TEXAS SNAPSHOT, JULY 2012

SAN ANTONIO OFFICE

Are things getting better? The question seems to be in the forefront of everyone’s mind, but the evidence seems to be less than decisive.

There is no doubt transaction velocity has increased. In nearly all sectors (office, retail, industrial and even land) we are seeing more interested prospects. What is more impactful than the quantity is the quality. Current prospects have more realistic expectations regarding rental rates and purchase prices than in years past. These modest financial expectations are now coupled with a sense of urgency, which has been all but absent during the past two years. The net result of all of these factors is an overall tightening of the leasing market and a stabilization of purchase price.

The Eagle Ford Shale play has pushed real estate values in a big way for properties located in South San Antonio — even those previously thought to be poorly located. Due to limited supply of office and industrial space, arbitrary buildings are being repurposed. The area is difficult for most real estate developers to get their arms around. If you remove the oil and gas play from the environment, the area lacks the real estate fundamentals to support traditional office or industrial investment property. For the rest of San Antonio, the leasing market has seen smaller oil and gas companies and affiliated groups move into or expand within the city. Most believe uncertainty in future oil prices has slowed the ramp-up of well locations, infrastructure development, suppliers’ offices, etc., that will eventually need to be located in the area. If this is accurate, higher oil prices could eventually release a pent up demand for office and industrial lease space in San Antonio.

Hospital expansions by Christus, Baptist and Methodist in several locations in San Antonio have sparked a somewhat uncharacteristic amount of activity in the medical sector. While many moves will be lateral as groups struggle to realign themselves within specialties, we are seeing some expansions and longer term renewals. This would indicate the medical industry is gaining confidence in its ability to maintain operations despite potential changes proposed by the current administration. San Antonio will also see two new hospitals soon by Forrest Park Medical and Victory Hospital, both located at Loop 1604 and Interstate-10 West.

In light of the information above, one might be tempted to be overly optimistic about San Antonio’s real estate market performance in 2012 and into 2013. The statistics for office absorption, however, will be fairly modest due to the three large corporate campuses being constructed, and the subsequent vacancies that will be left by NuStar, KCI and Nationwide Insurance. NuStar has nearly completed its new campus adjacent to the Rim on IH-10 West and will likely vacate approximately 115,000 square feet in Heritage Oaks I & II in November of this year. KCI will relocate to its new campus on IH-10 near Dezavala and leave a 166,000 square foot vacancy at 8023 Vantage Drive, recently purchased by NAI REOC. Lastly, Nationwide Insurance will move into its new facility on Highway 151 in the first quarter of 2013, creating more than 160,000 square feet of available space in several locations around the city. These three corporate relocations will result in roughly 441,000 square feet coming back on the market in the next six to nine months. Despite the substantial negative impact to the citywide occupancy levels, there are two bits of good news associated with these moves. One, the jobs will remain in San Antonio and, two, the development of corporate campuses represents a long-term commitment by these organizations.

The sizeable holes left in the multi-tenant office market and the availability of lending will likely limit or prevent speculative construction for the foreseeable future. Any new projects coming out of the ground during the next 12 to 24 months will primarily be smaller projects which are at least 50 percent leased by merchant builders and/or corporate users.

A simple question of “How is your business doing?” usually produces optimistic shrugs among the brokerage community in the San Antonio market. The reason is that although we are anticipating some large vacancies coming back on the market and continue to hear uncertain sounds from Wall Street regarding economic recovery, office users in our area continue to quietly move into the area, expand, renew and purchase buildings. We are busy, but it is a different kind of busy than the flurry of uninhibited real estate activity of 2006 and 2007. The activity is tempered with an emphasis on market knowledge, real estate fundamentals and contingency planning.

— Ryan Harrison, CCIM, vice president of Stream Realty Partners in San Antonio

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