When Amber Austin, a commercial real estate professional, thinks back to the start of the year, she recalls running from meeting to meeting, closing deals, and not having enough hours in the day.
“And then March 2020 happens. The steering wheel is literally ripped out of our hands, the road of normalcy no longer exists,” said Austin, a vice president in the San Antonio office of real estate services company CBRE.
As lockdowns and fears of the virus kept people at home and sent the economy faltering, some sectors of the commercial market went from brisk to sluggish nationwide. In San Antonio, the market for industrial property has weathered the crisis better than retail, which has been hit hardest, but the future of the office market remains murky.
Ernest Brown calls the period of March and April “difficult business months.” During the first months of the coronavirus pandemic, the commercial real estate professional’s clients either terminated contracts or extended them.
“In most cases, people are cautiously optimistic, but I think that’s a broker’s natural tendency,” said Brown, a certified commercial investment manager and vice president of investments, Rohde Ottmers Siegel Realty. “The reality is, when we look at the numbers, we know there’s going to be an impact.”
There are some signs the market is heading toward recovery. “Retail sales from multi-tenant retail are down significantly and yet I just closed one yesterday, and I’ve got two going under contract,” said Brown. “So we’re seeing interest in properties, and I think, as with everything when times get sort of tough, every property responds differently.”
Developers and investors are also feeling more confident, said Rob Burlingame, first vice president at CBRE. “Now that we know a little more about the virus … they’re able to make more informed projections out into the future [while] in March, April, May, early in the process, there were still so many unknowns,” he said.
The industrial market has remained strong throughout the pandemic, growing in inventory and declining in vacancy, said Yesenia Marili, vice president of marketing at the commercial real estate company, Transwestern. Marili and Austin recently presented market data during a virtual program for San Antonio real estate professionals with a commercial investment manager designation.
Marili said that because nearly three-quarters of the city’s total of 114.7 million square feet of industrial space is used for warehousing and distribution, the growth of e-commerce during the pandemic combined with a strong housing market have fueled demand for that space.
Burlingame said industrial has turned into another “darling asset class,” attractive to investors. “I won’t say it’s pandemic-proof, but it’s certainly well insulated because as retail comes back it’s going to have more need for industrial,” he said.
San Antonio’s location also is attractive to the e-commerce market, Marili said, with the city well-positioned to serve as a regional distribution center. Construction of new industrial space has already exceeded both last year’s total and the 10-year annual average of 2.3 million square feet.
“We’re seeing demand across the board,” Burlingame said. But the pandemic slowed the pace of sales and leasing. “There’s a lot more space on the market now than there should be. [But] what is on the ground now should fill up.”
It helps that “San Antonio boasts one of the healthiest economies in the country,” Marili said. But when it comes to office space, the outlook is more uncertain even with the signs of the market warming up.
“It’s unclear whether working from home will reduce demand for office space or companies will need to take additional space to accommodate for social distancing,” she said. “Still, there’s been activity in the Class A sector with ‘flight to quality’ as companies still see value in their office space providing a way to recruit and retain talent.”
The current vacancy rate for the total 57.9 million square feet of true office space, in all classes, is nearly 10 percent while the 2019 rate was at a 10-year low of about 8.5 percent, Marili said. Asking rates have declined slightly from an all-time high in January of $27.43 a square foot.
“The big question that everyone is facing is how are we going to use office space moving forward, and I think companies are really struggling to figure this out,” Austin said. “But some of them are kind of at a point in their lease where they have to figure it out, and so what we’ve seen is a landlord’s willingness to do short-term renewals and work with their tenants and try to build some goodwill, hoping for a longer-term commitment once we’re past all of this.”
Office construction remains constant throughout the city, likely leading to a lot of inventory and opportunity next year. Developer Worth & Associates has under construction the Walker Ranch Business Park, a 10-acre property at the corner of Wurzbach Parkway and West Avenue. But Worth also recently announced it signed a 20,540-square-foot lease with the first tenant, Computer Solutions. The first of the two buildings is expected to be complete during the first quarter of 2021.
Empty parking lots and dark storefronts across the city, however, are evidence the retail market is suffering the most among commercial real estate property types.
“It’s no surprise that the pandemic has disproportionately affected the retail sector in San Antonio, as compared to other asset classes,” Marili said. “Though the shelter-in-place orders have lapsed and the governor’s office continues to rollback restrictions, it’s apparent that consumer spending habits have changed in the wake of the COVID-19 virus.”
San Antonio’s commercial retail market is made up of 99.3 million square feet of space, she said, ranging from strip centers and convenience stores to grocery-anchored developments and regional power centers.
For the first time in the past 10 years, the retail property market has experienced negative absorption, meaning there was a marked decrease in the rate of space leased or sold. Last year’s absorption rate was just over 500,000 square feet and this year’s so far is at minus-184,000 square feet.
Though the specialty soft goods segment – clothing stores and boutique shops – was hammered by the pandemic, other types of retail surged, said Garrett Wood, investment sales broker at Foresite in San Antonio.“Grocery stores saw a huge increase in sales year-over-year during the pandemic,” Wood said.
Online shopping sites also increased. “In the second quarter of this year, it grew in three months as much as it grew in 10 years prior. So e-commerce’s penetration of total retail sales in the United States skyrocketed because of COVID.”
Increased sales in those segments has had some ripple effects. “We’ve got a manufacturer that was pretty close to leases in March, and they basically pulled the plug,” Burlingame said.
“Now it’s November … and they’re now coming back to the market. It’s a pretty common story that unless they’re directly related to e-commerce or directly related to some of the support services like for grocery, pandemic or no pandemic, people have to buy groceries. It just looks a little different how they’re doing it now.”
In August, several retail segments started showing signs of recovery, Wood said. The total retail sales volume was down only 0.2 percent for August, “which is a sign that there’s still healthy spending out there, [and] there’s a strong consumer desire to buy things,” Wood said.
But the number of new store openings this year is only about a third of last year’s openings. And the number of store closings this year, as of Oct. 3, amounts to nearly the same number of store closings in all of 2019. But many more have closed since then, Wood said, and he expects vacancies to continue going up in both San Antonio and Austin.
“Unfortunately, these guys who we have all seen closing their doors recently had financial troubles prior to COVID, so COVID wasn’t the main reason that these guys closed,” Wood said, pointing to retailers like Pier 1 and Stein Mart, which filed for bankruptcy in August and closed its four stores in San Antonio.
It’s also been a hard year for retail investment sales. The number of new listings and deals that went under contract in the third quarter of 2020 decreased by 67 percent over the previous year. A survey Foresite conducted among its clients showed that more than half of investors believe it’s going to take at least two years to recover, Wood said.
“Thankfully, what we’ve seen when businesses are able to reopen, people are still motivated to shop and dine so the numbers have trended upwards,” he said.
Brown said he’s seeing six to nine months of pent-up demand now coming into the market. “People are at the stage [when they say] I need to get going. I need to move on. I can’t let these plans languish anymore,” he said.
When that time comes, Austin believes San Antonio will be ready to fill the demand.
“The vaccination will come, life will go back to normal,” she said. “I’ve been in the market for over 15 years and we’ve never had this much Class A office space readily available for that next economic recovery.”