MARKET HIGHLIGHT, MAY 2004

ALBUQUERQUE: BALLOONING CAPITAL SET TO SOAR
Rich Diller

Albuquerque appears to be back on track with a strong economic showing in 2003 following a rather stagnant 2002. In November 2003, unemployment was 5 percent, a full percentage point lower than the national rate. The city continues to earn favorable rankings by various economic measures. In March, Inc. Magazine ranked Albuquerque the seventh best medium-sized city — out of more than 250 metro areas — in which to do business.

The city’s downtown revitalization program continues to gain momentum as evidenced by Mayor Martin Chavez’s recent announcement that Arena Management and Construction of Phoenix will build a 10,000-seat sports and entertainment arena downtown. The $50 million complex will be used for professional hockey, arena football and big-name entertainment groups.

Along Central and Broadway, just east of downtown Albuquerque, a newly designated commercial and residential neighborhood will feature New Urbanism designs. Planners envision a mixed-use district with buildings — up to five stories tall — having residences on upper floors and retail at street level.

Industrial

With a market base of 36.4 million square feet, the Albuquerque industrial sector remains somewhat soft, posting a fourth quarter 2003 vacancy rate of 8.2 percent, up from around 7 percent at the end of 2002. Much of the industrial activity in Albuquerque has taken place in the North I-25 submarket, with more than 400,000 square feet absorbed in 2003, a figure representing almost 50 percent of the entire market.

Escalating land prices have started to change the development characteristics of the North I-25 corridor, as evidenced by the recent CarMax announcement. The nation’s largest specialty retailer of used cars and trucks just signed a lease with Titan Development Co. for part of a 12-acre site at I-25 and Alameda Boulevard, the former location of the Levi Strauss and Honeywell plants. CarMax is tearing down the 107,000-square-foot Honeywell building and constructing its own facility on the I-25 frontage site.

Another major occurrence in the North I-25 submarket will be the closing of the nearly 500,000-square-foot Philips Semiconductor manufacturing plant. The closing will mean the loss of 600 jobs and a further increase in market vacancy. Several other semiconductor entities have been eyeing the facility.

On the rapidly growing west side of Albuquerque, the Double Eagle II Airport’s economic development project was recently launched with the groundbreaking for the Aerospace Technology Park. The airport is viewed as a significant economic engine and employment center by the Albuquerque City Council. Infrastructure upgrades, general aviation facility development and other economic development initiatives have lured companies such as Eclipse Aviation, a new economy jet plane manufacturer, which could provide up to 5,000 jobs in the area.

Construction is also underway on a 66,000-square-foot industrial project in the Interstate Business Park. Developer Bob Russell will offer, for lease or sale, freestanding condo buildings with bay sizes of 2,250 square feet. Other recent manufacturing announcements include a $20 million expansion of Cardinal Health’s pharmaceutical manufacturing plant, which employs about 1,100 people, and Tempur-Pedic’s plans to build a $56 million, 530,000-square-foot factory, which will create 300 jobs on the west side of the city.

Multifamily

Due to the city’s fourth-quarter occupancy rate and year-over-year rent growth, RealFacts, an apartment data specialist, ranked Albuquerque in the top 10 of 25 western cities. Though many multifamily markets experienced rate declines, Albuquerque’s rent growth remained stable at 1.4 percent. Occupancy increased to 94.1 percent because of job growth and unit demand. With demand for apartment units increasing by approximately 1,000 each year and annual new construction resulting in only 300 to 400 additional units, the occupancy rate should inch higher. Also, cap rates still compare favorably to other regional markets, attracting more out-of-state investors. Sales in 2003 doubled and the market remained strong in first quarter 2004.

The large apartment property sales market has been especially robust. Last year saw several 100-plus-unit properties change hands at $60,000 to $100,000 per unit. Houlihan-Parnes of White Plains, New York, purchased Albuquerque’s tallest apartment complex, The Landmark, for $6.3 million. Its uptown location — near retail, offices, restaurants, movie theaters and I-40 — was a major factor in attracting buyers to Albuquerque.

Downtown renovations are turning some of Albuquerque’s landmarks, such as the old Albuquerque High School, into attractive multifamily dwellings. City planning officials have supported this development trend while pushing for the inclusion of affordable rent components for lower income tenants. Future events, such as the National Main Streets Conference 2004, will serve to keep this downtown development direction consistent with the historical preservation focus.

Office

The overall feeling is that the Albuquerque office market has hit bottom and that vacancy rates will decrease by the third quarter. Due to significant movement between submarkets and the consolidation of many tenants, the office market vacancy rate rose to 16.9 percent.

The downtown submarket has been most affected because of numerous government entities relocating to suburban locations. The Department of Interior vacated 55,000 square feet in the downtown area to relocate to the Journal Center. The FBI and the Bureau of Indian Affairs also plan to leave downtown. State Farm Insurance has consolidated its claims and agent training facilities into a new 25,000-square-foot location at Jefferson Commons in the North I-25 corridor. Tenants continue to move into more efficient space, which allows them to lease less square footage.

On the development side, 700,000 square feet of new office space is scheduled to come on line in 2004. The new buildings are being leased or sold almost as soon as they open. A 14,000-square-foot medical office building is being built at I-40 and I-25. Lease rates for such space range from $15 to $18 per square foot NNN.

Boeing SVS expanded its facility in the I-25 corridor by 35,000 square feet in 2003. Office tenants in this corridor absorbed approximately 81,000 square feet, most of which came from Northrup Grumman’s moving into 70,000 square feet at One Sun Plaza.

Vacancy rates will start to decrease as the economy improves and the employment base expands, causing companies to absorb available space at lower asking rates. Landlord concessions and tenant improvement allowances will increase in the meantime.

Office market rents range from $13 for Class B space to $20.50 for Class A properties. The lowest rates can be found in the airport submarket while the North I-25 submarket boasts the highest.

Retail

Albuquerque’s retail sector has experienced a surge of activity in the past 18 months, a trend that will likely continue into 2005. Eckerd’s initial market rollout includes the construction of six new drugstores spread throughout the metropolitan area, with eight additional sites under contract. Lowe’s Home Improvement Warehouse will begin construction this summer on a 116,000-square-foot “super wide” location, its fourth store in the market. Target is under contract to purchase 11 acres at Paseo Del Norte along I-25 where it will build its sixth Albuquerque store. Walgreens continues to expand throughout the market with five sites under contract and two stores under construction. Wal-Mart has repositioned two stores, turning both units into super stores. Also, Wal-Mart’s new South Valley store will open in early-2005. National restaurant chains P.F. Chang’s China Bistro, Krispy Kreme Doughnuts, Johnny Carino’s Country Italian, Boston Gourmet Pizza and Fox & Hound have all opened new Albuquerque stores in the last year.

Retail vacancy in Albuquerque has hovered around 9 percent despite the uptown and North I-25/Jefferson submarkets enjoying vacancy rates of less than 7 percent. Average retail rent is $15 per square foot NNN with rates in uptown and North I-25/Jefferson reaching $22 per square foot NNN. Uptown Park, a newly constructed specialty retail strip, has leases averaging $30 per square foot. Tenants in Uptown Park include Verizon Communications, Earth Shoe, Pei Wei Asian Diner and Satellite Coffee.

The retail investment market has been one of the strongest sectors in Albuquerque. Cap rates for grocery-anchored and shadow-anchored properties are approximately 9 percent. Freestanding, single-tenant drug stores and other retailers are selling at cap rates of less than 8 percent — even as low as 6.9 percent for newly constructed Walgreens stores.

The prognosis for retail growth remains strong. Statistics from the 2000 census — released in 2002 — have shown Albuquerque’s metropolitan area population of 735,000 people to be constantly growing. An increasing population and improved city infrastructure, including an enhanced interstate highway system, have made Albuquerque a larger blip on the national retail radar screen.

Rich Diller is president of NAI The Vaughan Company in Albuquerque.

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