WESTERN SNAPSHOT, SEPTEMBER 2006

Albuquerque Office Market

Arnold

The new space represents an inventory increase of 6.6 percent, but it’s unlikely that the city’s market-wide vacancy rate will increase because most of the new construction is either build-to-suit or significantly pre-leased. At the end of the second quarter, Albuquerque’s office vacancy rate was 10.9 percent — the lowest it’s been since 2001, according to REIS.

The research firm predicts that Albuquerque’s vacancy rate will continue to decrease during the next 4 years, falling to 9.2 percent by 2010. The city is outperforming the rest of the nation when it comes to its vacancy rate — the national rate is 13.5 percent, according to REIS — and is performing in line with Phoenix and Las Vegas.

However, Albuquerque’s rental growth lags behind other western cities and the national average, according to REIS, which predicts that the city will boast 2.6 percent rental growth this year compared to the nation’s 4.9 percent. The average asking rate is $15.76 per square foot — the highest rate since the late 1990s. The good news is that the city is expected to experience positive rental growth in the next 4 years, reaching $17.51 per square foot in 2010, a 2.9 percent increase, according to REIS.

While demand is impacting rental rates, the new construction also is influencing rental rates for existing buildings. Because the cost of construction is so high, the rates for new buildings have spiked, and owners with older buildings are able to boost their rental rates without worrying about losing tenants.

Today, several local companies are in expansion mode, yet they have nowhere to grow and are being forced to construct new buildings. For example, the U.S. Forest Service built a 92,000-square-foot building, while Blue Cross Blue Shield is in the midst of developing an 110,000-square-foot structure, both in the North Valley/Interstate 25 corridor. Most of the new office buildings are going up in that Albuquerque submarket. In fact, 60 percent of the city’s office development is concentrated there, according to REIS. This particular submarket benefits from the two crossings over the Rio Grande, allowing it to connect to both the east and west sides of the city.

Companies are moving to the North Valley/Interstate 25 submarket because they want to be able to attract employees from the well-established east side and the growing residential neighborhoods on the west side. In particular, office condos of 1,000 square feet and larger are a hot commodity in this expanding submarket. Just 18 months ago, office condos were selling for $180 per square foot; today, they’re trading at $200 per square foot or more.

Other than office condos, few large office buildings in Albuquerque have changed hands in the past year given the small inventory of class A buildings. However, one of the city’s largest Class A office buildings, a 121,000-square-foot property along Interstate 25, recently was acquired by Bay Area-based Westlake Development for about $24 million.

Because it’s a much smaller market than Phoenix and Las Vegas, Albuquerque’s absorption during the past couple of years seems somewhat anemic — the city absorbed 191,000 square feet in 2005, according to REIS. However, that number is a big improvement from 2002 and 2003 when the city had negative absorption of 120,000 square feet and 229,000 square feet, respectively.

REIS estimates that Albuquerque will record more than 200,000 square feet of positive absorption in 2006 followed by 4 more years of robust absorption. In 2010, for example, the firm predicts that 314,000 square feet of office space will be absorbed.

Much of the future office demand will come from both new and existing companies. For example, Pacific Ventures has indicated that it plans to invest $75 million in the city to establish a movie studio, while Eclipse Aviation expects to bulk up its employee base to manufacture six-person jets.

New construction will continue to spring up on the west and south sides of Albuquerque. The city can’t grow north because the land is set aside for Native American reservations, and the mountains curtail the growth to the east. Toward the south, for example, Forest City Covington recently broke ground on Mesa del Sol, a 12,000-acre project that will take 35 to 50 years to build out. Planned with sustainable urban principles, Mesa del Sol will include 1,400 acres for industrial/commercial and office use, 4,400 acres for residential and retail use, 3,400 acres for open space and parks, and 800 acres for schools and universities.

Walt Arnold is a senior advisor with Sperry Van Ness in Albuquerque.

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