The Albuquerque metro area’s economy continues to play out in the commercial real estate market, reflecting in bricks and mortar the challenge of rebuilding the labor force while pink slips continue to be handed out.
The 323,541-square-foot Albuquerque Office Park, shown here, originally built for federal contractor BDM and most recently Presbyterian Healthcare Services headquarters, is now for sale at an asking price of $28.74 a square foot. (Courtesy of Joel White)
The vacancy rate for offices ended the year at 19.3 percent, up from 18.9 percent in the fourth quarter of 2012 but down from 19.6 percent in the preceding third quarter, according the latest market data from Colliers International.
The office market, which had an average vacancy rate of 12.3 percent in 2005-08, tends to thrive or dive with the job market.
The vacancy rate for industrial real estate such as warehouses and R&D buildings ended the year at 9.3 percent, down from both 10.3 percent in the fourth quarter of 2012 and 9.9 percent in the preceding third quarter, Colliers reported. The industrial market’s average vacancy rate was 7.8 percent in 2005-08.
The retail real-estate market appears to have fully recovered, sporting its lowest vacancy rate in six years at 7.6 percent in the fourth quarter.
According to the Chicago-based CCIM Institute’s Quarterly Market Trends report for the fourth quarter, the average vacancy rates nationwide were 15.6 percent for office, 9.2 percent for industrial and 10.4 percent for retail.
Compared to signs of a national economic recovery, the turnaround in Albuquerque’s economy appears hesitant, which is particularly evident in the office market. The local office vacancy rate approached 4 percentage points higher than the national average at year end.
“There are silver linings to everything and we can try to be optimistic, but the improvement we expect to see in 2014 is not going to be substantial,” said John Ransom, managing director of Colliers’ Albuquerque office.
“We’ve been fortunate but too reliant on the government for jobs,” he said. “The question is what’s going to be the next spark (in the local economy)?”
In addition, commercial real-estate brokers point to the fact that Albuquerque has a lot of old, obsolete office, industrial and retail properties that nobody wants to rent – at least not without an infusion of renovation money. Those properties prop up vacancy rates.
“It’s not that we’re overbuilt, but under-demolished,” Ransom said.
The month-over-month improvement in the office vacancy rate during the fourth quarter was based largely on one large deal, Blue Cross and Blue Shield of New Mexico’s expansion into 84,724 square feet at The 25 Way, said Ken Schaefer, director of brokerage services at Colliers’ Albuquerque office.
The 25 Way mixed-use business park is in the Albuquerque’s strongest and biggest office submarket, the North I-25 corridor which straddles Interstate 25 north of the Big I. The vacancy rate was 14.2 percent at year end, down from 18.5 percent in the fourth quarter of 2012, according to Colliers.
“The North I-25 (corridor) has the newer product – more energy efficient buildings, fiber (optics) and ample parking – with good access from both sides of the river,” said Terri Dettweiler of commercial real estate services firm CBRE.
The North I-25′s popularity reflects a continuing trend in the office market for companies to house more employees in less space, thus saving on the overhead costs of leasing, she said. As a result, contemporary buildings designed with open layouts, suitable for so-called “cube farms,” see more demand.
The Downtown office submarket is a different story. The year-end vacancy rate was 29 percent at year end, an improvement over 32.2 percent in the third quarter when Albuquerque had the distinction of having the highest office vacancy rate of any city’s central business district in the country.
“The problem is not Downtown being Downtown,” said Tom Jenkins of Real Estate Advisors. “The problem is the aging inventory.”
Improving the Downtown office market will take more than building more parking garages, he said. Many of the office buildings are basically tired and in need of upgrades to infrastructure like heating and cooling systems and elevators, he said.
Overall in the office market in the fourth quarter, Schaefer said leasing activity was “a mixed bag with positives outweighing the negatives. Growing deal activity is setting up the next two quarters for positive absorption (of vacant space).”
In the third quarter, however, the office market could take a big hit when Presbyterian Healthcare Services vacates most of its 323,541 square feet of leased space at the Albuquerque Office Complex near the airport. Presbyterian is moving to a corporate-owned headquarters near Balloon Fiesta Park.
That big of a vacancy hitting the market could push up the office vacancy rate by 2.3 percentage points, Colliers has said. While leased space is tracked as part of the office market inventory, owner-occupied buildings like Presbyterian’s new headquarters are not.
Originally built for a predecessor firm of Northrop Grumman in 1980-88, the four-building Albuquerque Office Complex is not currently being marketed for lease. A team of brokers at Sperry Van Ness/Walt Arnold Commercial Brokerage has listed it for sale at an asking price of $9.3 million.
Improvement in the industrial vacancy rate is based less on positive moves in the market, as in empty space filling up, and more on fewer negative moves from downsizings and closings, said Jim Smith of CBRE.
“Space vacated in 2013 – about 1 million square feet – was half the space vacated in 2009,” he said. “What that says, especially for a smaller market (like Albuquerque) with not a lot of business growth, is most businesses that decided to downsize have done so.”
An uptick in construction activity, most of it in multifamily and retail projects, has given the industrial market some buoyancy, Schaefer said. Construction-related businesses, including contractors and suppliers, have traditionally been a major user of warehouse space in the metro.
The metro’s construction sector gained back lost jobs for much of 2013, but the preliminary count of 19,900 jobs as of November is still well below the peak of 31,700 in mid 2007, according to state labor data.
By: Richard Metcalf (Albuquerque Journal)
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Archives for January 2014
NAR Comments on Tax Reform Draft
On Jan. 16, 2014, NAR joined with a group of 18 other real estate associations in sending a comment letter to Senate Finance Committee Chairman Max Baucus (D-MT) regarding a staff discussion draft released by the Committee on Nov. 21, 2013. The discussion draft, one of a series of such drafts that set forth possible options for tax reform, was focused on cost recovery and tax accounting issues.
The Finance Committee draft included several proposals that would, if enacted, have serious negative effects on the investment in and ownership of commercial real estate. These include proposals to:
Increase the depreciable life of all real property to 43 years (the current tax law provides a depreciable life of 39 years for non-residential property, 27.5 years for residential property, and 15 years for qualified leasehold improvements*).
Repeal the provisions in section 1031 of the Internal Revenue Code, which allow owners of real property to exchange it for like-kind property on a tax-deferred basis.
Change the tax rate of gain on sale of real property that represents depreciation recapture from the current-law rate of 25 percent to ordinary income tax rates.
In short, the letter argues that the Committee’s cost recovery and accounting tax reform discussion draft could have a severe, widespread, and chilling effect on U.S. real estate activity. By creating an arbitrary and discriminatory cost recovery system that is disconnected from the economic life of actual structures, the proposed reforms would reduce real estate investment and development, result in lower real estate values, and stifle the real estate industry’s ability to continue creating new jobs as the economic recovery picks up steam.
The following is a summary of the 17-page comment letter:
The letter focuses on four main elements of the tax reform proposal: (1) the extension of the cost recovery period to 43 years for all real property; (2) the repeal of like-kind exchange rules; (3) the increase in the tax rate on recaptured depreciation; and (4) the retroactive application of all three of these proposals to preexisting investments.
We see a strong a parallel with the unintended consequences that the sweeping reforms enacted in the Tax Reform Act of 1986 had on real estate in the late 1980s and early 1990s, when retroactive tax changes ushered in a real estate depression and led to the taxpayer bailout of savings and loan institutions. In many respects, the proposals in the discussion draft go beyond the prior reforms by raising taxes on sound and economically motivated real estate transactions.
First, modernizing cost recovery rules to accurately measure business income would require reducing, not lengthening, the depreciation schedules for real property. Today’s depreciation system is less favorable for real property investment than at any time in the last 40 years. Unfortunately, the depreciation estimates underlying the discussion draft rely on outdated studies from the 1960s and 1970s. Recent research by a broad range of economists, academics, and government agencies has shown how technological change, transformations in the workplace, and other factors affect the useful life of structures. Without constant capital improvements, buildings become obsolete faster than ever.
Second, the deferral of gain on like-kind exchanges is a bedrock principle of tax policy and the statutory rule is nearly as old as the income tax itself. Rather than raising revenue, the proposal in the discussion draft to repeal like-kind exchange rules would have the undesired effect of “locking up” real estate assets in the hands of current owners. It would deter the transfer of real estate to owners with the resources to invest in job-creating building upgrades and improvements, undermine land conservation efforts, and deprive states and localities of much-needed tax revenue.
Third, by treating all recaptured depreciation in real estate transactions as ordinary income, the discussion draft would raise the tax rate nearly 60 percent on a significant share of the income from real estate transactions. The proposal would reverse the longstanding Congressional policy of applying different depreciation recapture rules to long-lived, capital-intensive real estate assets, where gain is more likely to reflect inflation than excessive depreciation.
Fourth, in applying all of these provisions to preexisting real estate investments, the discussion draft would penalize taxpayers who relied on well-established tax rules when committing their capital and sweat equity to a long-term investment. The retroactive application would undermine confidence in the tax system and raise doubts about future “rules of the road” for capital-intensive property investments.
The signatories are also concerned with the proposed repeal of the energy-efficient commercial buildings deduction, section 179D, which helps address a failure of the market to accurately take into account the value of energy-efficiency improvements to commercial buildings.
We recognize that the discussion draft is a first effort, the issues are complex, and the tradeoffs are significant. As mentioned, we are very grateful for the transparent and open process the Committee has created. With the right tax and regulatory policies—reforms that treat the industry consistently with other types of businesses, assure predictability for long-term investment, recognize the economically useful life of assets, and encourage capital formation—we believe real estate could create millions of new, middle-class jobs while also contributing to a more efficient and productive domestic economy and workforce.
The comments represent the collective and unified views of the real estate industry on the issues and proposals raised in the draft, and the letter has been signed by 19 real estate-related trade associations. The signatories include:
The Real Estate Roundtable
American Institute of Architects
American Land Title Association
American Resort Development Association
Appraisal Institute
Associated General Contractors of America
Building Owners and Managers Association International
CCIM Institute
Institute of Real Estate Management
International Council of Shopping Centers
NAIOP, the Commercial Real Estate Development Association
National Apartment Association
National Association of Home Builders
National Association of Real Estate Investment Trusts
National Association of REALTORS®
National Multi Housing Council
Real Estate Board of New York
REALTORS® Land Institute
Society of Industrial and Office REALTORS®
(* The provision allowing a 15-year depreciation period for qualified leasehold improvements expired at the end of 2013.)
(National Association of REALTORS®)
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NAREIM: Uncertainty, Innovation, and The Future of Real Estate Investing
National Association of Real Estate Investment Managers (NAREIM): Uncertainty, Innovation, and The Future of Real Estate Investing
In times of disruptive change, new winners and new losers are often revealed. The question often becomes, how can I make sure I’m in the first category but not the second? Anticipating, understanding and responding to change was a passionate core of the discussion at NAREIM’s Asset Management & Acquisitions Winter Meeting in Dallas on January 15 and 16.
Evolving Strategies
Everything in commercial real estate seems to be changing—investor needs, employee values, capital markets expectations, and real estate market demands—and the pressure on leaders in this business is not letting up. The need to learn, evolve and connect with others in the business is greater than ever. In today’s real estate, leaders need to understand the emerging and evolving social, financial, geopolitical, and environmental trends are affecting risk and return. Changes in the past were often slow enough for forward-looking real estate investment managers (REIMs) to mitigate risks and seize opportunities. But to many, the pace of change is
allowing far less lead-time. So what can be done? How can someone be strong enough or smart enough to thrive in this environment? According to Charles Darwin “It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change,” Perhaps in today’s environment, as NAREIM President Gunnar Branson pointed out, “The ability to change
is more important than being the smartest or strongest. Perhaps we need to approach
our challenges in a different way than many did in the past.”
What are we facing, exactly?
Tenants may need less space. For example, law firm lease renewals are typically for
one-third less space than the leases they replace, due to electronic file storage, the
elimination of law libraries, and other efficiencies brought on by technology. Internet sales
are expanding faster than store sales, and as this trend continues, malls and shopping
centers may need to re-think their approach to space. Are we ready for higher density
of use and perhaps a lower gross demand for space on a per person basis?
People are acting different than before. Social and demographic shifts are in high gear.
Millennials, which make up the 18-to-34 age cohort that drives apartment and retail
markets, have tended to make different life choices than preceding generations—living in
cities, renting apartments and putting off marriage and children longer, driving less, and
acquiring fewer physical assets. Business people of all ages work outside the traditional
office more, and consumers are buying more and more online. All these fairly recent
shifts have a direct impact on office, retail, industrial and multifamily residential markets.
Are the assets in our portfolio flexible enough to allow for the changing uses of space?
Capital is changing. It’s not just about the defined benefit pension plans anymore. Global
capital, defined contribution plans, family offices and other investors of capital are looking
for different things from private real estate. Are we providing the right kinds of structures,
risks and returns for a changing client base?
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By: NAIREM Winter Edition (Acquisitions & Assets Management)
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Lease Language
The road to litigation is paved with creative clauses.
Although the basic ingredients for commercial leases are the same, they can vary widely in length and number of issues covered. While many aspects of landlord-tenant agreements are tried and true, what happens when an aggressive and creative landlord — or more likely the landlord’s attorney — inserts a provision into the lease that is unusual and then tries to enforce that provision through litigation? Often the result is expensive court battles over the enforceability and impact of the unusual lease provision.
Two examples of such provisions that have been recently litigated, the so-called “most favored nation” and “early out” clauses, provide guidance for commercial landlords that seek to insert similar provisions into their leases.
Two examples of such provisions that have been recently litigated, the so-called “most favored nation” and “early out” clauses, provide guidance for commercial landlords that seek to insert similar provisions into their leases.
Most Favored Nation
In the commercial lease context, the term most favored nation, which is borrowed from the international trade arena, refers to an arrangement where a lessee in a shared building, such as a strip mall, receives the benefit of any other tenant’s negotiations regarding matters such as costs per square foot for common area maintenance, taxes, insurance, or even rent.
These clauses are more often found in leases with national tenants that are in a strong bargaining position. That being said, landlords can also take advantage of these clauses under the right circumstances.
Over the last few years, national tenant Payless Shoesource has engaged a third-party consulting firm to review its leases and determine whether its landlords are complying with most favored nation clauses. This review has led to litigation over the meaning and enforceability of such clauses. Recently, Payless brought a lawsuit over this type of provision against Belmont Shopping Center LLC, located in Detroit, in Wayne County Circuit Court, Case No. 12-012419-CK.
Eventually, the landlord was put under immense pressure to resolve the matter, because a violation of the most favored nation provision triggered the tenant’s right to reimbursement of legal fees under the lease terms. As the case wore on, the settlement value of the case continued to rise until the landlord eventually had no choice but to settle.
The lesson that other landlords can take from this case is to be mindful that even a minor violation of this type of lease provision could have costly ramifications if pursued by an aggressive tenant, and landlords should be cognizant of the risks when agreeing to such provisions.
Early Out Clauses
Unlike most favored nation clauses, which are generally inserted in tenant-friendly leases, early out clauses favor the landlord and are more typically found in landlord-friendly leases.
Early out clauses have rarely been litigated and are usually only present in leases where the landlord is in a strong bargaining position. An early out clause essentially allows a landlord to terminate a lease before the expiration of its term as long as the landlord provides advanced notice and consideration in the form of a termination fee in exchange for the right to early termination. Thus, these provisions allow landlords to take advantage of rapidly changing market conditions by exercising the early out to create vacancies in hot markets, but give them the flexibility to keep existing tenants in down markets.
Although there is very little case law on such clauses, at least two courts have accepted and approved so-called early out clauses. For example, in re Ardolino, 298 B.R. 541, 544-45 (Bankr. W.D. PA. 2003), the court rejected the tenant’s argument to invalidate early out clause as the clause is consistent with other terms of lease and not otherwise ambiguous. Landlords may be able to rely upon this case to enforce not only early out clauses, but also to limit a tenant’s attack to any portion of a lease, especially if the tenant relies upon evidence of verbal promises or statements.
More recently, a Orion, Mich., landlord defended an attack to the validity of an early out clause in a summary proceedings case in the 52-3 (Rochester) District Court, in Baldwin Plaza, LLC v. Xuan Thi-My Duong, Case No. 13-C01635, aff’d on appeal, where the tenant argued that the clause was unconscionable, or simply unfair. The landlord ultimately prevailed, because the courts found that the tenant had ample opportunity to negotiate and/or reject the lease if it did not want to be bound by the early out provision. However, under Michigan law, a district court’s ruling is not binding on other courts, so this landlord-favoring ruling from the 52-3 District Court, even though upheld on appeal, does not have precedential effect. Binding or not, this decision should give some confidence to landlords that utilize and rely on early out clauses in the future.
Most favored nation and early out clauses are just a couple of examples of the wide variety of unusual commercial lease provisions. As the foregoing cases illustrate, the question of whether a court would uphold an unusual lease provision is only one consideration for creative landlords. There is also the matter of how costly it would be to enforce. Landlords should also consider how to be in the best position to enforce such clauses and whether the potential for costly litigation makes the clause more burdensome than its potential intended benefit. These benefits and risks should be weighed by the landlord with the advice of legal counsel. Be wary of simply regurgitating old leases that might have been successful under different circumstances.
– See more at: http://www.ccim.com/cire-magazine/articles/323385/2014/01/lease-language#sthash.DRtn4DMb.dpuf
By: Ian S. Bolton (Commerical Investment Real Estate)
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