Industrial Market Trends Report - 4th Qtr 2014

Banner Year but Concerns Linger

The industrial market had a notable year. Vacancy declined 270 basis points from the first quarter of 2014 and nearly one million square feet of space was absorbed. It has been seven years since this level of absorption last occurred. Comparing to 2013, the total space absorbed increased by 66 percent or 382,410 square feet. 

Market velocity slowed down during the fourth quarter driven by a lack of quality inventory. Absorption registered a positive 103,000 square feet and was the lowest quarterly level of 2014. The North I-25 submarket outshined all other submarkets. In the biggest deal of the quarter Flagship Foods occupied nearly 79,000 square feet of space in the North I-25 submarket. There were also nine other spaces occupied in the North I-25 submarket which contributed another 60,000 square feet of occupancy. The common theme was that most of the deals were very close to Interstate 25.

A developing concern was the significant amount 6o%f new available space that was brought to market. Although still occupied, a total of 244,000 square feet of new space was added to the inventory. The majority of these new spaces were in newer properties with more desirable attributes. These new availabilities helped to offset the trend of declining asking rates given the additional supply of higher quality spaces being marketed.

The primary factor driving 2014’s success were a handful of larger deals over 50,000 square feet. The supply of larger quality spaces were steadily leased up throughout the year. These accounted for 54 percent or 522,000 square feet of space absorbed.

Forecast

The 244,000 increase of new available space is poised drive the vacancy rate upward over the new few quarters. Overall space demand will likely decline until a meaningful uptick in new housing starts occurs. The volume of larger deals may drop as well compared to 2014’s level.

The trend to repurpose functionally obsolete properties should remain a viable strategy. Attractive financing is likely to provide traction for this to occur, especially for owner occupants. Alternative uses like fitness centers, breweries, religious institutions, and education facilities are expected to remain vibrant.

New speculative construction starts should remain dormant throughout the first half of 2015. Holding speculative starts down will be the ability to obtain the required lease rates necessary to make the projects profitable, especially when compared to asking rates for existing inventory. Some estimates have lease rates being at least 25 percent higher for the new project to “pencil”.

The new construction that does move forward should occur in build-to-suit or user developed projects for larger buildings over 20,000 square feet. Land prices are likely to remain at depressed levels. This will contribute to making with these types of projects possible.

Demand for single-tenant industrial investments will likely increase as investors from other primary markets look to take advantage of higher returns in secondary markets. Growth in e-commerce is providing strong demand for large regional warehouse and distribution properties. With oil prices currently at six year lows and not expected to rise in the near term, the Albuquerque Metro area may not experience any demand for large warehouse spaces. It may be more economical to ship in product from cities with bigger distribution hubs.