Office Market Trends Report - 4th Qtr 2014
Sales Provide Some Healing
The market bounced back modestly refilling most of the vacated space from the third quarter. The majority of improvement was provided by the purchase of two vacant buildings by owner occupants. Sales activity accounted for two-thirds of the total space absorbed or 66,000 square feet of space. The balance was provided through occupancies of leased space in a handful of smaller deals.
A slow healing process has begun where the supply of office space competing for tenants is decreasing as the result of user acquisitions. Since the office market inventory does not include 100 percent owner occupied buildings, when purchased, these buildings no longer actively seek tenants. The first wave is occurring in older, obsolete, vacant office buildings. Many of these are typically being repositioned for alternative uses. Landlords with prolonged vacancies are facing significant tenant improvement costs required to make the spaces competitive. Combined with a low supply of new tenants in the market and attractive financing terms for owner occupants, many landlords are opting to sell their properties.
During the quarter there were four large buildings listed for sale. Together they comprise about 725,000 square feet of total space, or five percent of the total office market. These buildings are ideal for owner occupants who require large spaces. Most are obsolete and would necessitate re-purposing if used for medical, education, or religious purposes. If these properties are in fact purchased by owner occupants and removed from the inventory the vacancy rate would decline by nearly 525 basis points.
On the leasing side the supply of new available, but still occupied spaces, hitting the market has not abated. These primarily consist of Class A and Class B+ spaces, or 63,000 square feet, have which have leases slated expire in the latter half of 2015.
Sales activity is expected to remain strong. Conditions are favorable for the purchase of vacant buildings by owner occupants. Well financed buyers are poised to take advantage of historically low interest rates and obtain additional working capital to renovate or repurpose obsolete buildings. Demand to purchase smaller offices and condominiums should also grow over the next two quarters.
Interest in the Albuquerque Metropolitan area for office investments should increase over the next few quarters. Investors will seek out more offerings in the Albuquerque area as a strategy to diversify risk and improve returns by acquiring assets in in secondary markets. Capitalization rates for stabilized investment offerings are generally 100 to 200 basis points higher in Albuquerque compared to those in larger primary markets. Finding viable investment offerings will be the challenge.
The supply of new availabilities for large and medium sized spaces should be fairly consistent. Close to 100,000 square feet of new available space to lease may be brought to market by the third quarter of 2015. Whether or not these new offerings result in additional vacancy is the big question. It is anticipated that about half of the new availabilities become vacant by year end 2015. A majority of these leases in occupied spaces will get renewed but in smaller suite sizes. Vacancy will generally remain at current levels over the new two quarters as job and organic growth offset some of the vacancies hitting the market. As more of the larger obsolete office buildings get purchased by owner occupants, vacancy could fall by 300 basis points by year end 2015.
The Downtown, North I-25, and Uptown submarkets are likely to garner the majority of interest and deals moving into 2015.
Notable Office Leases & Sales
MH WIN, LLC (Buyer)
Seller: Whitfield Properties, Inc.
301 Dr. Martin Luther King, Jr Ave
House of Worship
Buyer: Morgan Real Estate & Development
10500 Research Rd SE
Landlord: LeaseOmninet Tijeras, LLC
Address: 400 Tijeras Ave NW
Landlord: REIT Management & Research, LLC
Address: 4420 The 25 Way NE
The office market is beginning to heal itself by reducing the supply of office space competing for tenants. Since the office market inventory does not include 100 percent owner occupied buildings, when purchased these buildings no longer seek tenants. The first wave is occurring in older, obsolete, vacant office buildings. Many of these are typically being repositioned for alternative uses. Landlords with prolonged vacancies are facing significant tenant improvement costs required to make the spaces competitive. Combined with a low supply of new tenants in the market and attractive financing terms for owner occupants, many landlords are opting to sell their properties.