Sliver of Success - Niche Demand (Download Full Report)
Vacancy declined again for a second consecutive quarter falling 60 basis points. The last time this occurred was over seven years ago. The decline’s primary driver was several large deals being made. Two of these were by health insurance companies gearing up for increased enrollments from the Affordable Care Act. Molina Healthcare expanded into almost 29,000 square feet of Class A space during the quarter. The second, Blue Cross Blue Shield of New Mexico, was announced during the quarter with occupancy of almost 85,000 square feet slated to occur by year-end. Both of these deals occurred in properties located in the North I-25 submarket and were expansions of existing companies. Additionally, the Downtown submarket experienced heightened deal activity with several tenants inking deals totaling over 20,000 square feet.
Excluding these deals the office market has struggled to breakout the trends that began three years ago. Activity for tenants leasing small spaces are still account for the majority of the deals being made. These are primarily related to the medical and professional services fields. To meet the consistent demand for small spaces executive companies are actively making master lease deals in Class A properties. Medium sized tenants are generally looking for opportunities to downsize into smaller spaces and/or improve the quality of their spaces. Consolidations from larger companies remain a consistent headwind. Transferring divisions to regional service centers outside of the state remains a common strategy.
Landlords are still having to get very aggressive in making deals and retaining tenants but are becoming more selective in credit quality. An emerging trend is a falling supply of large, contiguous spaces over 25,000 square feet, especially in the highly desirable North I-25 submarket.
Notable Office Transactions
Tenant: Molina Healthcare
Landlord: C & S Equities
Address: 8814 Horizon Blvd NE
Size: 28,726 Sq.Ft.
Tenant: Blue Cross Blue Shield of New Mexico
Landlord: HUB Properties Trust
Address: 4411 The 25 Way
Size: 84,724 Sq.Ft.
Tenant: Canon Information Technology Services
Landlord: Jefferson Plaza, LLC
Address: 4041 Jefferson Plaza NE
Size: 33,682 Sq.Ft.
Tenant: Developmental Disabilities Planning Council
Address: 625 Silver Ave SW
Size: 12,778 Sq.Ft.
Over the next two quarters vacancy will fall as over 100,000 square feet of space gets absorbed from several larger deals signed mid-year 2013. The overall recovery will remain choppy and many buildings will still experience lack luster demand as a result of tenants having very specific requirement. Tenants will experience a disconnect between perceived excess supply versus what is actually available that meets their selection criteria. For larger tenants parking ratio requirements and being in contiguous spaces are becoming paramount. Having at least “4 parking spaces per 1,000 square feet” is the minimum level as companies maximize the number of employees working in smaller spaces.
Additionally, activity for smaller spaces less than 5,000 square feet will remain strong throughout 2013. Demand for medium sized spaces from 5,000 to 20,000 square feet should experience the weakest demand. Larger spaces over 20,000 square feet will likely experience varying demand levels but still be higher than the last few years. Albuquerque is poised to attract increased interest from national tenants wishing to take advantage of attractive asking rates and high vacancies. This could even spur some limited build-to-suit projects for large tenants wishing to consolidate operations into a single location. The North I-25 submarket is primed to attract the majority of this activity given that the construction delivery time would be very close to the completion of the Interstate 25 and Paseo Del Norte renovation.
Tenant improvement allowances will be one area that well capitalized landlords will be able to compete more aggressively. Look for more landlords to be more selective offer when offering turn-key improvement allowances especially for established, credit quality tenants. A majority of tenants will be offered basic allowances for paint and carpet. More extensive build outs beyond this may have to be funded in part by the tenant.