Mixed Bag (Download Full Report)
On the surface the trend in the office market appears to be positive. For the third consecutive quarter vacancy dropped registering a modest 30 basis point decline. The majority of this movement can be attributed to one large space becoming occupied. Blue Cross Blue Shield of New Mexico moved into 85,000 square-foot space in the North I-25 submarket and making the quarter. Without this big move vacancy would have actually have increased 30 basis points.
The trend to consolidate operations and move them out of the city remains a challenge. Occurrences of these are preventing a full recovery. For example Intuit and Cardinal Health both closed down portions of their operations during the quarter. These two moves added back almost 30,000 square feet of space in the Downtown and North I-25 submarkets respectively. Another 30,000 square feet of space became available in two Class A building spaces in the Uptown submarket. Although these spaces are still occupied, growth in sublease availabilities can be a harbinger for future vacancy increases.
One the positive side two large charter school deals were inked during quarter with occupancy slated for the first quarter of 2014. Combined these charter schools will occupy 47,000 square feet of space, one in the Airport submarket and one in the Far Northeast Heights. The volume of small deals occurring in spaces less than 5,000 square feet has remained strong. It appears that the trend for smaller deals is to trade spaces into higher quality buildings.
The overall recovery will remain sporadic until the fourth quarter of 2014. Several larger deals will provide buoyancy and offset some of the consolidations slated to occur in over the next few quarters. Once the fourth quarter arrives, however, one of the largest vacancy spikes ever is likely to occur. Over 450,000 square feet of will be vacated by three large tenants. Downtown will have close to 100,000 square feet of space added to the inventory when the GAP’s Corporate Services Center moves into about 75,000 square feet in the North I-25 submarket. Cardinal Health has announced plans to vacate 54,000 square feet by year end transferring these operations out of the state. The biggest vacancy will occur when Presbyterian Healthcare Services leaves approximately 300,000 square feet in the Airport submarket and moves into their new building in the North I-25. Since the property Presbyterian is vacating is now available to purchase. It could be removed from the inventory if an owner/user purchases for their use.
Look for the amount of available sublease space to increase over the next few quarters. The trend for companies, especially in larger spaces, to reduce their suite sizes is likely to grow. Class A buildings could be the most susceptible.
Demand for smaller spaces less than 5,000 square feet will one of the positives throughout 2014. Conditions should remain positive for smaller tenants to upgrade the quality of their spaces within similar budgetary levels. Growth in the healthcare industry will drive demand for medical space and ancillary services providing some benefit to office landlords.
Landlord: DI Albuquerque Funding, Inc.
Location: 4400 Masthead Street NE
Size: 74,439 Sq.Ft.
Tenant: New Mexico International School
Landlord: Hope Plaza Office Partners, LLC
Location: 8650 Alameda Blvd NE
Size: 21,551 Sq.Ft.
Tenant: Cien Aguas International Charter
Landlord: 2000 Randolph, LLC
Location: 2000 Randolph Rd SE
Size: 25,451 Sq.Ft.