San Antonio apartments are being swapped in a flurry of trades, as outside investors pour into the city to take advantage of market conditions created in part by the pandemic.

More than 14% of all San Antonio apartments traded hands last year, a share greater than any city in the state and any city nationally except for Atlanta, according to a December report from CoStar, a real estate analytics firm. Those deals were worth a total of $3.6 billion in 2021, marking a near doubling over the transaction volume for 2019, before the pandemic.

“There’s a lot of investor confidence in San Antonio,” said Daniel Khalil, one of the report’s authors. “It’s not just because of good prices, or because it’s this [capitalization] rate, or that much per door. They’re also buying it because they see the growth prospects in the city, and because they see the economic resiliency of a city like this.”

Similar booms are taking place in cities across the state, Khalil said, part of the continuing “Texas Miracle” of people moving to the state in droves, but San Antonio in particular is moving up the ranks of investor-favorite cities faster.

The simplest way to explain why apartments have become such a hot commodity, according to Tony Ciochetti, the executive director of the Embrey Real Estate Finance and Development program at the University of Texas at San Antonio, is that San Antonio’s rapid growth has created demand — and supply is constrained.

For every new apartment unit that was built and ready to rent in 2021, there were almost three new rental leases being signed, according to figures from CoStar. Just over 4,000 units were built, but slightly more than 11,500 units were newly rented.

Renters are a growing class in San Antonio, thanks to pandemic-era population growth and the skyrocketing cost of homes. Meanwhile, construction on new apartments is lagging behind because of pandemic-related supply and labor issues, meaning these new renters are squeezing into existing apartment stock, nearly filling them to the brim. Vacancy rates in the city dropped four points in 2021, to just 5.5%.

The increased demand has also allowed landlords to raise rents roughly 13% over the year, slightly above the national average, according to CoStar.

The rent increases are outpacing wage growth, which in Texas’ Census division was 3.1% in 2021, according to the Federal Bank of Atlanta.

Ciochetti said rising rents across the market and more demand could lead to tenants moving into cheaper apartments — potentially explaining some of the interest San Antonio investors have shown in these older and lower-quality apartments.

For example, GVA, an Austin-based company that bought the second-highest number of apartment units in San Antonio last year, according to CoStar, purchased the Star Club apartment complex in northeast San Antonio this past September. The 221-unit apartment complex was built in 1975, has few frills, and was recently valued by Bexar County appraisers at $24.5 million. Older apartments like this, often in need of repairs, are considered the riskiest kind of apartment investments.

Others are focusing on higher-end apartment complexes, such as The Connor Group and Strategic Property Investment Advisory, both of which CoStar also listed among its 10 biggest apartment buyers in San Antonio.

Strategic Property Investment Advisory, or SPI, is a Dallas-based group that has gone on a buying spree in the city since August, most recently purchasing the Encore SoFlo, a 339-unit luxury apartment complex in downtown San Antonio. Among its amenities are a fitness center, a rooftop lounge and dog washing station. It was valued by Bexar County appraisers last year at $64 million, but as in most commercial real estate transactions in Texas, the sale price was not disclosed.

SPI is part of the growing share of private equity firms purchasing apartments in the city. Private equity firms use large amounts of debt, or leverage, to purchase real estate, putting the debt on the assets. This approach offers investors a chance to get a profitable return sooner than bonds or public companies. And as the Fed continues to hold interest rates near zero — originally part of an effort to stimulate growth under the pandemic — leverage is cheap.

According to figures provided by CoStar, private equity made up 16% of sales volume of San Antonio apartment units over the past year, a jump from the 4% average over the past three years. The 10-year average was 13%, potentially pointing to the lingering effects of the Great Recession, when private equity moved to sweep up distressed real estate.

The figure could actually be higher: “Private equity” as defined by CoStar is a somewhat subjective category, Khalil said. But there are other ways to slice it. Take for instance SPI, which is not listed as private equity by CoStar, but which defines itself as a private equity firm.

But winds could change. Goldman Sachs predicts the Fed will raise interest rates aggressively in the face of sustained inflation and a labor market nearing full employment. Higher interest rates could slow the pace at which investors buy and sell San Antonio apartments, as it would become more expensive to borrow.

But rents will likely continue to rise, as the renting population continues to grow faster than housing and apartment construction, making San Antonio’s apartment market a landlord’s and seller’s dream.

Waylon Cunningham

Waylon Cunningham writes about business and technology. Contact him at waylon@sareport.org.