Epic Challenges with Cautious Optimism
The 60 basis point jump in vacancy this quarter was a modest increase and within normal ranges. Unfortunately this increase brought the office vacancy into record territory and is at the highest level yet since the new millennium began. A majority of the increase is attributed to just over 90,000 square feet of space being vacated by two companies. Cardinal Health and Lovelace Health Plan both shuttered their operations as a result of a business unit transfer and an acquisition by another health plan.
One of the biggest hurdles is the new supply of available space consistently hitting the market every quarter and competing for tenants. These include occupied spaces where tenants have yet to make a final decision on pending lease renewals; tenants who have indicated they will not be renewing their leases or will be downsizing; and tenants who are subleasing their spaces. The overall availability rate jumped 130 basis points this quarter to 25.6 percent and includes vacant spaces. This is not surprising since the office sector employment in the Albuquerque Metropolitan area has fundamentally regressed back to 1998 levels during which there was three million less square feet of space.
The one bright spot is the Downtown submarket. So far this year Downtown is the best performing submarket. Vacancy has declined every quarter this year Downtown and has also posted the highest economic development program called Innovate ABQ. Under Innovate ABQ technology developed in public institutions, primarily the University of New Mexico, is transferred, incubated, and then commercialized. Just over 20,000 square feet of space was absorbed over the last two quarters in spaces occupied by Fat Pipe ABQ and the CNM STEMulus Center.
Most of the large expected vacancy spikes this year in spaces over 20,000 square feet have already occurred. Currently there are no major downsizings or big vacancies slated to negatively impact the market for the balance of the year. The growing amount of available spaces being added to the market, however, is expected to increase modestly over the next two quarters. The trend should be for vacancy to increase slightly as some of the available occupied spaces vacate through normal progressions. Steady activity from companies occupying smaller spaces less than 5,000 square feet should offset some of the vacancy.
Providing additional reductions to the office vacancy could be reductions to the overall inventory. This may occur with under-performing office buildings being purchased by owner/users and/or investors re-developing into different uses like multi-housing. Currently there is close to one-half million square feet of office inventory that is actively being marketed primarily for sale rather than for lease.
Weakness in the Albuquerque Metropolitan office market could begin to attract interest from national companies looking for more affordable options. Average office asking rates have basically stagnated over the last five years and are below many nearby cities. Compared to other major cities in the Southwest, Albuquerque remains the laggard in terms of office sector employment growth. The strong supply of labor combined with attractively priced real estate could position the Albuquerque Metropolitan area very well.
The Innovate ABQ incubator strategy underway in Downtown Albuquerque is expected to garner more interest and provide a boost to organic growth. The impact will likely take a few quarters to become a major driver increasing demand for office space, but could become a viable strategy well into 2015.
Kemtah Group, Inc.
Landlord: Carlo, Inc.
4100 Osuna Rd NE
14,007 Square Feet
CNM STEMulus Center
Landlord: First Plaza Galleria Operating Associates, LP
20 First Plaza NJ
9,000 Square Feet
S&P Data, LLC
Hewlett Packard, Co.
2351 HP Way
33,174 Square Feet