WESTERN SNAPSHOT, SEPTEMBER 2005

Albuquerque Multifamily Market

Boardman

Rental demand is strong (94 percent occupancy) and growing, a direct result of the state’s expanding economy. New Mexico’s job growth for the last 3 years has bounced around between 2 and 3 percent per year, a number about on par with other Southwest cities, but better than the nation as a whole.

The supply of new apartment units, on the other hand, remains severely constrained. There is a common misconception about Albuquerque that land for development is abundant. Flying in, seeing the vast open expanses of earth, this would certainly seem to be the case. It isn’t. Geographically, Albuquerque is nearly hemmed in. To the south, growth is restricted by the Kirtland Air Force Base (AFB) and the Albuquerque International Airport. To the east, the Sandia Mountains form a natural barrier. To the north, the land is owned by Sandia Indian Pueblo. This only leaves the west, across the Rio Grande river, for expansion. Although a smattering of projects has been constructed on the west side, it is a less than an ideal location. From a competitive standpoint, west-side apartments compete head-on with inexpensive track homes. Denizens of the west side typically face an arduous commute across the river to downtown, Kirtland AFB and Northeast Heights jobs. The morning commute is eastward, looking into the rising sun, and the evening commute is westward, looking into the setting sun. It is no wonder that west-side apartments don’t compete well with their counterparts on the east side of the river.

Although detached single-family homes, at least on the west side, do compete with apartments, their affordability is eroding. This August, as part of a smart-growth initiative, Albuquerque instituted a series of impact fees for new building development, particularly in the outlying areas. Designed to encourage infill development, these fees will add up to $10,000 to the cost of building a new home on the west side. The fading affordability of homes in this submarket will likely further increase demand for apartments and condos. Builders wishing to avoid paying these impact fees are leapfrogging to developments in neighboring counties that do not impose the fees, but the long commutes make this an unattractive option for most home buyers.

The combination of these trends — an ever-expanding workforce, scarce and not well-located land for new apartment construction, and increasing costs of new detached single-family homes — signals an impending “perfect storm” triggering rising apartment occupancy, rising rents and, consequently, rising values.

What does the actual deal landscape — the price and sales data — look like? Cap rates in the mid-7 percent range for most mid-size to large apartment deals are the norm, but drop into the 6 percent range for newer Class A properties. Rates climb to the 8 percent range for Class C properties. Per-unit costs range from $40,000 for Class C properties to $80,000 for Class A properties.

There is room for select and well-planned condo conversions. Condo conversions that compete with the droves of west-side tract homes will likely fail. However, what will likely do very well are condo conversion projects in solid Northeast Heights areas, where no new home construction is possible and where the subject apartment property is appropriate — large unit size and heavy on amenities. New loft properties in the redeveloping downtown core and the trendy Nob Hill shopping district are setting new and “lofty” price points.

Albuquerque’s attractive yields and positive outlook are hard to resist for California buyers, who are selling their properties at 3 and 4 percent cap rates. Albuquerque’s multifamily value proposition and positive trends for the future have it put it squarely on the investor’s map.

Daniel Boardman is a broker with New Mexico Apartment Advisors.

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