Office Trends Report - 2nd Qtr 2014
Office Research & Forecast Report
Looks Critical But Healing Possible
As expected vacancy spiked upward 250 basis points posting one of the biggest increases seen in over 15 years. This jump should be considered an outlier since it was driven primarily by a single-tenant vacating nearly 324,000 square feet of space in the Airport submarket. In the third quarter of 2011 Presbyterian Healthcare Services (PHS) purchased the former 110,000 square-foot Citicorp Office located in the North I-25 submarket and then expanded the building with a 193,000 square foot addition completed this year. Without PHS moving from leased space into their own building, vacancy would have only increased by 47 basis points.
Vacancy driven by large single-tenant moves such as this make the market appear to be much worse than it actually is. The current vacancy is realistically over stated by 400 basis points as a result of two large single-tenant spaces becoming vacant over the last eighteen months. The former Presbyterian and the former PNM Gas spaces account for 570,000 square feet of the total vacant space. Excluding these the “adjusted vacancy” rate would be 16.9 percent rather than 20.9 percent. Both properties are listed for sale and are not actively competing for tenants. The number of tenants in the market who could use over 200,000 square feet of space is very low.
One concern is the growing level of occupied space being added to the inventory and competing for tenants as available space. During the quarter 250,000 square feet of new available space was added. Almost half was related to two large corporate users. Hewlett Packard listed 81,000 square feet for sublease at their call center in Rio Rancho and Cardinal Health will soon be vacating 55,000 square feet in the North I-25 submarket by the fourth quarter. The balance was comprised of a wide variety space sizes as a result of tenants who gave notice their leases will not be renewed. Some are purchasing their own buildings while others are trading locations into buildings smaller spaces.
The office market is entering a transition period. More buildings with prolonged vacancy will be repositioned for alternate uses. With new construction costs around double those of purchasing an existing building, renovation and re-use strategies should become more prevalent. As interest rates remain at historic lows look for more purchases to occur especially for large users. An incubator strategy, where common office functions are provided, shared, and nurtured among fledgling companies in the same spaces, could be one of the long-term solutions necessary to heal the market, especially in the Downtown submarket.
Vacancy is expected to increase by 50 basis points during the third quarter as more available space becomes vacant. The growth of new available spaces that are still occupied hitting the market is not expected to slow down. Another 200,000 square feet of new available space may be brought to market by year-end 2014. This will occur primarily in larger spaces over 20,000 square feet as tenants actively reduce excess “shadow spaces” during the renewal process. In many cases this will be a challenge for landlords to reconfigure spaces cost effectively relative to the desired renewal rates. The result will be a growing number of tenants trading into smaller spaces into competing buildings.
As the Albuquerque Metropolitan area attempts to reverse its negative employment growth and shrinking economic output, interest could actually increase from national companies looking for more cost effective options. Compared to other major cities in the Southwest which are growing steadily, Albuquerque is the laggard. Interest in Albuquerque could increase given the abundant supply of affordable real estate and labor. Overall asking rates are about 40 percent lower than the national average while the supply of labor is growing.
Notable Office Transactions
Presbyterian Medical Services
6000 Uptown Plaza Partners, LLC
6000 Uptown Blvd NE
Fat Pipe ABQ
200 Broadway Blvd NE
Brownstein Hyatt Farber Schreck, LLP
Albuquerque Plaza Office Investments, LLC
201 3rd Street NW
Lone Star Funds
Common Wealth REIT
Bank of America Center
500 4th Street NW