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Office Trends Report—First Quarter 2010

San Antonio, TX
raphs

raphs
Vacancy Rate

22%
Positive Absorption Helps Office
18%
Market Gain Traction
raphs San Antonio’s office leasing market kicked off the year by posting 113,583 square feet of
14%
22% positive absorption. This marks the third consecutive quarter that the Alamo City has seen
positive growth. The positive news is largely a direct result of Class A and B properties re-
10%
18% cording 45,860 and 67,563 square feet of positive absorption, respectively. There has been
1Q 08 3Q 08 1Q 09 3Q 09 1Q10
a recent uptick in leasing activity which has helped to assist the office leasing market in
22%
14% CBD Suburban Combined its early stages of recovery. The office market seems to have turned the corner as is evi-
dent by the flurry of leased space that materialized in the first quarter and activity which
18%
10%
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 will be counted as positive absorption in the near future. The overall vacancy rate saw a
900
14% 40 basis point reduction from the previous quarter and currently stands at 18.1 percent
600
Completions vs. Absorption or 100 basis points lower than a year ago. This is an encouraging sign that the market is
300
(in Thousands of SF)
10% stabilizing as this quarter also marked the fourth consecutive quarterly drop in vacancy.
01Q 08 3Q 08 1Q 09 3Q 09 1Q10
900
One main reason to be optimistic is the approximate 217,000 square feet that will count
-300 towards positive absorption in the Northwest submarket over the next two quarters.
600
-600 Several firms including Allstate and Nationwide have signed leases to take down ap-
300 1Q 08 3Q 08 1Q 09 3Q 09 1Q10
proximately 115,009 square feet combined. These significant deals should help eradicate
0
900 some of the excess vacant space of nearly 1.5 million square feet in the Northwest, which
-300
600 accounts for 32 percent of the citywide vacancy. With nearly 4.5 million vacant square
-600
300 1Q 08 3Q 08 1Q 09 3Q 09 1Q10 feet spread throughout the city, a lengthy recovery is inevitable. Although many agree
$28
0 that a national economic recovery is underway due to two straight quarters of positive
$26 Absorbed Completed
-300 GDP growth, there is much debate as to how much the economy has to grow before jobs
$24
-600
$22
come back. Companies today are still showing extreme caution in their expansion and
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 growth strategies. What may delay the office leasing market from a speedy recovery is the
$28
$20
$26
$18 unaccounted “shadow space,” or space underutilized - but physically occupied by tenants.
Asking Rental Rates
$24
$16 Employers will continue re-evaluating their earnings on a quarterly basis to make hiring
($/SF/Yr. Full3Q
Service)
$221Q 08 08 1Q 09 3Q 09 1Q10 and expansion decisions, and will look to fill empty existing space before seeking out new
$28
$20 space in the market.
$26
$18
$24
$16 Forecast
1 $221Q 08 3Q 08 1Q 09 3Q 09 1Q10
$20
n Asking and effective rental rates are expected to further decline before they reach bot-
tom sometime late in 2010 or early in 2011.
$18
$16 n According to San Antonio Chamber’s economic forecast, San Antonio’s job growth will
1Q 08 3Q 08 1Q 09 3Q 09 1Q10
1 experience no net positive gains in 2010 with a turnaround probable in late 2010.
Class A Class B
n San Antonio will see improvement in its office leasing fundamentals through the
©2010 Grubb & Ellis Company

latter part of 2010 but will not see a vigorous recovery until delayed hiring decisions in
the job market begin to appear.
e1
Grubb & Ellis San Antonio Prepared by:
40 NE Loop 410, Suite 607, San Antonio, TX 78216 Luis Garza Research Analyst Ariel Guerrero AVP, Client Services Manager
210.828.5050 www.grubb-ellis.com 210.804.4835 • luis.garza@grubb-ellis.com 713.626.8888 • ariel.guerrero@grubb-ellis.com
Aaron Chovanetz Senior Research Analyst Yesenia Garibay Graphics Specialist
713.599.5129 • aaron.chovanetz@grubb-ellis.com 210.804.4851 • yesenia.garibay@grubb-ellis.com
Office Trends Report—First Quarter 2010
San Antonio, TX

Despite the sluggish leasing The San Antonio Class B office market continues to post the highest total vacant square

environment that landlords feet and vacancy rate among all classes. It currently holds nearly 2.6 million vacant
square feet and approximately 400,000 square feet of sublease space. There is much
find themselves in, there are
speculation as to what will happen if the nearly 320,000 square feet that AT&T vacated
hopeful signs.
in the CBD last year, currently being tracked as sublease space becomes directly available,
and how it will impact asking rents. One thing is certain, landlords will feel extra pressure
to fill vacancies as Class B properties are currently struggling to compete. Despite the
Vacancy Rate sluggish leasing environment that landlords find themselves in, there are hopeful signs.
(in Thousands of SF)
Two submarkets which have been primarily leading the charge in recent months are the
26%
Northwest and Far North Central submarkets, which recorded 44,306 and 42,771 square
22% feet of black ink during the first quarter, respectively.
26%
18%
22% One notable transaction during the early months of 2010 was Baptist Child Family
14% Services leasing and occupying 19,324 square feet at 211 Loop 1604 N, located in the Far
18%
10%
North Central submarket. Also taking down space in the Far North Central submarket
14%
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 was Deaf Link Inc. who occupied 12,772 square feet of Class B space in the Afton Oaks
10% I building during the first quarter. The Northwest submarket experienced a healthy
Class A Class B Class C
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 amount of leasing activity with insurance tenants such as Allstate, Nationwide, and TGA
Insurance planning to take down 75,009, 40,000, and 17,399 square feet later this year,
respectively. TGA Insurance will be coming out of One Technology to move into the North-
Sublease Available
800 west Center office building. This specific transaction, however, will not boost the net
(in Thousands of SF)
600
absorption totals since they are leaving behind space to make the move down the road.
800
400 Another Northwest deal that recently took place was the 10,000-square-foot lease
600
200 secured by Ace Career Institute at Centerview Crossing – Sabine building, which will be
400
occupied during the third quarter. Other notable deals were the 39,057-square-foot
0
200 1Q 08 3Q 08 1Q 09 3Q 09 1Q10 lease by XL Health at 4350 Lockhill Selma and the 15,039-square-foot lease by City of
San Antonio at Centerview Crossing. Both tenants plan to move in later this year. There
0
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 is also the sizeable deal of approximately 48,043 square feet at Corporate Square Garden
by Concorde Career Colleges, Inc. which will count as positive absorption once occupancy
takes place. The popular Northwest submarket is poised to have a rebounding year as
significant deals like these continue to be announced. The North Central submarket was
Office Space Under Construction
(in Thousands of SF)
the only submarket to experience negative absorption due in part to DPT laboratories
vacating 17,000 square feet at 4040 Broadway St. in order to move into a building they
1,400
own. The office market is experiencing significant sized deals which are desperately
1,050 needed to chip away at the existing vacant product.
700
The largest quarterly vacancy decrease occurred in Class A and B properties descending
350 50 basis points to 16.4 and 21.3 percent, respectively. Class C inventory continues to lead
©2010 Grubb & Ellis Company

0 its counterparts with the lowest vacancy rate among all classes at 10.8 percent, up 20
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 basis points from the previous quarter. Looking forward, vacancy rates should continue
Grubb & Ellis San Antonio Prepared by:
40 NE Loop 410, Suite 607, San Antonio, TX 78216 Luis Garza Research Analyst Ariel Guerrero AVP, Client Services Manager
210.828.5050 www.grubb-ellis.com 210.804.4835 • luis.garza@grubb-ellis.com 713.626.8888 • ariel.guerrero@grubb-ellis.com
Aaron Chovanetz Senior Research Analyst Yesenia Garibay Graphics Specialist
713.599.5129 • aaron.chovanetz@grubb-ellis.com 210.804.4851 • yesenia.garibay@grubb-ellis.com
Office Trends Report—First Quarter 2010
1,400 San Antonio, TX
1,050

700

350
Overall, asking rents have to slowly descend as most businesses have already downsized and consolidated their

remained
0 relatively flat which operations, which has allowed them to operate at maximum efficiency. Citywide office
1Q 08 3Q 08 1Q 09 3Q 09 1Q10 full-service asking rents declined during the first quarter by $0.13 to $21.34 per square
may indicate stability for the
foot per year. Class A and B rents pushed overall asking rents lower in the first quarter,
San Antonio office leasing
dropping $0.06 and $0.14, respectively. During the first quarter of 2010, Class C asking
market.
rents managed to increase by $0.39 to $16.77 per square foot per year.
Employment Growth
(% Change from Same Period of Previous Year) Overall, asking rents have remained relatively flat which may indicate stability for the San

4%
Antonio office leasing market. However, these rental rates should be taken with a grain of
salt as they are not representative of true negotiated rates. Many tenants are still seeing
2%
concessions come their way in the form of free rent and tenant improvements and are
0%
really mainly concerned with where effective rents stand. Landlords are sensing a shift in
-2%
leasing activity which may dissuade them from lowering rents in an attempt to hold out
-4%
3 for the right tenant who may be around the corner. Whether this strategy proves to be a
-6% wise one is yet to be seen.
2005 2006 2007 2008 2009 2010
San Antonio U.S. The office construction pipeline still stands at 221,772 square feet with the majority of
Source: U.S. Bureau of Labor Statistics
that being 200,000 square feet of Class A space in the Far Northwest submarket. The Eilan
Source: U.S. Bureau of Labor Statistics
in Far Northwest is under construction with two buildings totaling 200,000 square feet.
San Antonio Office Investment Volume The completion and availability of that project is set to be completed during the second
Trailing 12 Months (In Millions)
quarter of 2010. Once completed, these buildings will dump an excess amount of vacant
$600
space on the submarket. This will cause the vacancy rate to skyrocket to approximately 62
$400 percent in the Far Northwest, placing additional stress on owners to negotiate with ten-
3 ants. San Antonio is fortunate that the construction pipeline is nearly empty and is in posi-
$200 tion to accommodate new and existing businesses looking to expand their footprint in
the market. With nearly 4.5 million vacant square feet, it will be a long time before the city
$0
2005 2006 2007 2008 2009 2010 sees any speculative development at the current pace that inventory is being absorbed.
Source: Real Capital Analytics
San Antonio’s available sublease inventory fell by 52,505 square feet down to 496,943
square feet during the first few months of 2010. Class B product currently accounts for
OfficeSource: Real Capital Analytics
Cap Rate
Trailing 12 Months
80 percent of the citywide sublease inventory with 399,202 square feet. Class A product

9%
makes up the other 20 percent with 97,741 square feet. Class A saw a drop in sublease
availability while Class B saw an increase during the first quarter. The Class B sector will
8% continue to face downward pressure, causing landlords to consider lowering asking rents
in an attempt to lure tenants into their building. Currently the CBD (296,419), Northwest
7% (91,671), and North Central (87,707) submarkets make up the bulk of the total amount of
sublease space available throughout the city. The decline in available sublease space trans-
6% lates to the third straight quarterly decline of space. The big question on everyone’s mind
2005 2006 2007 2008 2009 2010
is when job growth will translate to increased demand for space. Landlords will be moni-
©2010 Grubb & Ellis Company

San Antonio U.S. toring the local employment growth closely to make the most well informed decisions.
Source: Real Capital Analytics
Source: Real Capital Analytics
Grubb & Ellis San Antonio Prepared by:
40 NE Loop 410, Suite 607, San Antonio, TX 78216 Luis Garza Research Analyst Ariel Guerrero AVP, Client Services Manager
210.828.5050 www.grubb-ellis.com 210.804.4835 • luis.garza@grubb-ellis.com 713.626.8888 • ariel.guerrero@grubb-ellis.com
Aaron Chovanetz Senior Research Analyst Yesenia Garibay Graphics Specialist
713.599.5129 • aaron.chovanetz@grubb-ellis.com 210.804.4851 • yesenia.garibay@grubb-ellis.com
Office Trends Report—First Quarter 2010
San Antonio, TX
NET ABSORPTION Under ASKING RENT

By Submarket Total SF Vacant SF Vacant % Current Year To Date Construction SF Class A Class B
Central Business District 4,462,079 830,234 18.6% 9,449 9,449 21,772 $21.68 $18.57
CBD Total 4,462,079 830,234 18.6% 9,449 9,449 21,772 $21.68 $18.57

Far North Central 1,447,435 352,268 24.3% 42,771 42,771 - $28.49 $21.24
Far Northwest 279,742 84,124 30.1% - - 200,000 $27.36 -
Far West 465,986 366,000 78.5% - - - $36.69 $22.01
North Central 8,037,948 1,021,939 12.7% (7,618) (7,618) - $22.66 $19.83
Northeast 2,044,865 355,050 17.4% 12,810 12,810 - $27.71 $18.16
Northwest 7,862,327 1,442,322 18.3% 44,306 44,306 - $25.13 $18.67
South 225,104 42,671 19.0% 11,865 11,865 - - $21.09
Suburban Total 20,363,407 3,664,374 18.0% 104,134 104,134 200,000 $26.92 $19.48

Totals 24,825,486 4,494,608 18.1% 113,583 113,583 221,772 $26.03 $19.36

AVAILABLE FOR SUBLEASE


By Class CBD Suburban
Class A 9,570,821 1,571,981 16.4% 45,860 45,860 200,000 19,957 77,784
Class B 12,146,726 2,586,802 21.3% 67,563 67,563 21,772 276,462 122,740
Class C 3,107,939 335,825 10.8% 160 160 - - -

Totals 24,825,486 4,494,608 18.1% 113,583 113,583 221,772 296,419 200,524

Grubb & Ellis—San Antonio


Real Estate Advisors
FNC
281 35 Lynn Blakeley, CPM • Associate Vice President
10
210.804.4837 • lynn.blakeley@grubb-ellis.com
FNW
1604
1604 NC International
San Antonio George Harcourt • Vice President
Airport 210.804.4845 • george.harcourt@grubb-ellis.com
NW 410
NE
10 Maggie Nigro, CCIM • Senior Associate
210.804.4848 • maggie.nigro@grubb-ellis.com
FW CBD
Downtown
San Antonio
Clint Parker • Associate
Port 410
San Antonio 210.804.4852 • clint.parker@grubb-ellis.com
410

Sherrie Wade, CCIM • Vice President


Office Submarkets 210.804.4842 • sherrie.wade@grubb-ellis.com
35 FW Far West
37 FNW Far Northwest
S NW Northwest
JJ Williams, CCIM • Vice President
FNC Far North Central
NC North Central
NE Northeast
210.804.4859 • jj.williams@grubb-ellis.com
281
CBD Central Business District
S South

office terms and definitions


Total SF: Office inventory includes all multi-tenant and single tenant Vacancy and Availability: The vacancy rate is the amount of Asking Rent: The dollar amount asked by landlords for available
buildings at least 20,000 square feet. Owner-occupied, government physically vacant space divided by the inventory and includes direct space expressed in dollars per square foot per year in most parts of
©2010 Grubb & Ellis Company

and medical buildings are not included. and sublease vacant. The availability rate is the amount of space the country and dollars per square foot per month in areas of Califor-
available for lease divided by the inventory. nia and selected other markets. Office rents are reported full service
Office Building Classifications: Grubb & Ellis adheres to the BOMA where all costs of operation are paid for by the landlord up to a base
guidelines. Class A properties are the most prestigious buildings Direct Vacant: This is the vacancy rate in space offered on the market year or expense stop.. The asking rent for each building in the market
competing for premier office users with rents above average for the directly by the landlord in single and multi-tenant buildings. This is weighted by the amount of available space in the building.
area. Class B properties compete for a wide range of users with rents excludes vacant space offered for sublease and vacant space that is
in the average range for the area. Class C buildings compete for ten- not offered on the market, for whatever reason. * Grubb & Ellis statistics are audited annually and may result in revi-
ants requiring functional space at rents below the area average. sions to previously reported quarterly and final year-end figures.
Net Absorption: The net change in physically occupied space over a
period of time.