Some had wondered what 2000 would bring when the year started with an 85.62% office occupancy rate thanks to a number of big space takers opting to build instead of lease, Richard LaGrange of REOC Partners, a San Antonio-based research firm, tells GlobeSt.com. In all, 750,000 net sf of office space had been absorbed last year and the trend has continued through the first quarter 2001.

"We're not going to see the same amount of absorption this year, that's for sure," he says. "But it will still be positive absorption." SBC had provided the city's biggest adrenalin shot, signing five new leases for spots in excess of 50,000 sf each. The largest leased site has been 200,000 sf at 8725 Datapoint in the northwest sector.

The city's hot spot is the north central sector, where the 7.6-million inventory carries an 89.3% occupancy and class-A space is going for $23 per sf to $24 per sf. LaGrange expects the north central submarket to account for 80% of the 2001 growth.

The problem, says LaGrange, is that San Antonio lessees aren't accustomed to paying that kind of money. "Tenants tend to back off when they see $20 rates," he says. But, they better get used to it because LaGrange is predicting that rent will go up again this year. Just how much remains to be seen since class-A space "might be the limiting factor," he says. Last year, the citywide average rental rate had increased 2.78%, down from increases of 3.80% and 5.85% in the two previous years.

LaGrange says the rent growth is directly linked to the city trying to exchange its military image for one of a destination city for tourists. San Antonio's strategic positioning along the NAFTA Highway and its proximity to Mexico also is contributing to the newfound interest in the Alamo City.

Class-B properties remain the strong product in the San Antonio market, according to LaGrange. Of the city's 19 million plus sf, the class-A inventory totals 7.8 million sf in comparison to 8.7 million sf of class-B properties. He doesn't foresee classA becoming the dominant player even though there is some 300,000 sf of higher-end multi-tenant product under construction and another 150,000 sf in the pipeline.