TEXAS SNAPSHOT, OCTOBER 2007

San Antonio Industrial Market

San Antonio’s industrial market continues to grow and expand. New speculative development activity persists at a steady pace, with 1.5 million square feet presently under construction or planned for 2007. New players are entering the market because they recognize the potential of the city and its surrounding areas relative to its own growth and that of trade with Mexico under NAFTA. After some 10 years, NAFTA is finally reaping the benefits and will see even further gains with improved border crossings to Mexico, notwithstanding the delays in streamlining the process alleviated by today’s announcement of great progress.

The most recent major industrial development is the Toyota plant, which employs some 2,000 workers (2,100 jobs including those created by its surrounding suppliers). This is the largest new development with the greatest impact on the region, but development also has been spurred by Port San Antonio; the former Kelly Air Force Base, which has up to 8.2 million square feet of development potential; and the San Antonio Intermodal Terminal (SAIT) in Von Ormy, located 15 miles southwest of the city on Interstate 35. The $100 million SAIT development will position San Antonio as a major shipping hub, connecting Mexico and the United States. Union Pacific Corporation broke ground on the 300-acre development in August. Slated to open in late 2008, the facility will be able to process 100,000 trailers, with the potential of 250,000 annually — 2.5 times the current local potential. In addition, the facility will pump approximately $2.5 billion into the local economy during the next two decades alone.

Other new entrants to the market include Cross & Company, which owns an estimated 1.7 million square feet of space and is now developing Cornerstone and Tri-County Industrial Parks. El Paso, Texas-based Verde Corporate Realty Services and Trinity Asset Management are partners in the massive Verde Enterprise Business Park industrial development, which is located adjacent to Tri-County on IH-35 North in Schertz, Texas, on the northeast side of San Antonio. The 200-acre Verde Enterprise Business Park has a long-term goal to develop 3 million square feet of industrial space. An 88,000-square-foot building is currently underway; another 96,000 square feet of development is proposed, and Trinity Asset is poised to begin construction on a 216,000-square-foot building.

Industrial development is primarily concentrated along major interstates, areas with ready access to them and along existing railroads. This is due to the locations’ primary access and conveyance of goods in every direction across the United States, from Laredo, Texas, and the Mexican market. Development is continuing in Alamo Downs in west San Antonio; Interchange Park; Tri-County in the northeast of San Antonio; Cornerstone on the east side; and Port San Antonio on the southwest side. Port San Antonio developments have been ongoing by Santa Barbara and Titan in the East Kelly Rail port, receiving shipments from across North America for further distribution by truck. Laredo and San Antonio distribution companies are the prime tenants.

The most recent entrant to the San Antonio market is DB Reef Trust, one of Australia’s largest property fund managers. This entity recently purchased a 1 million-square-foot portfolio of warehouse office/service, flex and rail properties for $57.5 million from Santa Barbara Development Services of San Antonio. DB Reef intends to embark on a joint venture with Deutsche Bank, which owns $1.1 billion dollars worth of U.S. property, to develop and operate an additional 1.5 million-square-foot, 16-building portfolio of similar properties valued at $95.5 million.

Other significant industrial acquisitions include New York-based ING Lion Fund’s purchase of two office flex properties totaling 190,762 square feet from a European investor. The buildings are located in University Business Park in northwest San Antonio off IH-10. Newport Beach, California-based Chase Merritt also recently purchased a 12-building portfolio, which comprises approximately 142,000 square feet of industrial space in Crosswinds Business Technology Park, located off I-35 in northeast San Antonio.

On the same side of town, a new tenant is expanding its presence in Texas. Tire Centers, LLC of Duncan, South Carolina — a wholly owned subsidiary of Michelin Corporation — will occupy 33,000 square feet in ProLogis’ Tri-County Distribution Center off IH-35 in northeast San Antonio (Schertz).

As of mid-2007, overall rental rates averaged $5.71 per square foot, a $0.28 increase from the average of $5.43 posted at the end of the second quarter of 2006. According to NAI REOC Partners, average rent for service center/flex combined space is $9.45 per square foot and distribution warehouse is $4.25 per square foot. For combined inventory, the average is $5.71 per square foot.

Overall, the city has been trying to maintain relatively low vacancy rates by attracting companies that are going to provide additional job growth in the city. According to NAI REOC Partners, vacancy rates are averaging 11.3 percent for service center/flex combined; 13.6 percent for distribution warehouse; and an overall vacancy for all categories of 12.9 percent. While inventory of service center/flex tops out at approximately 6.61 million square feet, and distribution/warehouse has nearly 17.1 million square feet, year-to-date absorption combined has been 491,923 square feet. Available space in service center/flex is 745,440 square feet, and distribution/warehouse has 2.32 million square feet, bringing the total available space to about 3.06 million square feet out of a total combined inventory of just more than 23.67 million square feet. Absorption has been strong and vacancy rates are declining.

Interstate 35 south, I-35 north, 410 southeast, and I-10 east all appear to be the major growth points of industrial development primarily associated with rail and interstate access.

Looking forward to 2008, rising rents indicate the strength of the overall market. The main trend and effort will be in the job growth in the city and distribution in coming years through NAFTA.

— Martyn Glen is managing director of Integra Realty Resources, Inc. — San Antonio.

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