MARKET HIGHLIGHT, MAY 2005

ALBUQUERQUE’S ATTRACTION
Brenda Canada, Michelle Genrich, Jim Chynoweth, Dan Newman, Steve Monroe and Anita Maestas

By all counts, 2004 was a good year for the Albuquerque commercial real estate market, but expectations are even better for this year. All sectors are seeing demand for Class A product and an increasing supply of lower-end product. Robust population and job growth in the area are helping to spur all real estate sectors.

Retail

The previously sluggish retail sector in Albuquerque is ready to explode. New developments are on the drawing board for all areas of the city. The long-anticipated Uptown Commons project was scheduled to break ground in April 2005. The mixed-use retail, hotel, office and residential project will be the first of its kind in the New Mexico market. The developer is targeting unnamed national retailers and restaurants that are not currently operating in the state. However, competing projects at Coronado and Winrock malls have encountered problems with the current uptown sector plan and have been sent back to the drawing board. This will slow growth and possibly dissuade some national tenants from entering the market.

Downtown Albuquerque has suffered the fate of many similar downtowns with slow retail growth and redevelopment. The newly completed loft projects surrounding downtown have energized the area, and new projects such as the Gold Avenue Lofts are looking to develop a retail component connected to urban housing. The target for this type of development is local upscale tenants who will attract shoppers from all parts of the city.

The rapidly developing Paseo del Norte retail corridor has seen the completion of La Cueva Town Center and Paseo Village, located on opposite corners of Paseo del Norte and Wyoming. These centers have seen strong demand from a variety of local and national tenants because of the rapidly developing residential growth in the area. Paseo Crossing is a 56,000-square-foot upscale center planned for the corner of Paseo and Wyoming. The approximately 100,000-square-foot Ventura Place at the corner of Paseo del Norte and Ventura is currently under construction. Target has broken ground on a 125,000-square-foot store next to the Lowes Home Improvement Warehouse at Paseo del Norte and I-25; Walgreens has also announced a new store next to Lowes. On the north side of the intersection, a 75,000-square-foot retail center is planned.

Northtown Center at Academy and Wyoming has been redeveloped by Weingarten Realty and includes the first Whole Foods Market in Albuquerque. The center also contains Borders Books & Music, White House/Black Market, Chicos and Ann Taylor Loft.

The booming west side has numerous developments ranging in size from 10,000 to 400,000 square feet These projects are located in neighborhoods, on main traffic arteries and near the central shopping area surrounding Cottonwood Mall. Many local and national retailers are focused on taking advantage of the surging the west side’s residential growth, which is taking place from the South Valley to the far north side of Rio Rancho.

The retail vacancy rate in Albuquerque is 9.5 percent. Lease rates in the market range from $13 to $16 per square foot for second-generation small shop space, $21 to $35 per square foot for new shop space and $12 to $14 per square foot for new big box space.

National tenants such as Kohl’s, Wal-Mart Neighborhood Market and others are rumored to be seeking locations in the area. Wal-Mart is in the process of securing a number of new locations, as are The Home Depot, Lowes Home Improvement Warehouse, Target, Burlington Coat Factory, Pier 1 Imports, Bed Bath & Beyond, Sam’s Club and other national tenants. It is truly an exciting time for retail development in the Albuquerque market.

— Brenda Canada and Michelle Genrich are associates with the CB Richard Ellis retail team in Albuquerque.

Industrial

Despite a strong start to 2004, a slow second half of the year brought the Albuquerque industrial real estate market down to a less than average year. Most of the activity seen in 2004 was due to tenant relocation. This activity was amenity- and rate-driven rather than growth-driven. Rental rates have remained exceedingly stable and net growth in the market remains slow.

The budding aerospace presence in Albuquerque holds a great deal of promise for the future of Albuquerque. Eclipse Aviation, Aviation Technology Group and American Utilicraft have all announced proposed manufacturing plants on Albuquerque’s west mesa that could add more than 700,000 square feet of manufacturing space to the west side in the next 3 years. Albuquerque was the only U.S. finalist for a Bombardier Aerospace manufacturing plant. Just breaking ground is a 750,000-square-foot Tempur Pedic mattress factory on the west side of Albuquerque. With an aggressive economic development program, New Mexico is poised to see some strong growth from new users.

At 8.09 percent, the vacancy rate is up slightly from last year because of an increase in speculative construction. More than 35 percent of the vacant inventory is Class C product with severe functional obsolescence, while only 20 percent of the vacant inventory is Class A. Given the trend toward newer more functional space, this vacancy rate is still very low.

Last year saw weaker than expected absorption in the industrial market. Only 323,000 square feet were absorbed last year despite robust employment increases and strong activity in the first half of the year. The industrial market cooled off in the second half of the year, but the employment numbers should result in increases in absorption in the first half of 2005.

Rental rates have been flat, averaging $5.94 per square foot. Because of rising construction costs and the introduction of impact fees to new development in Albuquerque in 2005, build-to-suit prices will rise this year. Until such time as demand picks up, there will not be significant movement in the rental rates on existing product or speculative construction. Expect this bump to occur in 2006.

Construction activity was slightly down last year with slightly more than 580,000 square feet being built. Almost half of what was built was speculative. The most active industrial developers are Brunacini Development and Bob Russell. With impact fees coming into effect in the summer of 2005, this should be an interesting year for construction. There is already as much speculative space under construction as was built all last year. However, once impact fees take effect, expect speculative construction to cool off for at least a year. With the outlook of increased job growth for 2005, the industrial market should experience a better year.

— Jim Chynoweth is the managing director for CB Richard Ellis in Albuquerque.

Office

The Albuquerque office market is alive and well. In third quarter 2004, vacancy was at 18.32 percent. During fourth quarter, the rates decreased to 13.43 percent. This was primarily due to increased occupancy in buildings such as One Sun Plaza and Albuquerque Centre. In the third and fourth quarters, a “flight-to-quality” trend emerged, as lease rates were somewhat flat enabling tenants to lease space in better class buildings for about the same rate they were already paying in lesser class properties. This upward migration has left the office market with an abundance of Class B and C buildings that have traded tenants amongst themselves. Due to the large quantity of these Class B and C class buildings, average lease rates have dropped from $14.10 to $13.68 per square foot in the fourth quarter. Additionally, there are very few high-end buildings with large contiguous floor plates available in the market.

The first quarter of 2005 is seeing a continuation of the same trends experienced in 2004. Preferred submarkets — specifically uptown and north I-25 — with newer buildings and good transportation resources are experiencing the lowest vacancy rates (8.6 percent and 11.1 percent, respectively). Conversely, the airport and downtown submarkets have vacancy rates of 24.5 percent and 15.8 percent, respectively. Downtown has been hit particularly hard by an exodus of Federal agencies to suburban build-to-suit properties. Like most western cities, Albuquerque remains committed to the automobile, and newer office properties with higher parking ratios can accommodate the denser employee ratios seen over the last 10 years.

Lease rates are increasing as the next generation of new construction for office buildings confronts higher land costs, high construction costs and newly imposed impact fees. The move to quality will continue because tenants are requiring facilities with large contiguous floor plates, good connectivity and adequate parking. The recent lease by the U.S. Forest Service at the San Francisco Building and One Sun Plaza is a good example of this. The Forest Service passed over less expensive properties because they didn’t have the amenities required. When the large floor plate space doesn’t exist in the market, as in the case of SBS and Thompson, these tenants have been able to stimulate build-to-suits for their needs. The net effect in the market is an increase in vacancy.   

Another trend that has been evident in the Albuquerque office market for the past 3 years has been the success of office condominiums. The market is well suited to professionals who wish to own their space. There are not many commercially zoned parcels of land that can accommodate a 2,000- to 7,000-square-foot user, so the condominium structure has allowed potential owners to share larger tracts of land. Low interest rates have made this market very competitive with leasing. In 2004, more than 80,000 square feet of new office condominiums were sold in the $150- to $200-per-square-foot range. 

In 2005, construction activity within the office market will remain strong. Once again, this will be driven by the market appetite for space that supports office practice and technology in the 21st century.

— Dan Newman is a vice president for CB Richard Ellis in Albuquerque.

Multifamily 

Albuquerque’s multifamily market continues to perform well. Recently released data from the Apartment Association of New Mexico showed overall occupancy at 94.3 percent based on the strongest fourth quarter performance since 1994. The local market typically displays some seasonality, with the second and third quarters usually outperforming the fourth and first quarters. The surprising fourth quarter showing bodes well for continuing strength in the Albuquerque apartment market. Because of these higher occupancies, there has been a reduction in rental concessions and a slight increase in rents across the market.

Fewer than 500 units were permitted in 2004, and the average has been slightly more than 600 units per year over the last 7 years. There are only a few parcels of land that are available for apartment construction within the city. Albuquerque has significant barriers to entry for new construction. To the north is an Indian reservation, to the east is the Cibola National Forest, to the south is Kirtland Air Force Base and to the West is the Petroglyph National Monument. Albuquerque’s west side is the only submarket that still has a significant amount of available land for single-family, retail and office growth. The restriction of available land creates high barriers to future development, which makes Albuquerque attractive to outside investors.

Sales of market-rate multifamily properties doubled in 2004. Like most of the rest of the nation, Albuquerque’s cap rates fell to an average of about 6.5 to 7 percent in 2004 and continue to drop. Some Class A properties have sold for around $100,000 per unit, Class B properties are selling in the $50,000 to $60,000 per unit range and Class C assets range from the mid-$30,000 to $40,000 per unit, depending on the submarket. Albuquerque continues to have an abundance of buyers with very little product currently on the market. Owners with a strong advisor and a good disposition strategy are seeing enthusiastic response to offerings, typically attaining at least eight to 10 offers, sometimes above the asking price.

— Steve Monroe, vice president, and Anita Maestas, associate, are members of the CB Richard Ellis multifamily team in Albuquerque.

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