Clouds Lifting From Commercial Real Estate

Commercial real estate in the Albuquerque metro area – basically the bricks and mortar of the business community – showed improvement in 2014, with the industrial and retail property types almost starting to look normal, according to the latest market reports from Colliers International.
The year-end vacancy rate for the industrial market, which includes warehouses and assembly plants, was 6.9 percent in the fourth quarter, down from 7.1 percent in the third quarter and 9.3 percent in the fourth quarter of 2013.
For the retail market, the year-end vacancy rate was 6.6 percent, down from 6.9 percent in the third quarter and 7.6 percent in the fourth quarter of 2013. Colliers, a commercial real estate services firm, only tracks retail buildings 10,000 square feet and larger.
The office market, which was especially hard hit by the recession, ended 2014 with a vacancy rate of 20.9 percent, down from a more than 20-year high of 21.5 percent in the third quarter but an increase from 19.3 percent a year earlier.
A common thread between the industrial and retail property types has been a low level of speculative construction of new space, said Ken Schaefer, director of research at Colliers’ Albuquerque office.
So-called “spec” space is built without being pre-leased and, as a result, carries the risk of hitting the market as vacant. Because of the risk, spec construction is common in an expanding economy, but rare in a flat economy like Albuquerque’s.
The upside is that the existing inventories of industrial and retail space have gradually filled up, thus driving down the vacancy rates. The downside is that the lack of a sufficient supply of new spec space can discourage expansions in the metro, particularly by national players.
While the retail real estate market is doing well, at a 6.6 percent vacancy rate in the fourth quarter, especially compared to the metro average of 8.9 percent during the 2004-07 boom years, the retail employment sector remains subdued.
Retail employment, which peaks each year during the holiday shopping season, has recovered from the lows of 2010-12, but is still short of the high-water mark of 46,200 jobs in the fourth quarter of 2007, according to state labor data. The sector registered 43,100 jobs in November, even with fourth quarter of 2003.
Industrial
For the first time in seven years, the industrial real estate market saw a net gain of nearly 1 million square feet of space fill up during 2014, driving the vacancy rate down to a pre-recession level of 6.9 percent, the Colliers Industrial Trends Report says.
The Albuquerque metro area has traditionally been a tight industrial market, spending most of the 1990s at around a 5 percent to 6 percent vacancy rate. In the 2000s, the vacancy rate ranged from a high of 11.2 percent in the third quarter of 2005 to a low of 5.7 percent in the second quarter of 2007.
Schaefer said half of the industrial space newly occupied in 2014 was at four properties in the metro:
• Nova Corp., a provider of information technology services, owned by the Navajo Nation, and United Poly Systems, a Springfield, Mo.-based plastic pipe manufacturer, moved into Schott Solar’s former 192,125-square-foot industrial campus at the Mesa del Sol master-planned community.
• Southern Wine & Spirits, a Miami-based wholesale distributor, occupied 163,475 square feet at the Montaño Distribution Center at 123 Montaño NW.
• Flagship Food Group occupied 78,803 square feet off Alexander NE in the Renaissance area, south of Montaño, in a move to consolidate and expand operations. The Los Angeles-based food manufacturer is best known locally for making products under the 505 Southwest name.
• Gastonia, N.C.-based U.S. Cotton, a manufacturer and distributor of cotton products, leased 63,428 square feet at the Fulcrum Building, 4321 Fulcrum Way NE in Rio Rancho.
Office space
Given that offices are used to house workers, not merchandise, like a store or warehouse, the problem with the office real estate market is the metro’s shrinking labor force.
The metro lost jobs on a year-over-year basis during the first nine months of 2014 before registering small gains in October and November, according to the state’s monthly Labor Market Review reports.
The biggest private sector user of office space in the metro, the professional and business services employment sector, had been shrinking for 14 consecutive months as of November. The sector’s employment count of 54,500 was 16 percent below the mid-2008 peak, according to state labor data.
The fourth quarter vacancy rate for the Uptown office submarket was 20.6 percent, roughly where it’s been since cracking the 20 percent vacancy threshold in the first quarter of 2012. Uptown’s availability rate was almost 30 percent. For comparison, in pre-recession 2006-07, Uptown’s office vacancy rate averaged 9.9 percent.
Available space is typically occupied on paper, but is either not used or soon to be vacated.
The North I-25 office submarket has shown some improvement at a 14.6 percent vacancy rate in the fourth quarter, roughly where it was in 2008-09, but the submarket’s availability rate was almost 22 percent at year-end. In pre-recession 2006-07, North I-25’s office vacancy rate averaged 9.7 percent.
The metro’s largest office submarket, North I-25 is a corridor that straddles Interstate 25 north of the Big I.
By: Richard Metcalf (Albuquerque Journal)
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