SAN ANTONIO | MULTIFAMILY OUTLOOK
OVERVIEW
San Antonio entered 2016 as one of the United States’ most stable economies. The city’s diverse economy and growing employment base is continuing to attract young professionals that prefer renting to buying. Tenant demand has been rising for Class B and Class C multifamily rental properties in San Antonio as many of these professionals are blue collar workers and government employees. The growth in the demand for Class B/C properties is causing vacancy rates to decline and rental rates to increase (Marcus & Millichap). The San Antonio market presents a unique opportunity for investors looking to reposition their portfolios and benefit from the city’s rising property prices and historically low interest rates. In addition, the banks increased desire to lend to multifamily properties gives access to relatively inexpensive liquidity that allows investors to rehab properties to increase rents and in turn raise net operating incomes.
ECONOMIC INDICATORS
Macro Economy
The U.S. nationwide homeownership rate has declined again during the first quarter of 2016, reaching its lowest level in nearly two decades. On the other hand, the multifamily sector has been experiencing sustained growth. Tenant and investor demand for multifamily housing has been on the rise. Median rental rates have been increasing over the past two decades and demonstrate less volatility/sensitivity to recessions and economic downturns than single family homes, making them a relatively safe investment option. In addition, nationwide demand for multifamily housing has also been increasing as a fairly strong labor market increases employment opportunities for young adults, the key market segment for the apartment rental industry.
San Antonio Economy
San Antonio is strategically located in South Central Texas, and has historically been the economic hub of the region. The city’s median household income is above the national average at $53,748 and is expected to grow 3.2% in the coming year (Forbes). According to the US Census, San Antonio’s growth rate has been steadily increasing for the previous five years. San Antonio’s diverse economy has allowed the city to remain strong while the rest of the state has experienced some turmoil as oil prices have plummeted. San Antonio’s job growth has not been hurt by the falling oil prices because about only two to three percent of the city’s jobs are related to the energy sector. San Antonio’s unemployment rate is currently declining as the state average is increasing.
Employment
San Antonio’s unemployment rate has been steadily decreasing since its peak of 7.7% in 2011. The city’s unemployment rate in May 2016 was 3.4% compared to 4.4% in Texas and 4.5% in the U.S. for the same time period (Bureau of Labor Statistics). Job growth has been strong in recent years and is expected to increase 2.5%, or by about 25,000 workers, in 2016. Employment increases are mainly driven by the healthcare, trade and hospitality industries (Marcus and Millichap).
Major Employers & Industries
The major industry sectors in San Antonio are healthcare, national defense, tourism, business services, and the new emerging energy sector. Healthcare plays an important role in San Antonio’s economy, with South Texas Medical Center being a vital part of the sector with their conglomerate of hospitals, clinics, and research facilities. In addition, government and national defense are one of the largest employment sectors of the city manly due to the location of four military bases in the area. San Antonio is one of the most visited cities in Texas because of its popular tourist destinations such as the Alamo and River Walk. The tourism sector is expected to generate thousands of jobs yearly, making the sector a key driver of San Antonio’s economy. Furthermore, the new emerging energy sector is opening up great opportunities for the future growth of the city with the help of the San Antonio Economic Development Foundation.
Population Trends
San Antonio is the seventh largest municipality in the U.S. The city experienced a population growth of around 8.55% between 2010 and 2016 and is projected to grow an additional 6.90% through the year 2021. Crime has been generally declining since the early 2000s.
LOCAL MULTIFAMILY TRENDS
Vacancy
Vacancy rates in 2016 are expected to increase slightly by 40 basis points, 0.4%, annually to 6.5% with a net absorption of 5,100 units (Marcus and Millichap). The increase in vacancy rates is mainly due to the increases in new construction of luxury apartments. However, the new constructions do not have a major effect on the occupancy of B/C class apartments built before 1990 due to the fact that they affect a different tenant group. The vacancy rates for apartments built prior to 1990 have tightened and declined about 100 basis points, meanwhile vacancy rates for 1990s forward apartments have increased 120 basis points (to 7.2%) during the previous fiscal period (Marcus and Millichap).
Local Rental Economics
Rental rates have been growing at one of the strongest paces since 2008. Average rents are expected to increase around 4.2% in 2016, raising the monthly effective rental rate to $933. In addition, on a year-to-year basis average rents in 2016 have been increasing at a higher pace than they were in the previous annual period. From 2015 to 2016, average rents increased around 6% compared to 5.1% in the previous year (Marcus & Millichap Market Report). During the previous fiscal period, rents surpassed $1,100 per month in four San Antonio submarkets, ranging from $1,080 per month to $1,238 per month. Furthermore, it is important to note that rental growth has been the strongest among properties built in the 1970s and 1980s, increasing 6.1% (Fannie Mae Multifamily Report). The strong growth rate for older properties is largely due to the increase in demand for such properties by the employment gains in the blue-collar workforce. Homeownership rates are on the downward trend in San Antonio, which directly leads to a larger pool of renters, which makes multifamily investing more attractive.
Cap Rates
CBRE categorizes San Antonio as a Tier III market for multifamily. Cap rates for Class B suburban multifamily properties stand at 5.25% – 6.00% for stable and value add; For class C they stand at 5.75% – 6.00% for both stable and value add. San Antonio’s cap rates are favorable compared to other metropolitan areas, specially tier I assets, that have cap rates between 3.75% – 5.00% for stabilized class B assets and 5.00% to 6.00% for class B value add assets.