WESTERN SNAPSHOT, MAY 2007

Albuquerque Industrial Market

Schaefer

The Albuquerque metro industrial market expanded in 2006, absorbing almost 2 million square feet of space. Rental rates increased across all product types, spurring a modest level of speculative projects while the industrial vacancy rate declined an incredible 400 basis points. Strong absorption in new warehouse/distribution space, renovations of functionally obsolete buildings and completions of large build-to-suit manufacturing spaces drove much of the absorption. This year is poised to surpass 2006 construction and absorption levels, but should occur in large owner/user projects.

Warehouse/distribution properties performed the best in the industrial leasing market, continuing a trend that began in second quarter 2005. Most of the 675,000 square feet of absorption occurred in the North Interstate 25 and West Mesa submarkets, with spaces averaging between 50,000 to 100,000 square feet. Demand for these types of properties has been spurred by population growth in the Albuquerque metro area, which recently surpassed 800,000 residents. Because the city is strategically located at the intersection of interstates 40 and 25, it is well positioned to serve outlying market areas of New Mexico, west Texas, eastern Arizona and southern Colorado.

Ironically, despite its convenient locale for accessing remote parts of the country, Albuquerque is facing a shortage of industrial-zoned land. Landlocked by the Sandias to the east and tribal lands in the other three directions, tracts of land exceeding 10 acres with the necessary infrastructure are becoming increasingly hard to find. From a speculative development standpoint, this will have the effect of driving rates up in 2007. Combined with inflated construction costs, new speculative projects are expected to fall off from 2006 levels. The majority of speculative projects undertaken will likely occur in medium-sized warehouse and distribution projects.

To deal with higher construction and land costs, projects that reposition or renovate obsolete facilities are becoming more popular. Two such large projects started in second quarter 2006. The first involves repositioning the former Philips Semiconductor Plant, one of Albuquerque’s largest manufacturing buildings located in the North I-25 corridor. This former manufacturing plant contains 500,000 square feet on almost 60 acres. Titan Industrial Development is planning to turn the Philips facility into a mixed-use project. The first phase, a 195,000-square-foot data center, is currently underway. It features 22-foot ceiling heights, under-floor ventilation systems and redundant power. The balance of the property will be utilized for back office operations, retail and even hospitality uses.

The second industrial redevelopment project involves a former Siemens’s Plant that has remained vacant since 1993. Located in the Southeast Heights, the facility consists of 192,000 square feet of manufacturing space on 18.3 acres. One of the major renovations planned by the developer, MW Development LLC, is to bring the facility to current building standards and raise the ceiling from 19 to 26 feet. The site has eight mega watts of power available and is slated for flex, distribution and office uses.

Mesa Del Sol, one of the most unique developments in Albuquerque, is a large master-planned community located just south of the airport. Sitting on 23,000 acres, this project has an abundance of industrial land. During the first development phase, developer Forest City Covington is focusing on industrial land sales to users that provide a strong economic element in the form of jobs. Land sales to speculative industrial developers will not be available in the near future at Mesa Del Sol. Any speculative projects will be developed solely by Forest City Covington.

The South Valley is another area likely to see heightened industrial developments. With nearby Mesa Del Sol underway, the South Valley is no longer on the fringes of the city and interest is increasing in the area. Most importantly, this area is one of the last sectors in Albuquerque with a decent supply of large industrial land tracts although many of these tracts lack the necessary infrastructure for development. From a transportation standpoint, a planned interchange will improve access to both Mesa Del Sol and South Valley areas from I-25.

The overall leasing market should remain active in 2007. Rising lease rates will taper down demand, but with strong economic development already in the pipeline, the effect will be minimal. One recent win is Tesla Motors, which selected Albuquerque as its manufacturing site for luxury electric cars. The 150,000-square-foot manufacturing plant began construction in April and will employ 400.

— Ken Schaefer is director of brokerage services and associate broker for Grubb & Ellis|New Mexico in Albuquerque.


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