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Thursday, July 24, 2008

Office vacancies jump in metro area

By By Richard Metcalf
Journal Staff Writer
      Demand for office space weakened in the second quarter, with the vacancy rate jumping from 11 percent in first three months of the year to 12.7 percent, according to Grubb & Ellis New Mexico.
    "We have not seen such a big increase in vacancy since we began tracking the market in 2001," said Ken Schaefer, who spearheads the company's Market Trends reports issued quarterly.
    Vacancy rates in commercial real estate typically fluctuate by just a few tenths of a percent from one quarter to the next.
    The biggest factor in the second-quarter jump was more than 170,000 square feet of new office space coming into the lease market empty in the second quarter, according to the report. Other factors include a bank downsizing and a private university repositioning within the metro.
    It's normal for new office buildings, if built without tenants lined up in advance, to open with a lot of vacant space, said Dave Hill of Maestas & Ward Commercial Real Estate. "It takes time to lease up," he said.
    For practical purposes, the asking lease rates are around $22.50 a square foot in the four projects that opened in the second quarter. In comparison, during the second quarter, the average asking lease rate metrowide was $17.54 a square foot for Class B space, which is the biggest and most active segment of the office market.
    Asking lease rates are higher in new office buildings primarily because of steadily rising construction costs, although government fees and land prices are also factors. The higher lease rates can discourage many potential renters.
    On a national basis
    The Albuquerque metro's vacancy rate of 12.7 percent compares favorably with the national average of 14 percent for office space in the second quarter, according to Grubb & Ellis.
    "We're doing better in Albuquerque," said Scott Throckmorton of Argus Investment Realty. "The office market is keeping its chin up."
    Not that Albuquerque is immune to concerns about the slowing national economy and increasing energy and food costs.
    Much of the local activity in the office lease market is from existing companies investigating the potential for a relocation, then frequently deciding to stay where they are, said Trudy Jones of Grubb & Ellis.
    "We're seeing activity, but not much movement," she said.
    The largest single move in the second quarter was Bank of America vacating 40,000 square feet in its flagship building at 500 Fourth NW in Downtown. Bank spokeswoman Britney Sheehan said: "This is about space optimization timed to coincide with a lease expiration, not a work force reduction."
    The asking lease rate for the vacated space is $16.50 a square foot, full service. Parking costs extra.
    A changeover
    Originally the headquarters of Albuquerque National Bank, the 230,000-square-foot building was built in two distinct phases, one completed in 1976 and the other in 1984.
    "Since it was born, it's pretty much been a bank building," said Throckmorton, who is the building's leasing agent. "Now it's going to become a multi-tenant building."
    Elsewhere during the second quarter, the University of Phoenix moved into its new 32,000-square-foot build-to-suit building at 5700 Pasadena NE, just off Pan American Freeway north of Alameda.
    In the process, the university vacated about 40,282 square feet in two buildings in the Journal Center area. Its former signature building at 7421 Pan American NE, which the university had occupied since 1989, is available at an asking lease rate of $16.50 a square foot, plus expenses.
    Also in the second quarter, the U.S. Forest Service moved into just over 29,000 square feet at Jefferson Plaza at 4041 Jefferson Plaza NE. The move is an expansion of the agency's human resources and financial services operation at the Journal Center.
    The 77,000-square-foot Jefferson Plaza, which opened in the first quarter, is now 100 percent leased, said Throckmorton, who is the building's leasing agent. Other tenants include PR Newswire and CH2M Hill.
    Construction update
    Office construction still appears strong in the metro, with Grubb & Ellis reporting nearly 375,000 square feet under way in the second quarter.
    The majority of the activity — roughly 270,000 square feet — is at Mesa del Sol, the giant master-planned community south of the airport. The two buildings are offices for Boston-based Fidelity Investments and a town center building.
    The remainder of the construction is primarily in smaller speculative projects. From 2003 through 2007, the metro averaged just over 200,000 square feet of office construction each year, according to Grubb & Ellis.
   

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