By Richard Webner | @RWebner | Heron contributor
Let’s imagine that someone made baseball cards, except for apartment complexes, with a picture on the front and stats on the back. And let’s pull out our card for Encore Soflo, in south downtown.
The front of the card shows a white-and-orange five-story building wrapped around a parking garage, with lounge chairs and palm trees around a courtyard pool. The back notes that it has 339 units, it was built in 2019, and it is a block from H-E-B’s SoFlo Market, and two blocks from the River Walk.
Now, onto the stats: In the first quarter of 2020, the first time all of its units were available for rent, just under half of them were occupied, with a median rent of $1.89 a square foot, according to the analytics firm Austin Investor Interests. The Covid-19 pandemic made 2020 a rough year, with rent dropping to $1.67 while occupancy fell and then recovered to 62.5 percent. But 2021 was better: By the year’s end, Encore SoFlo’s occupancy was nearly 94 percent and the rent had climbed to $2.12 a square foot.
In real estate jargon, Encore SoFlo had “stabilized”—in other words, it had filled up, so that it was performing as well as its developer, the Dallas firm Encore Multifamily, had hoped.
It is no coincidence that Encore sold the building in December to Strategic Property Investment, another firm from Dallas. The business model of Encore and many other developers goes like this: They build apartment complexes, do their best to stabilize them, and then sell them to private firms, insurance companies, pension funds, university endowments or other investors on the hunt for a reliable source of income.
In the industry, the developers are known as “merchant builders.”
Lately, several merchant builders have sold apartment complexes downtown. In December, Alamo Manhattan (Dallas), which built Jones & Rio on the Museum Reach, and Stillwater Capital (Dallas), which built the Augusta Flats on McCullough Avenue, sold their apartments to a partnership led by a subsidiary of global investment firm Franklin Templeton Investments. Two months earlier, SC Bodner Company of Indianapolis sold 120 Ninth Street, also on the Museum Reach, to Miami-based Constellation Group.
Before these, The Rivera and 1800 Broadway north of downtown, and The Agave to the south, among others, changed hands, as well.
Real estate markets are complicated, with dozens if not hundreds of factors at play, making it dangerous to force them into narratives. Yet it seems as though the downtown apartment market, which city leaders went to such great effort (and spent so much money) to grow over the last 15 years, has matured to a point where it is drawing major attention from out-of-town investors.
“The Decade of Downtown has worked. There is a neighborhood now,” said local developer Ed Cross, referring to the revitalization initiative spearheaded by former Mayor Julián Castro. “I look at the reports I get about the apartment complexes downtown, and they’re full. They’re raising rates—it’s boomtown. When that happens, it raises values. People come along and they want to buy it.”
Over the last five years, the number of apartments in the center-city market—an area that includes downtown and part of the near West Side—has soared by 81 percent, from 3,283 in the fourth quarter of 2016 to 5,936 at the end of last year, according to Austin Investor Interests.
At the end of 2021, the market had an occupancy rate of 91.3 percent, up from 83 percent at the start of the year. The average rent per square foot was $1.84, up from $1.60 in 2016, but many market-rate complexes had rents well above $2 a square foot, including Encore Soflo.
The rents are highest at the Pearl—as of this month, the average at the Cellars at Pearl luxury tower was $3.57 per square foot, or $4,415 a month.
When Encore started construction of the Encore Soflo in 2017, a $3.57 per square foot rent was something developers could only fantasize about. In an interview that year with the San Antonio Express-News, Encore’s then-president, Brad Miller, seemed amazed that $2 per square foot rents were becoming a possibility.
“Five years ago, if you told me you could get $2-square-foot rents in San Antonio, I would have sent you to the funny farm,” Miller said.
Lately, the downtown market as a whole seems to have been stabilizing, to use that industry term. In recent years, there had been a glut of apartments on the market after many of the complexes built with help of the city’s Center City Housing Incentive Policy (CCHIP) opened around the same time, developers and analysts say. Most of those apartments have now been filled, creating a more attractive balance between supply and demand for investors.
Meanwhile, San Antonio is drawing more attention due to the growth of its population and job market, and of institutions such as the University of Texas at San Antonio, they say. And the real estate markets in Dallas, Houston and Austin have become so competitive that investors are seeking steady returns in good old San Antonio.
“People are getting priced out of the Dallases of the world, the Austins of the world,” said Drew Garza, a director with the brokerage Institutional Property Advisors. “It comes right down to the returns they’re able to get in San Antonio, but I think a lot of it is the fatigue of being beaten out of the big Texas metros.”
Creating a market
In 2010, the year Castro’s “Decade of Downtown” kicked off, the options for renting market-rate apartments in downtown were few and far between. One could choose between the Cadillac Lofts on Madison Square Park, the mixed-income HemisView Village near Hemisfair, the Towers at the Majestic and conjoined Brady Tower, the newly-built Vistana (now Inspire Downtown) across from Milam Park, and a few other places.
Over the prior decades, downtown had become something of a dead zone for market-rate housing, largely due to the suburbanization that emptied many American cities during that time. Yet downtown San Antonio has its own challenges with regards to housing. Its tourism industry drives up land prices, so it often makes more sense to develop vacant lots with hotels than apartment buildings.
The preponderance of historic buildings and irregularly-shaped lots makes construction difficult in any case. Why not just build in the suburbs, where there are vast tracts of untouched land?
By the time Castro took office, the city had already begun offering specially-tailored incentive packages for the construction of downtown housing: In 2006, the Vistana, which eventually opened in spring 2009, received a package worth an estimated $4.8 million. CCHIP, which went into effect in 2012, was intended to scale up the effort, creating a consistent policy that developers could count on when they formulated plans to build downtown.
From a human perspective, the intent of CCHIP was to spur the construction of enough housing to turn downtown into a real neighborhood, where someone could live, work and play, as the saying goes. From an economic perspective, the intent was to create a market: Once the apartments were built and performing well, developers would feel more comfortable investing in the district. Thus, a market would be born.
CCHIP would come under criticism for raising land prices, especially those in neighborhoods that abut downtown. In the case of Mission Trails, which was located along the Mission Reach of the San Antonio River on the South Side, the program contributed to the displacement of more than 100 low-income households in late 2014-early 2015, making way for Mission Escondida, a luxury apartment complex by local developer White Conlee. In 2016, after fielding blistering criticism from housing advocates, the city scaled back CCHIP’s boundaries to encompass strictly the downtown area.
In late 2017, Mayor Ron Nirenberg suspended the program because it was incentivizing mostly high-end apartments. A year later, the city introduced changes to CCHIP, barring its use for luxury developments, and baking in measures that led to the creation of more below-market housing—or, what the city defined as affordable at the time.
[ Archive: City Council reinstates downtown housing incentives policy after one-year hiatus | Dec. 13, 2018 ]
At the heart of CCHIP was the tax rebate, which developers received for the city portion of their property tax bill for 10 or 15 years. While CCHIP expired at the end of 2020, a developer can still receive such an incentive package, but it must be approved by the City Council. If so, the developer would receive 75 percent of the property tax rebate, while the other 25 percent would feed into the city’s affordable housing fund.
The program had little success in spawning new housing in the tourism-dominated heart of downtown, around the Alamo and the loop of the River Walk. Some of the only exceptions are currently in development: The Floodgate apartment tower, under construction on East Commerce Street, with 53 units; and Weston Urban’s 32-story, 351-unit tower at 305 Soledad St., which has not yet broken ground.
[ Development Profile: Weston Urban’s 32-story apartment tower receives final design approval | Dec. 15, 2021 ]
Yet there is no doubt that CCHIP succeeded in creating multifamily markets in the north and south of downtown—in and around the Pearl and Southtown, respectively.
To get a sense of its success, let’s look at when some of its largest apartment projects were built, the number of units they added to the market, and the amount of incentives they received using incentive packages from the city or city entities:
» 2016: The Agave (south downtown), 349 units, $4.7 million; Southtown Flats (Southtown), 229 units, $3.5 million
» 2017: Cellars at Pearl, 122 units, $3.8 million; Jones and Rio (Mission Reach), 191 units, $4.4 million; Rivera on Broadway, 302 units, $4.6 million
» 2018: The Baldwin (east downtown), 271 units, $626,000 (total lower than others because it received a full property tax exemption from the San Antonio Housing Trust Public Facility Corporation; read more)
» 2019: 120 Ninth Street (Museum Reach), 220 units, $3.9 million; Encore Soflo (south downtown), 339 units, $5.9 million; Southline (Pearl), 223 units, $3.6 million; The ’68 (Hemisfair), 151 units, $542,000 (lower than others because it received a full property tax exemption from the HemisFair Park Public Facilities Corporation; read more)
» 2020: Heritage Plaza (south downtown), 341 units, $4.5 million
» 2021: Augusta Flats, 260 units, $2.4 million; Flats at River North (Broadway), 283 units, $1.5 million
Thanks to CCHIP, and other incentive policies, then, thousands of apartments were built downtown during those years. Yet for so many units to hit the market around the same time—and sometimes right beside each other, as in the case of Encore Soflo and Heritage Plaza—they posed a shock to the market. This is the “glut” referred to above. With so many units available, it took longer for a complex to fill up, or “stabilize,” and there was less pressure to drive up rents.
Editor’s note: We are keenly aware that downtown rents have risen to the point where most San Antonians cannot afford them. We realize that as the downtown market continues to grow, the average San Antonian continues to be priced out. On one hand, we look at the U.S. Census Bureau’s median income for San Antonio ($53,751 in 2019). On the other hand, there is the city’s efforts to boost wages, most notably through SA: Ready to Work—one of four pillars of the recently passed Strategic Housing Implementation Plan. We will explore these other facets and how they relate to the growing downtown housing market in future articles.
Rebound from Covid
While the market was absorbing the new units, Covid-19 came along to shake things up. In the pandemic’s darkest days, some were predicting that it would reverse the trend of migration back into urban centers—or worse.
Yet with occupancy now at 91.3 percent, the downtown market seems to have rebounded from the abundance of supply and the earthquake of Covid. Ed Cross, who co-developed Inspire Downtown and other projects, thinks the market has benefited as more Americans work from home, and as people take advantage of remote work policies to move from more expensive metro areas.
Over the last year, the median rent for the downtown market soared by 16.5 percent, to $1.84 per square foot, according to Austin Investor Interests.
“When you can see rents go up by more than just inflation, more than 3 percent, 8 or 10 or 20 percent over less than a year, that helps tell a story to both the investor and, more important, to the lender that they can do a project valuation higher than it is today, once they get the full stabilization,” said Jeremy Jessop, the principal of downtown brokerage JJ Real Co.
It looks as though the supply of apartments in the downtown market could stay stable for a while, which makes the existing complexes more attractive to investors because there won’t be another boom to contend with. The inventory of apartments citywide is set to increase only 1.5 percent over the next year, said Garza, with Institutional Property Advisors.
There aren’t as many apartment complexes under construction, partly because of the economic disruption wrought by Covid, as well as spiraling prices for raw materials such as lumber and copper, and appliances such as dishwashers, Garza and others said.
Meanwhile, the spigot of incentive dollars for market-rate housing has dried up. The city allowed CCHIP to expire in December 2020 as it tightened its belt during the pandemic, though it can still issue incentives on a project-by-project basis, and with City Council approval. The last CCHIP projects, including Weston Urban’s 32-story residential tower at 305 Soledad St., are now working their way through the pipeline.
“The risk in the real estate business today is actually building the project, and that’s because of inflation and materials shortages,” Cross said. “If you get it built, there’s a demand for it both to lease it and to buy it.”
San Antonio’s rising profile
It’s not only the downtown market that’s performing well, of course. The average rent for the San Antonio market as a whole rose by 16 percent between the third quarters of 2020 and 2021, to $1.38 per square foot.
The market’s performance has “turned heads and brought much interest from new players across the state and across the country,” Austin Investor Interests said in its market report for that quarter. “The current climate is reminiscent of the apartment boom that hit Austin in the 1990s, yet San Antonio has eased into the boom, as a steady city does.”
It was a big deal for the local market when Blackstone, one of the world’s largest private equity firms, purchased the West Oaks apartment complex on the Northwest Side in August, according to the Express-News. The acquisition indicates that the market is on the radar of major private equity firms.
“Portfolio managers of institutional capital are generally looking for stable income, that will keep up with inflation, in a market with enough liquidity that they can sell at any time,” said Patrick Shearer, president of Crockett Urban Ventures, the firm that built the Canopy by Hilton, in a text message.
Those requirements used to lead them to invest in large office buildings in “gateway cities” such as New York City and San Francisco, he said, but the pandemic revealed the risk in making those investments. Now, they see a growing Sunbelt city like San Antonio as “a very stable, core asset,” with good liquidity.
“Knowing that there is a stable liquid market for these kinds of assets gives developers and lenders confidence to do more projects, and so far the demand seems endless,” he said.
Midway, a development behemoth from Houston, is another major firm that has set its eyes on San Antonio, partnering with the local group GrayStreet Partners to redevelop the Lone Star Brewery at a cost of $596 million. And Encore continues its investment in downtown San Antonio its 386-unit apartment building as part of the overall Broadway East master development on the southern edges of Government Hill, near Broadway. Both projects are currently underway.
[ Related: Olivo: How McKee-Rodriguez’s support for a luxury housing project helps shape the Decade of Downtown | Dec. 2, 2021 ]
In interviews, investors from out of town often mention the city’s population growth, the expansion of UTSA’s downtown campus, and the infrastructure projects underway downtown at Hemisfair and the San Pedro Creek Culture Park as giving them confidence in the market.
Along with that, there is a herd mentality for investors, said developer David Adelman, who built The ’68 at Hemisfair. When they see that a major firm such as Midway or Blackstone is putting money somewhere, they want to follow.
“Investors are a little bit fickle. They’re a little bit like bar patrons—sometimes they just frequent a town more than others,” he said. “It’s hard to explain. Why did Nashville take off when it did? Denver: Why did it take off when it did? It already had the same sorts of things going earlier, but then all of a sudden it became a hot market, and all the investors wanted to be there.”
Richard Webner is a freelance journalist covering Austin and San Antonio, and a former San Antonio Express-News business reporter. Follow him at @RWebner on Twitter
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