Sunday, January 09, 2005

San Antonio proving to be hot market for apartment investment

By Tricia Lynn Silva

It is shaping up to be another banner year here in terms of investment in multifamily apartment projects.

As of Sept. 30, 2004, 51 multifamily communities in the greater San Antonio area had changed hands, according to Austin-based research firm Austin Investor Interests.

Many of those investors are coming from well beyond the Lone Star State. They hail from cities like Denver and New York and states like California, Arizona, Wisconsin and Florida, notes Will Balthrope, who is the senior director of the Cushman & Wakefield Texas Multi-Housing Group.

"Most of the capital is from other regions investing into San Antonio," says Balthrope, whose group has already sold 19 apartment properties here -- for a total value of $255 million. "They are bypassing Dallas, Houston and Austin."

About 70 percent of the 35 multifamily property transactions that Phoenix-based Hendricks & Partners brokered here over the course of 2004 involved California investors, according to Scott Weems of the firm's San Antonio office.

"The thinking is that if there is a real estate bubble, it's going to burst (in California) first," says Weems. Driven out of California by inflated prices for multifamily properties there, investors are coming to San Antonio, where the prices are cheaper and the capitalization rates are higher.

"The same property that an investor will pay $75,000 per unit for in San Antonio would cost them $90,000 per unit in other markets," Balthrope explains.

Investors, Balthrope adds, continue to prefer "the slow and steady rent and occupancy growth trend that has always been San Antonio's edge over the more mercurial larger Texas markets."

At the end of the third quarter of 2004, the city's average apartment occupancy rate stood at 92 percent, according to Austin Investor Interests. Indeed, since 2000, the occupancy rate in the local apartment market has averaged just over 90 percent, according to an October report by Encino, Calif.-based Marcus & Millichap.

Driving factors

But the consistency of the local multifamily market is not the only draw for investors, the Marcus & Millichap report notes. After shedding some 3,700 jobs here overall in 2003, local companies are now on track to hire a total of 16,000 employees by the end of 2004.

Also spurring interest in San Antonio is the planned Toyota Motor Manufacturing Texas Inc. plant, which is scheduled to open in South San Antonio in 2006. Toyota's interest in San Antonio has helped to put the Alamo City on the national radar screen.

Says Balthrope: "Toyota is showing that San Antonio is a growing job center."

The hot investment multifamily areas continue to be those same submarkets that are already attracting the new real estate developments. North Central and Northwest San Antonio remain high-demand areas, says Balthrope, who adds that the South Texas Medical Center on the Northwest Side is one of the core investment areas.

Besides the Medical Center area, buyers have also begun looking due West, says Balthrope, to the area known as the Westplex -- which is bordered by Loop 1604, Culebra Road, Loop 410 and Marbach Road. This Westplex area includes the master-planned community of Westover Hills -- a neighborhood that continues to be a beacon attracting many large employers.

More is less

But for all of the interest that investors have shown in San Antonio, is there a chance that the good times could end?

To date, there are more than 6,500 multifamily units under construction in the San Antonio area, Austin Investor notes. Another 2,800 units have been submitted for permitting; an additional 4,000 units have been proposed.

Of these 6,800 units in the planning or permitting stages, close to 5,000 of those will come on-line by the end of 2005, Austin Investor estimates.

"There is a bit of a bubble going on," says Weems.

"There will be some softness as many new properties being constructed are delivered to the market," says Balthrope, who adds that despite the influx of new product, San Antonio has consistently been more conservative in terms of new construction than other markets.

While San Antonio will be delivering more multifamily units over the course of 2005 and 2006, the city has also enjoyed steady demand for the new product, Balthrope continues. Something else to keep in mind: About half of the new units currently under construction are targeted to lower-income families -- including affordable-housing and tax-credit projects.

"If history is any indication," Balthrope says, "there will be a short period of softness, followed by continued steady growth in occupancy and rents."

And more multifamily units means more opportunities for new investors.

Adds Balthrope: "We are looking forward to the new projects coming on-line; it gives us a new class of projects to sell."

"San Antonio is still a good story," adds Weems. "There is a lot of money, a lot of interest in the market."

"It may not be as sexy of a market as Dallas or Austin -- if you catch those markets right," says Balthrope about investing in the very steady Alamo City. "But it makes it a lot easier to sleep at night."