The Federal Reserve Bank of Kansas City’s commercial real estate index continued to drop in the last quarter of 2023, with falling absorption rates and lower loan demand being the primary culprits.
The Kansas City branch monitors economic trends in the Federal Reserve’s Tenth District, which includes Albuquerque, Santa Fe and much of the northern half of the state. Much of the southern half of New Mexico falls into the Reserve’s Eleventh District under the Federal Reserve Bank of Dallas.
The index value — a measure of standard deviations from historical norms — showed commercial real estate contraction in Q4 of 2024, falling from -0.8 to -1.3. The report illustrated a continuing trend of declining real estate activity. That decline has been credited to the Federal Reserve’s continued efforts to curb inflation, the most notable being increased interest rates.
Not all contributing market metrics declined. Notable but small bright spots included construction materials sales, developer access to credit and credit standards for commercial real estate loans.
Regardless, most metrics were in the red. Property sales, for example, contributed -0.088 to the index value and absorption, or the rate in which commercial space is sold or leased, contributed -0.093.
However, the numbers don’t tell the entire story. Nichols Sly, vice president at the KC Fed, told New Mexicans business leaders at a recent Economic Forum of Albuquerque event that the outlook varies by commercial real estate sector and city population size.
“What’s happening on the coasts, or what’s happening in some middle markets is not the same as what’s happening in Albuquerque or Santa Fe,” Sly said.
According to Sly, one of the most talked about concerns in real estate, vacancy rates, differ depending on the size of the metropolitan area. In metros with a population of between 3 million and 500,000 residents, vacancy rates “haven’t moved that much,” he said.
The Kansas City branch is primarily made up of this category, with Omaha, Albuquerque and Oklahoma City all sitting below 1.5 million residents. The district’s biggest metros, Kansas City and Denver, have less than 3 million each.
Sly anoted the outlook for central business districts, industrial areas and suburban office spaces vary.
There is also disagreement in the algorithms being used to portray real estate trends, with Sly labeling it as “measurably high.”
“Within commercial real estate, but frankly more broadly, … the disagreement about the algorithm has never been larger,” Sly said. “That has to change the way you think about some of the headlines.”
Local and national picture
In Albuquerque, between Q2 2023 and Q3 2023, office market square footage increased by 34.3% and vacant square footage increased by 1.9%, according to Colliers’ 2023 Albuquerque Office Market Report.
A recent look at central business districts by The National Observer found that some of the issues surrounding them have been tied to branding and shifting focuses in a post-pandemic world, with a push for more diverse offerings in downtown areas.
Nolan Marshall, executive director of the South Park Business Improvement District in Los Angeles, told The National Observer that office towers, such as Albuquerque Plaza in Downtown Albuquerque, could benefit from incorporating more social-focused amenities.
“We’re recognizing that these neighborhoods that were devoted to commercial towers now have to serve different purposes, whether that be conversions to residential or conversions to hotel and hospitality focuses,” Marshall said. “In the downtown management world, we would traditionally refer to coffee shops or small pocket parks as third places, where people could gather, socialize, do some work. Office towers now have to become third places as well.”
Meanwhile, the Albuquerque industrial market fared worse in the same period from Q2 2023 to Q3 2023. Available square footage increased by 90.4% and vacant square footage increased by 17.27%. However, the industrial market has about half the available and vacant square footage compared to office space in the city.
The trends can be partially explained by a national decline in development starts after a surge following the end of the Covid-19 pandemic, according to Stephanie Rodriguez, national director of U.S. industrial services at Colliers International Inc. The slowdown can be correlated to creeping interest rates, she told The National Observer, as well increased difficulty for developers to obtain financing.
There’s good news for industrial spaces on the horizon, though. Recent federal policies, including the CHIPS and Science Act and the Inflation Reduction Act, have incentivized bringing manufacturing space back to the United States after years of offshoring.
This can be most clearly seen in New Mexico with Singapore-based Maxeon (NASDAQ: MAXN), who announced in August they would be building a new facility in Mesa del Sol. Another hot spot for such onshoring projects include the Borderplex in Santa Teresa, where companies like Taiwan-based automotive parts manufacturer Hota Industrial Manufacturing are erecting new facilities.
Source: “KC Fed commercial real estate index continues to fall, but numbers don’t tell full story“
