Bonnie Arbittier / Rivard Report
The price of San Antonio’s downtown Class A office space is rising sharply as demand grows, inventory shrinks, and, at last, new opportunities fill the skyline.
“The change is truly happening,” said Lindsey Tucker, first vice president of CBRE, a commercial real estate services company with offices in San Antonio. "We are extremely fortunate to have investors, developers, corporations, and large educational institutions committed to making our city a better place to work and live."
Class A+ and Class A office space are classified as such because they are considered the highest-quality workplace real estate on the market. Class A is generally a building that looks good and is managed well. Location and access also count. For those reasons, Class A also commands the highest rents.
The current inventory of Class A office space in the core of the Central Business District (CBD) includes the Weston Centre, the Bank of America Plaza building at 300 Convent, and One Riverwalk Place. Together, the three comprise about 1.3 million square feet of net rentable area. When complete in the summer of 2019, the 24-story Frost Tower will add another 170,492 square feet of Class A space available for rent.
In the second quarter of this year, the going rate for San Antonio’s Class A office space downtown was $29.32 per square foot (average full-service gross rate) – the highest ever in this market, and an increase of almost $8 over last year at this time, according to CBRE data.
“In my experience of being in this business for 18 years, markets don’t typically see that large of an increase,” Tucker said. “That’s pretty substantial.”
San Antonio has a total 30 million square feet of net rentable Class A office space, of which 14 percent is currently available for rent at an average full-service gross asking rate of $21.27 per square foot. Of the total rental area in the Central Business District (2.3 million square feet), there is slightly less than 340,000 square feet currently available for rent.
Demand is a major factor driving up rent. More companies are seeking office space in the center city, Tucker said, where they find synergistic and lifestyle qualities that are less prevalent in other submarkets of town.
In recent years, USAA has moved hundreds of its 14,000-person local workforce, many of them tech workers, from the company’s far northwest campuses to downtown, and will soon add needed parking. BBVA Compass also moved its headquarters from near the Alamo Quarry area on Highway 281 into the Weston Centre in 2017.
“We’re also seeing a lot of new companies looking at San Antonio,” Tucker said. UTSA’s planned expansion of its downtown campus and other partnerships are "definitely a positive in growing their cybersecurity program, and the recent PwC announcement [moving into the Burns Building] as well. And there will be others that follow that will impact the professional district in the next 12 to 18 months.”
But that wasn’t always the case. San Antonio has historically lagged behind other Texas markets. “Now we’re seeing this urban interest in people moving back into downtown,” said David Held, senior partner at Endura Advisory Group, leasing agent for the Weston Centre. “I’ve been doing this since 1982. Back then, downtown was dead, and nobody wanted anything to do with it.”
Held cited the example of a large accounting firm he worked with two years ago. The firm was located in Class A office space near the San Antonio International Airport but wanted space downtown in order to better compete with other firms when recruiting new graduates.
“Employers are locating downtown in large part in an attempt to attract better talent,” Held said. “It’s cool to be downtown now. For decades, you were here only if you had to be here, like for attorneys who needed to be near the courthouse.”
The Weston Centre is currently more than 90 percent leased. Held credits the quality and location of the building, the staff, and property owner Graham Weston's vision for the building to serve as a catalyst for San Antonio's growth as a whole.
For many years, San Antonio was unlike other major Texas cities in that many of its largest employers are located outside of downtown. Companies that make up Houston’s oil and gas industry, for example, occupy high rises in the heart of that city’s central business district.
But San Antonio’s Valero Energy, NuStar, USAA, and others are spread out on suburban corporate campuses on the far Northside of the city, spurring growth along major highway corridors and pushing both commercial and residential development outward to city limits.
These days, however, the growing number of living options downtown, much of it due to a recently suspended Center City Housing Incentive Policy initiated in 2012 to encourage housing developments, has made downtown living more viable than ever. The live-work-play model, expanded during the Decade of Downtown, is also serving to create demand and push up rental rates on Class A office space.
More supply of Class A office space is on the way as developers including Silver Ventures, GrayStreet Partners, Hixon, and others, plan additional multi-story, multi-use projects with office space throughout downtown. Projects under construction or proposed on Flores, Alamo, and Broadway streets are expected to deliver 335,000 square feet of Class A and Class B office space, according to CBRE figures.
San Antonio looks to be a healthy market based on how rates are rising, Tucker said, but she predicts quoted rates will continue to go up even as more space becomes available and users come to expect better quality.
“To provide that, it costs more money to build and yet the user, at the end of the day, will be in an environment where they are happy, they collaborate with their colleagues,” Tucker said. “So companies believe in providing nicer office space for their employees.
“We’re really going to see our city change in the next three to five years as this newer product delivers to the market.”
Frost Tower is the first high-rise office tower San Antonio’s urban core has seen since the Weston Centre opened in 1989. Gross-up rental rates for the Class A++ space that offers 360-degree views of the city is being quoted at $50 per square foot and up.
“The fact that you can stand up from your desk, walk to just about anything you want to eat, bump into a policy leader and a thought leader and a county judge on your walk, and be back at your desk in 45 minutes – refreshed – is something you just can’t quantify, and you don’t find anywhere outside of downtown,” he said.
“So there is a growing cadre of companies who know that this is what their talent wants. And for them to finally have a beautiful, contemporary option downtown just kind of says that downtown San Antonio is back.”