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Downtown Residential: Improving, But Not There Yet

Residential activity has picked up in Downtown San Antonio, and rents have broken the $2/SF barrier, but it’s still not enough. Panelists at Bisnow’s San Antonio State of the Market event last week say there’s still work to be done, and the city’s incentives need to continue.

City of San Antonio director of center city development Lori Houston (here with fellow panelists Lynd CEO Mike Lynd, AREA Real Estate principal David Adelman and moderator IPA executive director Will Balthrope) says the city’s had a “housing first” policy since 2012. It incentivizes residential development (waiving fees, etc, which can cut up to 8% of construction costs), figuring that all other property types will follow suit when there’s a housing base Downtown. In the last three years, 4,300 units have completed or are in the pipeline.

One of the best things about the program, she says, is that it streamlines the process—it used to take 14 months to negotiate an incentive, so the city did about three a year. Now it takes two months, and they’re knocking out 15 annually. The program’s set to expire in June 2016, but Lori says it has to be extended; she feels we can’t let go of incentives until rents get even higher Downtown.

LYND CEO Mike Lynd (showing off the newly renovated lobby at BC Lynd’s St. Anthony Hotel, which hosted the event) says people regularly ask him when he’ll build high-rise residential Downtown. The answer: When rents are high enough to support it. He says we’re getting there, and the fact that people are paying $2/SF for the first time is proof that the urbanization trend is real. He agrees that we need to keep adding multifamily to Downtown, because companies follow talent; office users will start coming back to Downtown as we bulk up our workforce there. (It’s exactly what happened in Chicago recently, he says.) Mike’s doing his part—he’s selecting between two potential sites Downtown for his next project.

The NRP Group is trying to increase its multifamily development pipeline, but VP Mark Jensen (left, with ARA Newmark executive managing director Pat Jones) says it’s gotten harder to build, so he’s anticipating a very similar production next year. It’s particularly difficult to build workforce housing because you can’t pencil it out with land and construction cost increases. He’s really excited about everything happening around the center core. NRP’s Big Tex community is under construction in Southtown (it’ll have competition; 900 units will be in lease-up around there next year), and he’s planning another project tentatively called Crockett Street Lofts, which will bridge the gap to the east side of the freeway.

Bulking up housing is all about creating a balance, Lori says. The stigma that only tourists go Downtown may be spurred by the fact that there are 13,000 hotel rooms, but there were only about 3,500 residential units. The housing first initiative will bring it to 11,000 apartments in the urban core. Next, retail needs to reach parity; she enjoys living Downtown herself, but says it’s frustrating that she can buy a coonskin cap but not a pair of shoes. She’d like the central city to be the vibrant retail area it was in the ‘40s and ‘50s. Step one: Downtown’s first grocery store is opening Dec. 1.

Lori and David believe the ongoing revival of Houston Street will help; new retail is coming on line there in the next six months. They consider everything happening along Houston (including Geekdom and Frost) as very important; it’ll tie the Alamo to Market Square and provide amenities for everyone living nearby. BC Lynd partnered with the city to develop Travis Park (across the street from the St. Anthony), which has become one of the best amenities in town for residents, Lori says. David’s kicking off the redevelopment of the Maverick multifamily/mixed-use building there soon, and he’s focusing on improving retail there. It’s all part of becoming what ULI terms an “18-hour city,” David says. David’s second from the right here with Transwestern’s Brad Kaufman, Cambridge Holdings’ Elize Pruske, Transwestern’s Larry Mendez, Griffin Partners’ Eileen Kondoff and Clarion’s Spence Sowa.

Retail Solutions market leader Michael Lynch (with his wife and colleague Sandy Lynch) applauds the vertical mixed-use trend that you’ll see at Maverick. He says going mixed-use helps returns and minimizes risks, and institutional lenders are starting to show interest in funding more of it in San Antonio. (Mike Lynd says San Antonio needs to work to be more attractive to capital, because that’s what you need to grow.) Michael just moved down from New England this summer to lead Retail Solutions in San Antonio. He says a global economic slowdown is coming and it will impact San Antonio, even though the Texas markets are strong. For one thing, retail REITs are 15% underpriced, which could spur bargain hunters to buy them and break them up. That’d impact property values, just like it did in ’08.

Pat says San Antonio is in a unique position: multifamily absorption is outpacing deliveries, despite an increased pipeline. In the trailing 12 months, we’ve put 5,200 units on the ground but soaked up 6,700 units. That’s driven occupancy to 93% across the metro. Meanwhile, we’re getting record rents, topping $2/SF Downtown and in the Broadway Corridor. It’s all driven by job and population growth—over 40,000 people moved to the Alamo City last year, and we added 30,000 jobs. (That’s over 3% growth, above the national average.) Multifamily investment sales have been quiet through the summer but are picking up again, and he thinks 2015 will set a new record for sales. Here’s Pat with the multifamily panel: Berkadia managing director Matt Greer, Mark, JLL managing director Scott LaMontagne and Mike.)

Somerset's Bell Works, Monmouth, New Jersey

USAA Real Estate executive managing director Dirk Mosis says San Antonio’s residential strength has awakened office users. That’s part of why USAA broke ground on spec office here last year, one of only three markets around the country where it was comfortable doing that. USAA is pleased by the activity at WestRidge at La Cantera, he says, but Dirk’s frustrated that the city only incentivizes Downtown tech jobs. Most of San Antonio’s demand is for back office users in dense places that require 8:1,000 parking, which just doesn’t fit Downtown. Dirk also says San Antonio doesn’t get a rising tide; you always have to work hard for your deal, but that’s earned San Antonio’s real estate community a lot of respect.

Westover Hills developer Marty Wender (far right with our commercial update panel: moderator Peloton partner Gardner Peavy, Dirk and Michael) also doesn't like San Antonio’s recent narrow focus—he says we need to work on our strong suits and not try to be what we’re not. He says we have a lot going for us: more college students than Austin and a wonderful labor force, CPS Energy (one of our best assets, he says, since we have some of the cheapest energy rates in the US and CPS pays one-third of the city’s revenue), very few natural disasters and a Central time zone that fits in well with national companies. One way we’re lagging: Marty is frustrated that San Antonio hasn’t started building toll roads like other Texas cities. He says we get the same amount of federal funding either way, and putting it towards toll roads would fund multiple future infrastructure projects.

The multifamily debt markets are strong, says Berkadia managing director Matt Greer, but you might be out of luck if you’re not already established. Two or three years ago, banks would try someone new to get money out the door, but now they’re selective about whom they lend to. The best rates will go to groups with a solid reputation and track record. But Matt’s got good news for everyone: He doesn’t see how interest rates could rise soon with everything going on in the world. Pictured: Setting up in the lovely St. Anthony Hotel before attendees started arriving.