TEXAS SNAPSHOT, MARCH 2007

POPULATION AND JOB GROWTH ATTRACTING RETAILERS
TO THE ALAMO CITY

San Antonio will rank among the fastest-growing metropolitans in the country for population and job growth this year, fueling the local retail market. After adding 19,000 jobs in 2006, employment growth is expected to accelerate this year to 22,600 new positions, an increase of 2.8 percent and one of the highest growth rates in the country. Bucking the national trend, employment and retail sales growth are accelerating in the metro, capturing the interest of national retailers looking to expand.

Much of the new development has been focused on the west, northwest and north sides of town as retailers follow home builders into the suburbs. The 1 million-square-foot Regal Hills shopping center is scheduled to open during the second quarter and will account for one-third of the new inventory delivered this year. With the opening of Regal Hills, which is located near two other power centers, The Shops at La Canterra and The Rim, the intersection of 1604 Loop and Interstate 10 is expected to attract shoppers from all over San Antonio. Elsewhere, the Northeast submarket is forecast to experience both vacancy improvement and concessions burn off this year due to strong tenant demand and limited new construction.

The prospects of long-term growth due to favorable metro-level demographics in the Alamo City will continue to lure investors in 2007. Cap rates in the high-7 percent range are above the national average and are attracting both private buyers and REITs from out-of-state to the area. Although increased demand has resulted in rising prices, sales prices have eased since the peak in 2005, and are expected to remain level through the end of this year. Nonetheless, San Antonio still compares quite favorably to higher-priced West Coast markets. Lower per square foot prices are enabling these out-of-state investors to trade up for larger and/or higher-quality assets. Investors may want to explore repositioning opportunities of older retail assets in prime infill locations where competition from new construction is limited.

Looking at overall retail property market fundamentals, construction is forecast to rise modestly this year to 3 million square feet, an increase in inventory of 4 percent. Last year, developers delivered 2.7 million square feet of retail space. Increased retail construction activity will push vacancy up 30 basis points this year to 11.3 percent after the metro posted a 20 basis point decrease in 2006. As retailers pay premiums for new construction in prime locations, asking rents are expected to increase 2.8 percent to $14.75 per square foot, while effective rents are forecast to gain 3 percent to $13.23 per square foot.

Because of this strong population and job growth, investors will keep a focused eye on San Antonio retail opportunities in 2007. Specifically, investors may want to look to the South San Antonio area, which has experienced a resurgence in recent years, including last year’s Toyota manufacturing plant opening. In addition, increased daytime traffic is expected to support the strongest asking rent growth in the San Antonio metro this year.

— Bradley Bailey is the regional manager of the San Antonio and Austin offices of Marcus & Millichap.


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