Uncertainty Yields Opportunity

You may remember the movie series, Men in Black. In MIB 3 there is a pleasant space alien named Griffin who has the talent of seeing the future, but he goes one step further by seeing all possibilities of futures outcomes! He intones, “So many possibilities!” Sort of like where we are now.

Will the rise in interest rates squash our strong economy, or will the high inflation beat the FED to it? Will we have a “soft landing” and avoid a Recession, or will Russia nuke Ukraine and turn everything topsy-turvy? And then there is China! And then there is Elon Musk! So many possibilities!

As anyone in leadership knows, you do your best to discover the facts, analyze your options and then make a decision, knowing full well that your course of action may work out well or not so well. But you know that inaction through indecision is worse than taking an imperfect action, because at least you are moving forward. You can’t steer a boat that is dead in the water. At least if you are moving, you can change directions when you see the need. So, to drop down to simple stuff like commercial real estate in San Antonio, let’s just consider the facts as best we can and keep moving forward.

I would suggest that the Financial Crisis of 2008 spawned the New Normal of low inflation, low interest rates, and eventually in 2018 ultra-low unemployment. The Pandemic shattered our sense of Normal and now we are grappling with the Next Normal. There are so many possibilities on how THIS one will play out. War, Inflation, Interest Rates, Politics, Supply Chain Disruptions, Boomers Retiring, Work from Home or not, trillions of dollars on the side lines looking for reasonable investments, Climate Change, China vs. Taiwan, China vs. Covid, $3-trillion in crypto-currencies. etc., etc. So many possibilities! But where there is uncertainty, so there is also opportunity!

So, let’s go back to what we do know. Office in the CBD is actually pretty strong. Weston took the new Frost Tower off of the market because they couldn’t get a really, really high price, so they will refinance and keep it. Smart move. Jefferson Bank’s new building is getting close to fully leased, the Oxbow building at the Pearl only has 8,700 SF left to lease and even the Soto (old Cavender Cadillac site) has gotten near 50% leased, after a very slow start. Over 500,000 SF has been added to inventory including sub-lease space, according to Kim Gatley of REOC. Out in the Exurbs, Medical Office is booming as health care groups expand, relocate and catch up from the two-year pause due to Covid.

The jury is still out on Work from Home vs. Back to the Office. One business owner told me that one section of her business thrives on personal interaction and coordination. They locked down for two weeks in 2020, and then all went back to the office. They couldn’t function unless they were in the office together. However, another section of her company, which is heavily oriented to analyze and compute data, had their productivity soar while working from home.

Some employers, like the insurance companies in S.A., are struggling to get workers to return to the office. In New York, J.P. Morgan Chase said a year ago for their employees to get back to the office to work, but recently they have backed off as they find that they are having to compete more vigorously to keep and hire employees. Air BNB employees are now allowed to live and work from anywhere.

Maybe this is the tip of the Great Resignation? The Wall Street Journal reports that Austin has the highest percentage of office workers having actually returned to their offices, at 60%; Houston is at 51% and Dallas at a 49% return rate.  The WFH vs. office dilemma has yet to be resolved it seems.

Industrial is on fire, with more square footage coming to market. The metro area has 10.8 million SF under construction, which is 8% of the inventory, an enormous increase for a short period; 1% to 2% is typical. Example: 54 acres at Wurzbach Parkway / West Avenue / Interpark Drive sold to Stream Realty for development of a 650,000 SF industrial park. This was expected to be a retail tract (Walmart had it under contract once), but now it will be an office service center, which is not usually considered a higher use. For the past 18 months industrial demand has outpaced supply, according to NAI Partners, which hasn’t happened since 2013. In the first quarter, 4-million SF of new construction was delivered with another 8.5-million under construction and another 5-million proposed. The largest spec development project ever, 640,000 SF, has been started at 410 and IH-10 East by Oakmont Industrial Group.   But this includes the big projects of Navistar at 900,000 SF, and the Aisin 500,000 SF plant in Cibolo near IH-10 East. Amazon has started facilities at I-35 NE near Crosswinds Drive, I-35 south of Loop 410, Hwy. 90 at Loop 1604, and they recently bought a 64-acre tract on Loop 1604 at Lockhill-Selma. Amazon is probably nearing build-out on what they will be doing, and will not continue expansion at this torrid pace, maybe even downsizing a bit.

Industrial expansion is strong throughout all of Texas. Austin is ranked #1 nationally with 20.6% growth in inventory. I expect the huge Tesla plant on State 130 east of Bergstrom contributes to this. Houston is #3 with 11.8% growth. DFW had 11.5% so this means 50-million SF of additional of industrial construction since the Metroplex is already so large.

Fun Fact: City of San Antonio collects about $759-million a year from property taxes; not their only source, but the largest by far. How much did your tax bill go up this year? 20% is a common answer; I don’t have a city-wide summary, but let’s just go with that number. If the City takes in an additional 20% in tax revenues due to property tax increases, then this adds up to abut $150-million in additional money the City will have available to spend. I would really like to know what their plans are for this “windfall” as it is a very major pay raise. It certainly exceeds inflation, even if that averages 7% for the year. And the school districts and hospital districts also get this additional revenue. Inquiring minds want to know.