Uncertainty in 25′

It has been said, that “Uncertainty may be uncomfortable, but certainty is absurd” (Voltaire).

Period of Uncertainty

We have struggled the past two years with the uncertainty of inflation [up and now lowering], with interest rates [up a lot, and now lowering] and then there was the very uncertain Election which has been decided and now the uncertainty of the new policies. It appears that the new administration will be more pro-business, and anti-regulation than the previous regime.

However, uncertainties still loom. Has Covid killed the office building? Or at least killed Class C buildings and 90% occupancies in Class A offices?

When will mortgage rates get down to the 5.5% target that will revive home sales? They went from a high in Oct. 2023 of 7.8% to 6% in Sept 2024 back up to 6.84% now.

Can you spell rollercoaster?

Will Californians keep flocking to Texas? Some have actually reversed course because:

1. Texas is really hot in the summer.

2. It is not that much less expensive than California. High property taxes offset no state income tax.

3. The political climate is a red state, not a deep blue state. Bye. Bye.

A real estate man from Dallas reported the following snippets that seem to help paint the picture of where we are presently.  WFAA News reports 12.7% of Texan homeowners do not have house insurance. Up 5% since 2019. Census Bureau says 22% of American’s work remotely. Texas is one of the leaders when it comes to credit card debt. Average credit debt in Plano is $17,000. Arlington $16,000. One out of three seniors have returned to work to make ends meet. Department of Labor Statistics reports grocery stores have profits of only 1.5% in 2023; but in 2019 their profits were 3%. Spectrum News reports one third of new Texas teachers are not certified. Moreover, a man went to a popular shooting range and the instructor said his business is off 70% since last year; his clients said they have to feed their families.

Last year I quoted the Merle Haggard’s song, “If we make through December …” Well, we did. And my next line was we need to Survive ’23 to Thrive in ’25! Well, it may take the better part of 2025 before we begin to thrive again in commercial real estate, but I hear from many sources there are green-shoots poking up from the ground.

Forecasts in CRE

Urban Land Institute and PwC Consulting release their Emerging Trends Report each Fall with forecasts for the coming year. This national survey of commercial real estate professionals sees falling interest rates next year, so capital will be cheaper, cap rates will be lower, bringing an upturn to the 20% decline in values over the past two years. (Probably not reflected in your property tax statements, though.) Deal volume will pick up.  Here’s a quote from the report: “Sentiment is improving, although largely still erring on the side of caution, but we’re glad to see the early signs of capital markets poised for recovery, as firms look to longer-term strong fundamentals and adjust their strategy by market and property type.” It ranks us as #13 in Overall Real Estate Prospects.  So, let’s look at the various property sectors in San Antonio and see how they are faring.

Apartments

Apartments have suffered from very low deal volume over the past year and a half. One broker said there have been more foreclosures than sales. Occupancy rates dropped from 94% down to under 90% and rents have fallen as a result.

Experienced owners typically stay prepared for the cyclical downturns and choose to ride it out rather than being forced to sell into a weak market. Then there are the inexperienced owners, often investors in syndications who have not realized markets go down as well as up. In this bracket there have been forced sales. Some are underwater, with lower rents that don’t cover costs like mortgage payments, property taxes, insurance and property management. Because they may be rookies, they took on debt from private lenders – which is not a bad thing.

Private lenders may be much more flexible in deferring payments and accruing interest, but they will be paid, at some point. And the Tax Man will be paid. So, their equity is wiped out while the lender chooses how to do a work out. Real Estate 101, going back centuries.

You may have heard that SAWS and CPS have turned off service to apartments that are very late on paying their bills. The most egregious example is the Palantia Apartments on Sahara, a 300-unit 1970’s property. Recently the gas was shut off to part of the complex and 150 units had to be vacated. Then, the Tren da Aragua Venezuelan gang took over, leasing apartments out themselves to new migrants. In the year before the police raid there had been 1,500 calls for service, including shots fired, burglary, and assault. The police arrested 19 people, four were Venezuelan and one was known as an enforcer. When rental income declines, Landlords can’t keep up the property and bad things happen as a result.

New multi-family construction

New multi-family construction was going great in 2022 and we ended the 12-month period in August 2024 with the most completions ever at 11,000 new units, according to Co-Star, but starts pulled back dramatically this year. It takes nearly two years to bring a project on line so we may have a shortage in a year or so.  The interest rates and lower loan amounts offered by construction lenders tanked a lot of deals. But not all. Starting in September with the prospect of falling interest rates, many developers went back to work on deals that they had put on the shelf and also started looking for new deals.  Still, San Antonio ranked #6 in apartment construction in the U.S.

Retail

Retail on the other hand has been doing extremely well.  Occupancy levels remain high because new construction has continued to soften. The costs of land, materials, labor and capital have forced developers to require high rents from prospective tenants in order to make new retail centers pencil out. Often, they don’t. Thus, the average occupancy rate is remaining steady at around 96%.  Older properties are struggling with higher property taxes and insurance premiums, which are then passed through to the tenants. However, this, results in the Landlord not being able to raise rents to cover higher interest rates if they have to refinance, or capital expenditures for new tenants. There is only so much a Class B tenant can pay in rent before they reach a point where no one is making a profit.

Offices

Offices are problematic. Class A+/new construction is doing well. If you are going to rent space, then rent the best.  Class C, like older properties from the 1980’s, are suffering a great deal. No one wants to be in them, unless the rent is really cheap, but then owners can’t afford to keep making the capital expenditures and pay the mortgage and pay the taxes and pay the insurance which is up 20 to 30%.

Question: how much is an obsolete office building worth? Answer: maybe only the value of the land. Demolition is not cheap. How good is the site for another use? Conversion to apartments is generally not practical as the structures are radically different.

Then, Austin has the second highest vacancy rate in the U.S. near San Francsico’s 27.8%. The beautiful skyscrapers are mostly empty. Austin Trending says,

“Google has yet to move into its 35-story sail-shaped building overlooking Lady Bird Lake, and Facebook’s parent company, Meta, abandoned plans to move into its nearly 66-story skyscraper on Sixth and Guadalupe which they have been seeking to sublease since 2021.”

The Work-From-Home trend is certainly a major factor.

Industrial

Industrial properties are doing pretty well, but it is a bifurcated market. Medium and small properties are in big demand and lease and sell with little waiting time. However, a couple of years ago some very large projects were begun, like Stream’s project at Wurzbach Parkway and West Avenue, and the multi-building projects on IH-35 in Schertz and I-10 East.  These projects take a year to two years to complete and rarely have pre-leasing, so now they are skewing the occupancy numbers the wrong way. The slow down in the economy and now the uncertainties of multi-national logistics are weighing on decision makers. Note: Laredo is now the largest port in the U.S.A. and that impacts San Antonio favorably.

Overall, commercial property investment activity boomed in 2021 and 2022 but has fallen back to a slightly lower-than-pre-Covid level over the past year, according to Co-Star. This sector is always very reactive and reflective of the interest rates that are available. Maybe the New Year will bring a more favorable cost of funds, but investment activity still certainly resides in the Uncertainty camp.

Population growth

Population growth continues to be the good news in San Antonio which continues to be very strong according to the U.S. Census Bureau, which reports we have had a gain of 1.51%, or about 37,000, in the MSA (the 8-county region) to 2,491,000. This follows a 2% gain in 2021, 1.9% in 2022, and 1.7% in 2023, so you can see we are experiencing very steady growth. Then, our unemployment rate is at a low 3.7%. This is also reflected in the growth of our sister cities in the Texas Triangle.  For example, Austin grew 3% in the Covid boom year of 2021 while last year growth was 2%. Austin’s MSA totals 2,274,000 making the total for the ASAMSA (Austin San Antonio Metro Statistical Area) 4,765,000; compared to DFW’s population at 8.1-million and Houston at 6.8-million. And the total Texas population increased by 315,000 last year.

New Home Construction

New Home construction is also strong currently, with 17,751 annual starts rate in SA, exceeding Austin’s 16,663.  The Emerging Trends Report ranks San Antonio as #20 in the U.S. The New Year with lower interest rates should spur better home sales.

Poverty and Unemployment Rates

I would suggest that you read the article on San Antonio in the recent Texas Monthly magazine. The writer’s premise appears to be that nothing is working to raise the lowest income earners to a better wage level and standard of living. She lists out the various achievements of San Antonio, from Hemisfair to SeaWorld to Toyota’s Tundra plant to the efforts of Henry Cisneros, Julian Castro’s Decade of Downtown to Mayor Nirenberg’s Ready to Work program. While all of these efforts have benefited 78% of the population they have not driven down the 22% poverty rate. Why? The city has a low unemployment rate of 3.4%, and in every industry and trade, it is known that there is a wide spread shortage of workers. From construction, electricians, plumbers to school teachers, firemen, police, to engineers, doctors and other professionals. All are desperate for new workers.

So if we have a possibly underemployed workforce, along with, a high need for more skilled workers, how do we get our citizens prepared to enter the workforce to move up to higher incomes? There are numerous trade programs throughout San Antonio and the Ready to Work program has tried to fill the need. Yet, they have only been able to recruit about 3,000 participants and graduate about 1,400 from this heavily funded project over the past 3 years! The original goal was 40,000 graduates!

San Antonio Community Colleges has 66,700 in their two-year programs; UTSA has 32, 400; Tx A&M San Antonio has 8,000 and the other 4-year universities add 11,200; bringing the total to over 118,000 in colleges, which is equal to 9% of our total workforce of 1,286,856. Adrian Lopez, CEO of Workforce Solutions Alamo, said the local labor market is the strongest it’s been in years.

The brightest minds in San Antonio have tried to solve this problem of generational poverty for decades. The solution seems, well, uncertain.

But the bright light remains that San Antonio has a strong and growing economy and plenty of room for new graduates and folks moving up in their professions. We have an affordable economy, lots of new job opportunities, strong educational systems, a long and beautiful multi-cultural history and plenty of room for hard working dream-makers.

San Antonio is a great place, with certainty.

God Blessed Texas!!!

Merry Christmas and may you and yours have a prosperous New Year!