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Monday, September 13, 2010
Commercial Real Estate Values Dip 20%
By Richard Metcalf
Of the Journal
Commercial real estate values have dropped by an average of just more than 20 percent in New Mexico since the deal-crazy days of just three to four years ago, according to a recent survey of brokers, owners, investors and appraisers by Albuquerque-based Cantera Consultants & Advisors Inc.
Almost three-quarters of those surveyed – 59 out of 80 respondents – said they've seen a decrease in the value of their properties from 2005 to 2010. The survey turned up similar results regarding decreases in both rental and occupancy rates at their properties.
"All in all, while this matches an overall downward trend in pricing that the rest of the nation has seen ... it is better than the national averages," said Todd Clarke, CEO of both Cantera Consultants and its sister brokerage company N.M. Apartment Advisors Inc.
Nationwide as of July, commercial real estate prices were 38.9 percent below the peak recorded in October 2007, according to the Moody's/REAL All Property Type Aggregate Index.
The drop in commercial real estate values is a function of an increase in cap rate, short for capitalization rate, which is based on a formula and commonly used to evaluate the risk and rewards of buying a property. Cap rates are influenced by broad market forces, including supply and demand, and tend to go up when buying commercial real estate is seen as a riskier investment.
Now is such a time.
The average cap rate in New Mexico, blended across all property types, was 7.7 percent in 2005. The rate dropped to 7.4 percent in 2006-07, which were the height of the let's-make-a-deal years in commercial real estate.
The average, blended cap rate increased to 8 percent in 2008 as the economic recession spread from residential real estate to the commercial side. The rate jumped to 8.9 percent in 2009 and is currently at around 9.5 percent, according to the Cantera survey.
Although he has kept track of cap rates in the apartment market for years, Clarke only saw the need recently for a broader survey of cap rates across the major commercial property types.
"When we started doing property tax protests, we thought we needed something like this to quantify values," he said.
Each percentage point increase in cap rate translates to a roughly 10 percent drop in a property's value. As an example, Clarke cited a case scenario of a mini-storage property that has a consistent net operating income of $100,000, which is the rental income minus expenses and lost income from vacancies.
"In 2005, a 7.5 percent cap rate would indicate a value of $1,333,333," he said. "By 2010, investors were looking for a 9.5 percent cap rate – (as a result) the value had decreased to $1,052,632 for an effective decrease in value of $280,701 or 21 percent."
Cap rates vary from one property type to another, although all are headed in the same upward direction. Here's how average cap rates have moved by property type over the past five years:
• Office: Dropped from 7.8 percent in 2005 to a low of 7.5 percent in 2006, then rose steadily to 9.6 percent in 2010.
• Retail: Dropped from 7.4 percent to a low of 7.1 percent in 2007, then rose steadily to 9.8 percent in 2010.
• Warehouse: Dropped from 8.7 percent in 2005 to 7.9 percent in 2006-07, then rose steadily to 9.7 percent in 2010.
• Industrial: Dropped from 8.5 percent in 2005 to 7.8 percent in 2006, then rose steadily to 9.9 percent in 2010.
The local apartment market deserves special mention because, as an investment, it has done well in terms of increasing rents and occupancy. Nevertheless, after the average cap rate dropped from 6.9 percent in 2005 to a low of 6.4 percent in 2007, it rose steadily to 8 percent in 2010.
The increase in cap rate has less to do with performance of apartment properties as an investment, than it has with "some uncertainty about property values since so few deals have traded in the last 20 months," Clarke said.
Cantera's survey, conducted in June and July, had a comparatively strong 11 percent response from the 700 commercial real estate professionals who got it.
New CNM building opens
The 106,500-square-foot, two-story Student Resource Center, the first new instructional building built on the Central New Mexico Community College main campus since 1991, is open for the fall term.
The $32 million project provided more than 200 construction jobs from groundbreaking in early 2009 to completion in August, said CNM spokesman Brad Moore. Most of the financing came from voter-approved general obligation bonds. The general contractor was Albuquerque-based Gerald Martin.
The center is the new, larger home for the main campus library formerly housed in the Jeannette Stromberg Hall, which is undergoing a renovation. The Information Technology Services office relocated from the A Building, while the Assistance Centers for Education consolidated to the center from offices in Jeannette Stromberg Hall and Ken Chappy Hall.
The center also has general classrooms, conference rooms, study areas and a cafe.
The building itself is designed to meet the requirements of silver certification in the U.S. Green Building Council's Leadership in Energy and Environmental Design program. In addition to the use of recycled, renewable and environmentally friendly materials, the building is designed to make optimal use of natural light during the day for energy efficiency.
CNM's Student Resource Center was built on the site of a baseball field behind neighboring Heights Community Center.
Consolidating move
Energy Balance & Integration, a 34-year-old company with 27 employees, has begun a gradual consolidation to 5,040 square feet at 8915 Adams NE near Balloon Fiesta Park from its current 2,000-square-foot headquarters in Broadbent Business Park and a satellite office in Rio Rancho.
"We had the need to grow a little bit," said owner Anthony Kocurek. "The Alameda corridor is a great location, centrally located, and we could be under one roof."
The company tests and balances heating, ventilation and air-conditioning systems in large commercial buildings, often in the capacity of third-party verification of an HVAC system's energy efficiency.
Demand for testing and balancing HVAC systems isn't a new phenomenon triggered by green building codes like the U.S. Green Building Council's Leadership in Energy and Environmental Design program. Energy Balance & Integration traces its roots back to 1976 after energy efficiency burst into public consciousness with the OPEC oil embargo of 1973, Kocurek said.
The company will occupy space at 8915 Adams NE vacated by a government contractor that expanded elsewhere. Little in the way of tenant improvements was needed, Kocurek said.
Into new home
New Mexico Donor Services has moved into its new $2.8 million, 15,500-square-foot building at 1609 University NE, behind fellow nonprofits United Blood Services and Camp Fire USA.
Previously based in about 4,000 square feet at Broadbent Business Park, the organ and tissue recovery agency has seen a 142 percent increase in organ donors over the past five years.
The new building was more than three years in the works and was financed through parent company Dialysis Clinics Inc. It has a tissue recovery suite and large meeting spaces for hosting health care partners, volunteer groups and donor families.
Richard Metcalf covers commercial real estate for the Journal. You may reach him at 823-3972 or class="black">rmetcalf@abqjournal.com.
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