this market area to avoid the additional costs and timelines involved in developing projects in North Central San Antonio,” Cade says. 

“This is a great time to be in San Antonio,” Cade says. “Our city is growing and expanding, which is very exciting for everyone involved in the real estate industry. Real estate professionals are all extremely busy and optimistic about the future of our city.”

— Vicki Cade is vice president with the office and private capital investment groups in Grubb & Ellis Company’s San Antonio office.

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