San Antonio is starting to show up on the business real estate radar a little more frequently, as the city offers a combination of low cost of doing business, and a base of local talent that is highly educated, and has been out of work for most of the last three years. So marketing, sales, engineering, management, and core support personnel are in place and ready to work for a lower wage than say in Houston, or Dallas.

A shrewd developer would be looking at converting a lot of the manufacturing sector into modern industrialized office space for local, national, and international companies to rent for satellite locations. Currently it is going to waste, and creating a high tech, but industrial minimalist look would attract prospective businesses. This would also kill some of the urban blight seen by freeway, and Interstate travelers coming in and out of the city on a regular basis, and give the city a little tweak or makeover around the rough edges.

Believe it or not one-room offices, and space for cafe’s and bistros are in high demand right now, and you will see an even larger demand soon. Many of those displaced workers from 2008 and on have had to create their own business enterprises on a small scale to just bring in a paycheck to feed their families. These businesses were created out of desperation, but a large percentage have pulled out of their terrible two’s and have started to mature to the point where they need legitimate leased business space to operate with new employees coming onboard.

Is the worst over for the commercial real estate sector in San Antonio? The answer is not completely, but there enough activity to create the momentum everyone has been waiting for, and the time is right start new business concerns, and expanding the older ones. In addition, the family entertainment venues keep traffic flowing into the Alamo City, and is most likely the deciding factor when it comes to needing more eating choices in the area.

This was, by far, the major theme of the 2010 San Antonio/South Texas CCIM Real Estate Symposium, which was recently held at the J.W. Marriott at the San Antonio Hill County Resort and Spa.

Goodbye to 2009

Much of the talk at this year’s Symposium was saying good-bye to the dismal 2009 and looking at the gains experienced during 2010. That’s not to say that 2010 wasn’t without its challenges but, when compared to 2009, it was a breath of fresh air, to say the least.

To put the difference between 2009 and 2010 into perspective, consider this: during the 12 months ending December 31, 2009, the San Antonio commercial real estate market absorbed just 186 square feet of office space. Yep, that’s just 186 square feet.

Hello to a Brighter Future

However, looking to 2010, and it’s an entirely different picture: As of December 2010, the San Antonio commercial real estate market has absorbed nearly 472,000 square feet of office space.  Even though this number is considered a downturn from an average of 350,000 to 500,000 square feet per year in previous years, it sure blows away 2009 and shows just how resilient the San Antonio economy really is.

In addition to office space absorption, there are also several new developments that have real estate analysts excited about the commercial real estate market, including the new campus of NuStar and plans for a new campus for Nationwide.

One of the challenges that continue to exist for the commercial real estate market is lending. The lack of lending slows new construction, which therefore has a negative effect on commercial space absorption. Analysts also expect to see a lot of “no vacancy” for commercial space, thereby halting any growth that can be anticipated.

From the San Antonio office space market to the San Antonio residential real estate market, the success of downtown San Antonio is vital to the rest of this sprawling city.

Realizing new Opportunities

With the challenges of the last couple years and economic downtown that brought along with it a dramatic downturn in both the residential real estate market and the San Antonio office space market, the 2010 Community Development Summit focused on working to keep the downtown San Antonio area the place for both residential and commercial activity and growth.

Most experts at the summit agreed that the downtown San Antonio area will see a large increase in the number of residents over the next few years, so the many sessions and workshops that were held were focused primarily on the task of handling the expected increase in activity.

Issues Affecting Downtown San Antonio

The summit, which was co-sponsored by the city of San Antonio and the Urban Land Institute, was entitled the “Transforming the Center City through Collaborative Efforts.”

Panels comprised of both national and local leaders spoke about such topics as cyber-security, energy issues, affordable downtown housing and the city’s aerospace sector. Building and maintain the “strong, urban core,” as one attendee put it, is vital to the success of San Antonio over the next 10 years.

The summit also focused on making the city more pedestrian and bike friendly, as well as making the roads coming in and out of downtown San Antonio easier to travel. Other panelists focused on transit-oriented development, which no doubt will play a big part in the San Antonio office space market. A light rail system was spoken of, as well, as this would surely have a positive effect on the San Antonio office space market.

Curiously, the per square foot cost of renting office space in San Antonio has increased some 17 cents per square foot since the last quarter of 2008, to a median cost of $20.41 per square foot as of this writing. However, under current market conditions landlords frequently will make concessions to a prospective tenant that may offset some of the rental cost.

An upturn in the nation’s economy coupled with the city’s friendly business climate and the commitment to San Antonio shown by such companies as Wells Fargo and the Tesoro Corporation, among others, bode well for the future of commercial property owners in San Antonio.

Certainly, when the office space glut in San Antonio is finally resolved, lenders will have to loosen their presently tight grip on credit so that new development can continue to provide the office space needed for future growth.

Leasing Office space

Leasing office space, particularly for a small company, deserves considerable thought and planning as well as expertise in negotiating with the landlord. The importance of knowing what will best suit your needs, budgetary constraints and requirements, both for the present and future, will unquestionably have a major impact on the profitability of your business.

Office space planning, negotiating a lease that will allow for future expansion or sub-leasing, and many more details should be undertaken by experts such as an interior designer, real estate attorney, etc. in order to obtain a lease that will provide the most short and long-term benefit.

Where are the New Commercial Construction Projects?

Because the San Antonio commercial real estate market continues to decline due to the number of foreclosures, the number of new commercial construction projects continues to struggle. However, amidst all of the problems surrounding the slow rate of new commercial construction projects and the tight lending standards that have inhibited builders from starting new construction jobs, the medical industry has come to save the day.

Medical Industry comes to the Rescue

The $16 billion-a-year medical industry, which makes up a good portion of San Antonio’s economy, has allowed many commercial construction projects to move ahead, despite the tight lending environment.

The reason for this may lie with the fact that most lenders see the medical industry in the San Antonio commercial real estate market to be quite low risk. In fact, many lenders view construction for the medical industry to be less risky than other publicly funded projects.

Even with lenders turning a deaf ear to new commercial construction projects, doctors and developers have been able to make deals with the lenders to build necessary medical space. It doesn’t hurt, either, that most doctors have great credit.

The Medical Industry gets the Green Light from Lenders

Many lenders in the San Antonio commercial real estate market are requiring builders and developers to have minimum occupancy and equity requirements for new projects; however, if doctors have tenants lined up, lenders seem willing to let these requirements pass.

In addition to giving the green light for medical industry construction, lenders have also begun to offer very attractive and competitive loans.

As a result, the health care industry in the San Antonio commercial real estate market continues to grow, even as the commercial real estate industry otherwise continues to struggle.

In addition, the nation expects that under Obama’s new healthcare legislation millions more people will be able to obtain health insurance, thereby increasing the need for new medial space.

Unusually wet weather conditions over the last few months have pushed the completed date to June, although it appears as if progress is starting to take shape.  Many construction companies have noted that the wet weather conditions are unlike any other they have experienced. In fact, many construction companies have said that it was one of the worse years for wet weather-related delays to date.

The phase two RiverWalk Crossing project, which will consist of two, 25,000-saquare-foot, mixed-use buildings that will house San Antonio downtown office space will be located at the Jenks retail center.

The estimated cost of this two-building section will be $5.5 million.

Despite the weather-related delays, major tenants are already lined up, including McDermott’s Grille, a restaurant and music venue and Midnight Rodeo, a country and western club chain.

The upper floors of the two-building project will be devoted to San Antonio downtown office space. The addition of San Antonio downtown office space will be a welcomed addition to this area, and is sure to bring in a multitude of tenants looking to take advantage of this prime area of the city.

In addition, a 350-seat amphitheater will be a part of the project and will be similar in design to the current amphitheater in RiverWalk Crossing.

Other changes expected soon include:

• Construction has begun on the RiverWalk Apartments, a development by the TranAlliance Development Group. The 234 apartment units are expected to be finished this spring.
• Calistoga Grill has opened up in the former location of Alehaus.
• Twisted Tilt, a 6,000-square-foot bar and grill, will take the place of TKs 2 Asian Restaurant.
• Blind Lemons, a bar with a blues theme, will open soon in the shopping center.

The RiverWalk is San Antonio’s most famed attraction, as it attracts millions of visitors each year. Just some of the attractions that draw visitors to the RiverWalk include:

• San Antonio Zoo
• The Alamo
• San Antonio Botanical Garden
• The Guenther House
• King William Historic District

According to NAI REOC San Antonio, asking rents for the fourth quarter of 2009 in San Antonio were down 26 cents to $17.85 per square foot, when compared to asking prices in the same quarter of 2008.

Rental Prices Continue to Drop

With an excess of supply in the San Antonio commercial real estate market, landlords have been forced to drop their prices. Although 26 cents isn’t a huge decrease in price, it becomes quite significant when dealing with large spaces.

Moving Towards a Stable Market

However, even amidst rental price decreases, the San Antonio commercial real estate market is stabilizing nicely after a rocky year. In fact, vacancy rates dropped to 13.7 percent in the fourth quarter of 2009, compared to 14.3 percent in the same quarter of 2008.

Many real estate experts find that as vacancy rates decrease the rental prices will soon start to stabilize, thereby creating a more balanced San Antonio commercial real estate market.

The magic number for vacancy rates appears to be 10 percent, and the San Antonio commercial real estate market is clearly headed in the right direction. When that happens, landlords will have more control over their rental spaces, thereby creating more harmony and stability in the San Antonio commercial real estate market.

How we got Here

San Antonio’s retail market saw a big hit in 2009 when some of the area’s major retailers, such as Circuit City, closed up shop. Although San Antonio in general survived better than other areas of the county in terms of its commercial real estate market, it definitely had an effect on the bottom line.

Another factor that led to an increase in commercial rental space was that many construction projects that were started before the recession took hold wrapped up in 2009, thereby creating much more available space in the San Antonio commercial real estate market.

However, these positive signs for the economy left more than 220,000 square feet of office space vacant.  Combine that with the highest office space vacancy in years for San Antonio, and it’s clear to see that San Antonio has a bit of an office space issue.

In fact, the end of the third quarter of 2009 brought on San Antonio’s highest office space vacancy rate in five years – 18.4 percent. In comparison, the vacancy rate for San Antonio office space was 14.2 percent for the same period in 2008.

Lending Standards at a Standstill

The nationwide credit crisis has greatly affected any new investment for the San Antonio office sector. Unfortunately, the clampdown on lending in San Antonio has brought new investment in San Antonio to a veritable halt.

New projects are simply not able to get off the ground, thereby leaving developers with no other options for financing. However, many developers are unwilling to start new projects anyway because of a lack of demand.

With all of the doom and gloom of the office space sector in San Antonio, rental prices still continue to increase: rental rates for San Antonio stood at $20.41 per square foot in September 2009, compared to $20.24 September 2008. Many times, however, the concessions that are being offered by landlords may affect these prices.

Still Going Strong

Despite the tough lending standards and vacancy challenges, the office market in San Antonio is still posting gains. The bottom line is that San Antonio is still an attractive place to do business. The low business costs and the high quality of life continue to attract new businesses to this dynamic region of Texas.

The San Antonio commercial lease space market is the place to be for renters because there is a high vacancy rate and the lease rates are quite reasonable.

There are a slew of major differences between commercial leases and residential leases, so it pays to understand the ins and outs of a commercial real estate lease before signing on the dotted line.

Questions to ask when seeking commercial lease space:

• What is the rent price, and what increases are expected?
• What is the security deposit and what are the conditions for the return of the deposit?
• What is the length of the lease? Is this negotiable?
• What does my rent cover? Does it cover utilities, taxes and maintenance, or will I be charged separately for these items?
• Will I have the option to renew the lease?
• How, if necessary, can I terminate the lease? What are the notice requirements regarding the termination of a lease?
• What does my rent include? Common areas, hallways, bathrooms and elevators?
• Do you have specific rules regarding the placement of signage?
• Do you have any plans for improvements or modifications to my lease space or to the building?
• Will you entertain build-outs? Who will pay for them?
• Who maintains the property?
• Can I sublet the space, if necessary?

Although all of these questions may not personally relate to you and your lease, it is important to get answers to all of these questions, as they may pertain to you at some point throughout your lease. Read the lease agreement thoroughly carefully and, if necessary, have an attorney review it. Although you may be wary to pay an attorney to read over your lease agreement, it can actually save you quite a bit of money in the long run.

Commercial foreclosures for San Antonio commercial real estate rose nearly 55 percent during 2009; in other words, there were 863 commercial property foreclosures in San Antonio in 2009, compared with 557 in 2008.

Throughout all of the trouble that the San Antonio commercial real estate market is experiencing – and is likely to experience in the months ahead – economists note that the trends of the past year can’t even hold a candle to the real estate collapse of the 1980s.

Commercial Foreclosures Peak for Older Buildings

Case in point: many of the commercial foreclosures in San Antonio in 2009 were from smaller, older buildings in less desirable parts of the city. However, larger, nice properties have also not been spared the brunt of the foreclosure crisis.

Construction in San Antonio has slowed, and vacancies have risen. The hardest hit sector of the commercial real estate market was industrial buildings. There were 47 industrial building foreclosures in San Antonio in 2009.

Apartment building foreclosures also experienced a huge jump, with 87 foreclosures posted in 2009, compared to 33 in 2008.

Retail foreclosures were up, as well, from 51 in 2008 to 66 in 2009.

The surprising factor in the commercial sector, however, was that office building foreclosures dropped eight percent from 2008 to 2009.

A Bright Spot

Because the commercial real estate market in San Antonio is linked to the residential real estate market, and usually follows the trends of the residential real estate market, many analysts turn to the residential real estate market to gauge the future of the commercial real estate market.

Luckily, after nearly three years of double-digit drops in the residential market, home builders are starting to build once again because demand is on the rise.

The residential real estate market clearly hit bottom in 2009, and is now on the way to a rebound. This is good news for home builders; and perhaps even better news for commercial real estate builders and investors.