San Antonio, Texas – Accustomed to this city’s steady, sometimes sluggish, apartment market, local multifamily experts have been taken aback by the tremendous amount of new units that are under construction or in the pipeline.

The veritable flood of new units is expected to trigger increased vacancies, increased concessions and rent stagnation well into 2007.

In 2005, nearly 3,800 rental units came online in San Antonio, double 2004’s volume, according to Austin Investor Interests, LLC (AII), an apartment research firm based in the Texas capital. This year, 6,500 units will be added to San Antonio’s rental inventory, which consists of 150,000 units, and another 5,000 units are waiting in the pipeline.

“San Antonio has experienced overbuilding in the past, but it’s usually been mild,” said Will Balthrope, senior director of apartment brokerage services at Cushman & Wakefield of Texas, Inc., and a San Antonio native. “That’s not really the case today.” He pointed out that the Alamo City typically absorbs 3,500 units annually, meaning that the new wave of construction is creating two to three years of excess supply.

The silver lining is that the construction is more geographically diverse than it has been in the past, Balthrope said. Historically, most multifamily development has occurred in the North Central and Northwest submarkets, but today properties are also going up in the Far West, Northeast and South submarkets.

New jobs boost occupancy

So, what is compelling developers to keep moving dirt? For one thing, San Antonio’s economy has never been stronger, says Mike Lynd, president of the Lynd Co., a locally based firm that owns 8,000 apartment units in San Antonio. “We haven’t seen this amount of development in a long time, but it’s not that large when you consider the types of jobs that are coming into the city,” he said.

Last year, San Antonio’s job growth reached 1.6%, the highest it’s been since 2000, according to Alamo WorkSource, pushing the unemployment rate down to 4.6%, just a notch below the national unemployment rate of 4.7%. The city, which has a population of 1.2 million, has long been a blue-collar employment market, but that’s changing. “In the past we’ve had only tourism and the military, but we’re seeing a dramatic shift to white-collar jobs as companies see San Antonio as a much better place for corporate relocations,” Lynd said.

Washington Mutual, for example, chose San Antonio for its new regional operations center and plans to add as many as 4,200 jobs in the city over the next seven years. In addition, the National Security Agency decided to establish a campus on the city’s Far West side, bringing as many as 5,200 high-paying jobs to the area, and the federal government is expanding its army hospital at Fort Sam Houston and plans to add 14,000 new jobs over the next several years.

That job growth has helped the market absorb the new construction to date, and the new jobs bode well for the continued health of the apartment market. During the first quarter, the apartment market absorbed 1,774 units, twice its normal rate of absorption. The city absorbed 4,500 units in 2005 and 600 units in 2004, according to AII. “The new units have trickled into the market rather than slammed it, and we’ve managed to absorb them,” said Janine Claycomb, a research analyst with AII.

Strong absorption across the market has pushed the occupancy rate to 92.3% at the end of the first quarter, up from 90.7% for the same period in 2005, according to AII. However, the absorption and occupancy have come at the cost of rental rate growth, Claycomb points out. At the end of the first quarter, two-thirds of apartment properties were offering concessions ranging from two weeks to two months of free rent. The effective rental rate at the end of the first quarter was 78 cents per square foot, 5% less than the market rental rate of 82 cents.

Class A properties have suffered the highest vacancies and heftiest concessions, while Class B and Class C properties are doing much better, said Mike Hogan, CEO of Hogan Real Estate Services, a local firm that manages a portfolio of 3,000 Class B apartments. “We abandoned the high-income market and went to the real apartment renter,” he explained, adding that single-family housing in San Antonio may seem affordable compared to most cities (the median price is $130,000) but is actually expensive considering the city’s median income of $50,000.

“Increasing home prices mean that a lot of people are forced to look for rental housing, and that helps the market,” Hogan said. To that end, he says that his portfolio now has its highest occupancy of the last four years. Even better, the firm “got a little bump” in rents – about a penny a square foot, he said.

Investor interest unabated

Despite increased occupancy and the slight increase in his portfolio’s rents, Hogan is less than bullish on San Antonio as an investment market. “I’ve got a feeling that taxes are going to increase 5% to 10% this year, so I don’t know how the cap rates are justified, and I don’t know why people are so anxious to buy properties here,” he said.

Last year, more than $500 million worth of apartment properties in San Antonio changed hands, according to AII. Over the past 12 to 18 months, prices have increased 15%, with Class A properties now selling for $95,000 per unit; Class B complexes selling for $50,000 per unit and Class C communities selling for $40,000 per unit.

The investment market in San Antonio does seem to be slowing slightly, Lynd said, but not because demand is softening. “Over the past three to four years, we’ve had a very high volume of property sales, so there’s just not a lot of product on the market today,” Lynd explained. His firm was able to acquire two Class B properties totaling 444 units late last year, but was recently outbid for Equity Residential’s 1,400-unit, Class B portfolio. The four-property deal was marketed by Balthrope of Cushman & Wakefield, who declined to disclose the price, but said that the portfolio received 15 offers.

Class B properties seem to garner the most investor interest, said Scott Weems, an associate partner at Hendricks & Partners’ local office. He and senior adviser Chris Ross recently sold the 293-unit Hampton Greens complex to a Los Angeles-based investment group. Properties like Hampton Greens are trading at 7% to 8% cap rates, while Class A properties are achieving cap rates in the 6% range and Class C properties are in the 8% range.

Weems has more confidence in the San Antonio market than Hogan. “This is a great investor market,” he said. “I can’t see anything over the next five years that would give me any concern – not even the new construction. I think we’ll end up fairly well balanced. In fact, if not for the new inventory, we could even end up with a housing shortage.”

San Antonio multifamily market



Rent growth


Units under construction




600 units

5,868 units




4,500 units

8,453 units

1Q 2006



1,744 units

6,500 units

Source: Austin Investor Interests, LLC