Thanks to a strong local economy and restrained multifamily development, the San Antonio apartment market will be a very stable investment in 2006. Despite its unflattering reputation for excess construction, the San Antonio market offers a different climate than other Texas markets, such as Dallas and Houston: In San Antonio, the core apartment investor will find the market provides a unique combination of stability and yield.
More than 20 million visitors come to San Antonio each year, many to enjoy the city's famed River Walk district of shopping, restaurants, entertainment venues, hotels, and parks. Among their destinations: Market Square, the largest Mexican market outside of Mexico. The very things that make San Antonio attractive to visitors lure residents and workers as well.
The area continues to prove its mettle and maintain a stable rental base by attracting large employers. Banking firm Wachovia Securities is establishing a larger presence in San Antonio, and a significant expansion of Toyota's truck plant is on the horizon. Job growth in the San Antonio metro will increase significantly this year, with more than new 32,000 positions expected to open up–a big hike compared to the fewer than 12,000 jobs created in 2005. Much of the growth can be attributed to the success of the city's Economic Development Foundation, which has aggressively recruited employers and workers to locate in the region. The unemployment rate is forecast to fall for the second consecutive year to reach a level below 5 percent, signaling the region's relative economic strength.
In addition, new construction is expected to decline by more than 30 percent this year, marking the third consecutive year of construction pullback in the metro area. Completions are projected to come in at 1,800 units in 2006, down from a peak of nearly 4,000 units in 2003. In 2004, the region saw 3,100 new units; in 2005, there were 2,700. The increased costs for land and construction materials play a significant role in the construction decline. Far north central and northwest San Antonio will receive the bulk of new construction this year, with a combined 1,000 units scheduled to come online in these two areas.
By the Numbers
Vacancy is set to decline for the second straight year after peaking at 9 percent in 2003. The rate is forecast to drop 40 basis points to 8.3 percent by the end of 2006, reflecting the decline in construction and the stronger employment growth enjoyed by the region. Southwest San Antonio likely will have the lowest vacancy in 2006, declining 80 basis points to 5.8 percent. San Antonio's vacancy rate compares favorably with other Texas metros' rates, well ahead of Dallas (10 percent) and Houston (12.3 percent) and trailing only slightly behind Austin (7.4 percent). Hurricanes Katrina and Rita are likely to have an impact on occupancy through the third quarter of 2006, as those displaced by the storms settle in the city. Concessions remain an issue, however, as owners continue to attempt to attract tenants to boost occupancy and increase revenues.
Median asking rents are expected to rise for the fourth consecutive year, hitting $659 per month. This would represent a 2.5 percent increase over 2005's median asking rent of $643 per month. The median effective rent is projected to grow 2.8 percent to $621 per month.
Despite the convergence of favorable demand and supply trends, the one factor that ultimately moderates stronger apartment fundamentals is the affordability of the metro's single-family homes. The median price for existing single-family homes in San Antonio is approximately $135,000. Given 6 percent to 7 percent appreciation annually, area homes will remain an option next year for local households with annual incomes greater than $43,000.
On the Money
After plummeting for the past three years, cap rates in San Antonio appear to be stabilizing. This will be welcome news to potential investors and also a sign to owners that a temporary plateau in values may have been reached. Average cap rates were as high as 9 percent only 36 months ago, but current going-in yields ranged from 7 percent to 7.5 percent late in 2005. Much of the decline can be attributed to aggressive out-of-area buyers, especially from California, who are accustomed to low cap rates and are competing for assets. As a result, the average median sales price has increased to $45,100 per unit, up 12.2 percent from year-end 2005's figure of $40,200 per unit. While properties across San Antonio continue to increase in value, investors may find more appreciation potential in the southwest and central San Antonio submarkets, where vacancy is low and population growth continues to stimulate demand.
Several large transactions dominated San Antonio's investment market in 2005, many of which involved MBS Realty Investors. These included the sale to MBS of the 612-unit Signature Ridge by Jupiter Realty Communities for $45.5 million and 360-unit Retreat at Canyon Springs by Western Rim Property for $42 million. Other sales included the 390-unit Ventana, which was sold by Venterra Realty Management to Francis Property Management for $34.4 million and the 330-unit San Miguel, which was sold by Koontz-McCombs to MBS for $31.5 million. The 334-unit The Lodge at Westover Hills was sold by the Hanover Co. to Frankel Family Trust for $29.3 million. Another large transaction involved the sale of the 320-unit Westpond community by Sovereign Development Partners to Westpond Apartments GP for $17.9 million.
The number and size of these transactions indicate the robust nature of the San Antonio multifamily investment market, which promises to continue to offer stability and relatively strong yields in 2006.
Linwood C. Thompson is a senior vice president and managing director of Marcus & Millichap's National Multi Housing Group in the company's Atlanta office.
Affordable housing destruction outpaces starts.
The low-income housing tax credit seems to be doing its job, producing just over 100,000 new units of affordable rental housing each year. The problem: Approximately 200,000 rental housing units are being demolished each year, according to a new report, "America's Rental Housing: Homes for a Diverse Nation," from Harvard University's Joint Center for Housing Studies.
"The thing that's striking about that number is that it's out of sync with new units coming on line," says Nicolas P. Retsinas, director of the Joint Center. "On the one hand, you see the units coming on line, and everything must be fine. What we are losing is at the low end, which is putting squeeze on rents for low-income renters. The new units aren't affordable to the people who are the big users of this rental stock we're losing."
The survey's findings didn't surprise Ken Wade, CEO of NeighborWorks, a Washington, D.C.-based national network of more than 220 community development and affordable housing organizations. "I think it has been pretty consistent with what we've been hearing," he says. "There's a need for more affordable rental housing."
Karen K. Cleveland, executive director for Habitat for Humanity of Northern Virginia, says any effort needs to begin with preserving existing affordable housing. "The race is on to keep us from bleeding more of these affordable units," she says.
While some local governments have begun to realize the importance of preserving affordable housing stock, others continue to push homeownership. "We wanted to shed some light on this issue [of affordability]," Retsinas says. "Every level of government prides itself on homeownership. The reality is there are over 34 million households who rent. These are people at the low end of the income scale who are the low-wage workers essential to the economy."
Take a Dip
Multifamily starts slowed at the end of 2005.
Don't be fooled by the drop in multifamily starts and permits in the last quarter of 2005. It's only a seasonal hiccup, not an indicator of the cooling housing market, says Hessam Nadji, managing director of research services at Marcus & Millichap.
Nadji expects condo development to be the main driver of a strong 2006 multifamily market, even though the larger for-sale housing market is slowing. Condo developers can't respond to sales information that quickly. Many condo projects in the pipeline are already too far along to stop. "It takes time to slow down the construction locomotive," Nadji says. (To get a sense of just what a powerful force the condo market has been, just consider 2005 completions: 130,000 condo units versus 85,000 competitive rental units.)
But in 2007, a big change is coming: The condo share of the multifamily market will drop. Yet at the same time, multifamily activity will remain strong, driven by growing rental development. "Condo conversion removed a large inventory of [rental] product from the market," which in turn created a large unmet demand, Nadji says.
In fact, even though some of the condo development will eventually revert to rental units, it won't compensate for tight rental supply.