Analysis: Downtown housing market is steady, but far from the boom of recent years

The downtown housing market, to use one of Manu Ginobili’s favorite mathematical analogies, has regressed to the mean.

In terms of unit production and demand for downtown living, housing in our center city is doing well, but not the boom we saw for much of the last decade.

A total of seven housing developments have been announced in the downtown area since 2018, the year Mayor Ron Nirenberg placed a moratorium on incentives for downtown-area projects. The program, which doles out property tax rebates and development fee waivers to developers, was launched in 2012, two years after former Mayor Julián Castro prioritized the production of multifamily housing as a means to revitalize downtown. It worked. Housing production in San Antonio’s center thrived between 2013 and 2017, when there was an average of 12 incentive agreements signed per year.

In December 2017, concerned the incentives were producing exorbitant amounts of market-rate housing, whose downtown rents are well outside many San Antonians’ price range, Nirenberg ordered the policy revised so that it produced more affordable units, which meant developers would receive less subsidy.

“These are public resources, and it’s increasingly a concern that we use public money to (incentivize) development that the general public can’t even afford,” Nirenberg said last week.

Meanwhile, 90.9% is the average occupancy for the 17 apartment buildings that were built in the downtown vicinity the last decade and that are more than a year old. When factoring in the three projects built last year—Encore SoFlo (June), The ’68 (July) and the Pearl’s Southline Residences (October); which have naturally lower occupancy rates because of their infancy—the overall average is lowered to 82.6%.

[ Editor’s note: These averages represent the total number of occupied units against the total number of units, which we gathered and calculated by calling each property in January. They are not averages of averages. ]

Housing researchers and leasing agents we spoke to describe these averages, like the number of projects in the pipeline, as being good, not great. They also say occupancy levels typically start to tick upward beginning in February.

“San Antonio has been a slow and steady market that has remained fairly consistent with their annual growth rate,” said Robin Davis, founder of Austin Investor Interests, a firm that researches housing in Austin and San Antonio.

[ Editor’s note: There are dozens of ways to gather this type of data. We surveyed multifamily properties built since 2010 in the downtown vicinity, roughly 1½ miles from the geographic center of downtown, which is more or less the 200 block of East Houston Street. Austin Investor Interests’ definition of San Antonio’s central city is everything inside the highways (including I-37 to the south) as well as the near West Side. Also, the company surveys every apartment building, including older ones like the Brady Tower and Maverick building. ]

Davis’ firm shows occupancy levels in San Antonio’s center city the last decade as reaching their peak of 95-96% between 2011 and 2014. They ended 2019 with an average of 85.3%, according to the company’s research; citywide that figure was 92.1%.

Rent-wise, Austin Investor Interests shows central San Antonio as having an average rent of $1.74 per square foot, far above the city average of $1.20 per square foot.

So why the partial slow down after the downtown area reached its peak in housing production and occupancy just a few years ago?

Did the downtown housing market sputter on its own, a natural regression to the mean? Nirenberg’s moratorium of 2018, when the tax rebate and development fee waiver program went dark, certainly played a role in curbing the momentum. But did it dull it forever, or just temporarily?

Can San Antonio achieve housing density in its downtown while also setting aside some of those homes for lower-income households?

The incentive policy, formerly known as the Center City Housing Incentive Policy, or CCHIP, expires Dec. 13. Soon, the city’s downtown development department will begin to assess the program, which will inform the City Council’s decision on whether to maintain the incentives, adjust them in the direction of more or less subsidy, or end the program altogether—a debate certain to happen later this year.

What impact will the council’s decision have on future developments of significant magnitude, such as Weston Urban’s strategy to add at least 1,000 apartments to west downtown, Silver Ventures’ desire to expand the Pearl footprint west of the San Antonio River, and GreyStreet Partners’ ambition to build the multi-use Broadway East, a kind of Pearl extension east of Broadway in Government Hill? And how will their decisions impact the affordability of San Antonio’s already-changing inner city neighborhoods?

So many questions. Let’s try to answer a few.

Why the slow down?

When asked this question, Silver Ventures Managing Director Bill Shown said he didn’t have a definitive answer, but he has theories.

“Anything I give you would be pure speculation without digging into it. I speculate that part of the reason is because the incentives aren’t enough to make these things pencil,” Shown said meaning the developments aren’t projected to make enough profit (to which the rate of return on investment varies for each developer). “But again, that’s just speculation. I just don’t know.”

In the older version of CCHIP, pre-moratorium, developers received a full rebate on the city portion of their property tax bill. They still pay other taxing entities, such as Bexar County, school districts, etc. Typically, for the larger apartment projects we’ve seen emerge ubiquitously, the tax rebates are estimated to be worth $3-$4 million spread over 15 years.

The current version of CCHIP, spurred by Nirenberg’s edict, offers a 75% rebate on city property taxes to developers; the other 25% is funneled into an affordable housing fund. Depending on the development’s location, setting aside a small percentage of affordable units is required.

[ Editor’s note: Other programs, like public facility corporations, grant developers full property tax exemptions, which are well documented in this recent San Antonio Express-News article. ]

Because developers now receive less tax incentive from the city—75% compared to 100%—some say that’s enough of a difference to sink a development early. The numbers don’t work, developers say.

District 1 Councilman Roberto Treviño agreed that can be the case.

“This speaks to how much planning goes into these projects,” Treviño said of the slowdown. “It’s hard to believe that a small change here and there can impact the entire project, or its feasibility. The unfortunate fact and reality is that it can.”

The question of profit is one the Heron has attempted to answer before, but it’s tough. Developers who receive public subsidies often challenge our requests for their financial documents, which are made via open records laws. For more, read “Are developers receiving incentives they don’t need?”

Developers say in order to build multifamily projects in the downtown, they’d have to receive 6-8% return on investment in order to make them viable, i.e. make enough profit. In an interview two years ago, Shown said the return on investment for the Southline Residences, the recently-completed 223-unit market-rate apartments that have extended the Pearl’s footprint across Newell Avenue, was calculated at less than 6%. Silver Ventures, he said, can build at lower returns because they are long-term owners—not looking to sell soon after completion, as is common practice in the development world.

Silver Ventures plans to build on property it owns west of the Museum Reach, but the company hasn’t yet crunched the numbers to see if the current version of CCHIP will work with what they want to do, Shown said. He expects those calculations to happen later this year.

That’s Silver Ventures. Every developer is different.

In the suburbs, developers can make triple the return because land is usually cheaper, and there are less regulations and infrastructure hurdles to overcome, developers and city officials say. This could also explain why most CCHIP-backed developments are located in downtown’s outskirts, where land is cheaper, although that’s slowly starting to change with properties like Encore SoFlo and Heritage Plaza (expected to open in May) in south downtown, and the Augusta Flats (currently under construction on McCullough Avenue), to name a few.

“It could be that the land values are still at hotel-price levels, where every property is waiting to be the next hotel,” John Jacks, director of the Center City Development and Operations Department (CCDO), said about downtown land owners seeking premium prices for their dirt.

Former Councilwoman Maria Berriozabal, who served on the Mayor’s Housing Policy Task Force, said the city needs to play a larger role in solving issues like land values, and other impediments to producing more affordable units. She points to the city’s current effort to develop a coordinated housing system, which was the chief recommendation from the task force’s August 2018 report. Last month, Assistant City Manager Lori Houston told the council they’d be presented with a recommendation for the housing system in June.

Such a system would corral all of the commissions and boards focused on housing and homelessness, the various incentive programs and entities outside of the city’s purview, and align them in a more efficient way and give San Antonio a better chance at solving its housing affordability issues.

“We leave it up to developers to come up with their projects and then the city works with them a bit—it’s developer driven,” Berriozabal said. “If it’s developer driven, making money is going to be the bottom line. Who is the partner on the other side pushing the other way. I think (city officials) just do what developers want to do.”

Berriozabal believes in Castro’s strategy to infuse downtown with as much housing as possible.

“I’ve always thought there should be more people living downtown, my problem is that we’re making it a rich people’s downtown,” she said.

The numbers now

The city’s strategy for more than a decade has been that of housing first—meaning, build as much housing as possible in the downtown area as a way to revive it. As the downtown population grows, then enter the companies and jobs, the restaurants and other retail, upgrades to parks, roads, and other public amenities—which is happening to a degree.

Since 2012, when CCHIP began, 7,150 units, for-rent and for-sale either completed, under construction or in development, received CCHIP packages, according to the city.

Keep in mind, these units are predominately in the center city, but not all. Version 1.0 of CCHIP spread far beyond the downtown area, which is why you have apartments like Mission Escondida (the luxury development that replaced the Mission Trails mobile home park) and The St. John (which is incorporating the old St. John’s Seminary) popping up in the Mission Concepcion area.

It was Mission Trails, and the fear the program was encroaching on vulnerable communities, that spurred the city to revise CCHIP’s boundaries, pulling them closer to downtown proper in Version 2.0.

At the very end of 2018, the City Council revised CCHIP again by introducing affordability requirements, thus ending the moratorium. It also extended the boundaries—roughly along major transportation corridors in the 13 regions identified in the city’s SA Tomorrow comprehensive plan. As a result, Franklin Development of San Antonio recently received a CCHIP package for its Medical Center project of 196 units, all of which will be rented to households making 60% area median income (AMI) or less.

Since 2012, $104 million in incentives, mostly city tax rebates, have been given to developers yielding the 7,150 units, CCHIP’s citywide total. The projects, 69 by the city’s count, have pumped $1.4 billion into San Antonio’s economy.

If we zoom in on downtown-area housing in general …

By the Heron’s count, 4,773 apartments have been completed in the downtown area, with or without CCHIP, since 2010. Of that total, 577 units—or 11%—are considered affordable meaning they are priced below market rate.

Another 1,100, all with some level of CCHIP, are currently under construction—

» Heritage Plaza, 410 S. Main Ave.—343 units (all market rate), by Cypress Real Estate Advisors of Austin

» The Flats at River North, 1011 Broadway—283 units (141 market rate; 114 at 80% AMI or less; 28 at 60% AMI or less) by NRP Group and San Antonio Housing Trust Public Facility Corp.

» Augusta Flats, 819 Augusta St.—260 units (247 market rate; 13 at 80% AMI or less) by Stillwater Capital of Dallas

» Museum Reach Lofts, 1500 N. St. Mary’s St.—95 units (9 market rate; 70 at 60% AMI or less; 9 at 30% AMI or less) by nonprofit Alamo Community Group of San Antonio

» The Arts Residences at the Thompson Hotel, 101 Lexington Ave.—66 units (all luxury) by DC Partners of Houston

» Floodgate, 143 E. Commerce St.—53 units (all luxury) by Keller Henderson of San Antonio

— and another 864 are under development and have yet to break ground.

For more, visit the city’s CCHIP database: sanantonio.gov/CCDO/IncentiveAgreements.

Some theorize developers want to see these nearly 2,000 units completed, and observe their occupancy and rents, before pulling the trigger on their own project.

Looking ahead

If a recent City Council debate is any indication, there is a strong desire for more affordability to be baked into CCHIP.

Last month, for his 48-unit condo and townhome project near the Pearl called SOJO Commons II, developer Steve Yndo asked the City Council for an additional $282,225 in a forgivable loan, bringing the project’s overall CCHIP package to $1 million. In return, he’d add five “affordable” units to the 10 already built into the project, for a total of 15. Also, the loan would help pay for burying utility lines underground, a city code requirement, and other infrastructure costs.

The “affordable” units would be priced for households making 120% AMI or less, which is $68,150 for a couple, or $76,700 for a family of three. Yndo told the council that studio and one-bedroom condos would be priced at $250,000 to $280,000, which, he said, a couple each earning in the low $30,000 could afford.

That’s when District 9 Councilman John Courage unleashed a barrage of incredulous questions. He asked about the condo fee, to which Yndo said would be about $100 a month. Courage also cast serious doubt that a family could live in the smaller units Yndo was reserving for the lower price points.

“Probably a couple, possibly a couple with a child,” Yndo said.

“You’re optimistic,” Courage said.

Houston told Courage that Yndo would have to pay back the $282,225 loan if he sold one of the affordable units to a household making more than 120% AMI.

It was a unique conversation in that debates about median income usually pertain to apartments, where no one would ever describe 120% AMI as affordable. Local housing observers have debated whether 80% AMI or less is affordable for your average San Antonian, or whether it’s closer to 60% AMI or less.

Houston said Yndo could build the project without the additional incentive, but sales prices would rise to at least $500,000 per unit.

Yndo said the project’s proximity to jobs will help a household save on transportation costs, referring to the two office buildings going up on Broadway next to the Pearl—one anchored by Credit Human, the other by Bank of America—and Jefferson Bank’s planned headquarters across the street.

District 7 Councilwoman Ana Sandoval aired a concern, one others on the council share, including District 5 Councilwoman Shirley Gonzales, about the cost of parking in the monthly rent or mortgage. If a household rents or buys a downtown dwelling, and they don’t own a car, do they still have to pay for the cost of building parking (usually a garage) into the development’s overall cost?

Developers have told council members in other committee meetings that banks won’t finance projects without including parking; San Antonio is still a vehicle-heavy town.

Sandoval, Gonzales and others on the council said San Antonio has to do a better job of pushing back on aspects of developments before allocating subsidies.

“If we ever revisit these guidelines again, I do not want to be using taxpayer dollars to subsidize parking that’s required for people to buy,” Sandoval said.

District 10 Councilman Clayton Perry suggested perhaps it’s time to pullback on incentive packages in areas that have done well so far, like the Pearl.

It was a candid conversation about the city’s role in subsidizing housing, especially in the downtown. When the council revisits the issue, closer to years end, by what measure will it judge the program’s success? The production of the most units possibly built, the program’s original metric? Or the level of affordability it yields?

“I think CCHIP’s success should be measured by density first and foremost, but our overall success in the housing system is density in the segments of affordability that we need the most,” Nirenberg said. “We can get myopic when we just look at what the CCHIP is doing when we don’t consider the overall health of the housing ecosystem. That’s ultimately the balance we are trying to create with the new CCHIP, one element of the overall system.”

One priority everyone seems to agree on, from politician to developer to housing advocate, is educational attainment of the city’s youth, as well as the development of its workforce, as another approach to solving housing affordability—downtown or elsewhere.

San Antonio has to make a “concerted effort to raise the overall wage standards of the city through the creation of good, high-paying jobs and a workforce development pipeline that can sustain it,” Nirenberg said.

A topic to delve into another day.

Related
» Commentary: The Decade of Downtown is over. Now the hard work begins.
» Has downtown lost its housing momentum? Lack of applications for incentives suggests so
» City Council reinstates downtown housing incentives policy after one-year hiatus
» Exclusive: In new policy, downtown housing incentives would spread to other parts of San Antonio, exclude ‘luxury’ developments

Clarification: The total number of apartments built in the downtown area has been adjusted to 4,773.

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The area median income (AMI) levels shown here are for the greater San Antonio area (Bandera, Bexar, Comal, Guadalupe and Wilson counties), according to the U.S. Department of Housing and Urban Development.

Contact Ben Olivo at 210-421-3932 | ben@saheron.com | @rbolivo on Twitter