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Monday, November 22, 2010
Industrial, Office Real Estate Still Moribund
By Richard Metcalf
Of the Journal
"Can anyone say 'flatline?'"
Asked during last week's luncheon meeting of NAIOP The Commercial Real Estate Development Association, Tim MacEachen's rhetorical question pretty much summed up the outlook next year for industrial and office real estate in the Albuquerque metro area.
Prospects for 2011 show little room for improvement over 2010, which proved harsher than expected on the two commercial property types. Tight financing and the absence of job growth will continue to be a drag on the market.
An industrial broker at Grubb & Ellis New Mexico, MacEachen was one of three speakers at the NAIOP luncheon from the New Mexico chapter of the Society of Industrial & Office Realtors, a professional designation. The SIOR market update, attended by about 400 people, is an annual event at NAIOP.
The SIOR forecast for vacancy rates, a key measure of commercial real estate health, is as follows for next year:
• The industrial vacancy rate is expected to drop from 10.4 percent in the third quarter to 9.3 percent by the end of 2011. The drop will be due largely to the anticipated demolition of the shuttered General Electric jet-engine plant, which now contributes 450,000 empty square feet to the vacancy rate.
• The office vacancy rate is expected to drop from 18.1 percent in the third quarter to 18 percent by the end of 2011. The stable vacancy rate is based on no major company closings or mass layoffs, noted luncheon speaker Dan Newman of CB Richard Ellis.
The office market has been particularly sensitive to the more than 20,000 jobs lost in the metro over the past three years.
"Jobs spur office space absorption, home sales and consumer spending," said Terri Dettweiler of CB Richard Ellis, moderator of the SIOR presentation. "Employment is the basic fuel for economic development."
Beyond jobs, however, commercial real estate has stalled because of trends in financing since 2008.
"You would have to have been living under a rock not to be aware of the changes," Dettweiler said. "Banks are once again being held to higher standards and tighter regulation."
The lending environment has a similar feel to what it had in the late 1990s, Newman said. Investment deals require more cash — typically in the 30 percent to 35 percent range — and are tied to existing leases or pre-leases, he said. The spread on interest rates will be in the 300-basis-point range over treasuries, not the thin spreads at the height of the market.
"Underwriting will be based on current income, not pro forma income," he said. "Lenders may require reserves for interest, tenant improvements and brokerage fees."
One curious aspect of industrial and office real estate in Albuquerque is the stability of the asking lease rates. Around the country, rates have fallen on average from 5 percent to 11 percent since the recession spread into commercial markets.
In Albuquerque, the average asking lease rate for industrial space was $6.57 a square foot in the third quarter, one penny off the 10-year average rate of $6.58. The average asking rate for office space was $16.49 a square foot, which is a 5 percent premium on the 10-year average rate of $15.67.
"I would warn the audience that 'askin' ain't gettin,'" MacEachen said. "There is a marked difference between asking rates and the rates that are being realized."
From a national perspective, Grubb & Ellis chief economist Robert Bach told the NAIOP luncheon that the threat of a double-dip recession has disappeared with the growth in gross domestic product. Employment is expected to increase slowly because of the levelling off of worker productivity, but any kind of strong job growth is still likely a couple years away, he said.
The Great Recession officially ended in June 2009; thus the national economy is generally viewed as in a soft recovery mode. As a rule of thumb, New Mexico lags national economic trends by 5 to 6 quarters and thus may be close to emerging from its late-stage recession, Dettweiler said.
Lewinger easing back
John Lewinger sat in his small windowless office last Tuesday, door closed to the noise of the party celebrating the 25th anniversary of the company he founded.
"This is a nonretirement party," he said. "I'm 65 years old. I expect to be able to put in a reasonable workweek for the next 10 years."
But he's no longer running what has evolved into Grubb & Ellis New Mexico, one of the top full-service commercial real estate companies in Albuquerque with about 100 employees and offices in Las Cruces and Santa Fe. Former SunCal executive Will Steadman has taken over as CEO.
Lewinger will linger on as the company's qualifying broker for the next six months, possibly longer, and remain on the board of directors. He'll also remain on the boards of First National Bank of Santa Fe, Stewart Title and Greer Enterprises, a real estate company in Santa Fe.
Beyond that, Lewinger said he's returning to his roots in commercial real estate – doing deals – by helping "mature, high net-worth individuals find quality properties." Although he hasn't done any direct transactions in 15 years, he said he's enjoyed the art of the deal vicariously by advising young brokers on his staff.
"I've gotten my excitement through them," he said. "Now I'll get some myself."
Lewinger founded The Lewinger Company in 1985 after a stint as president of Walker Hinkle Co., once a real estate powerhouse in the metro. Two pivotal points in the company's history occurred in 1990, when he joined forces with John J. Hamilton to form Lewinger-Hamilton Inc., and in 1997, when the company affiliated with Santa Ana, Calif.-based Grubb & Ellis.
While Tuesday's celebration carried on, Lewinger was asked if he minded trading in his spacious executive office with the panoramic view for an apprentice-sized interior office.
"I don't care anymore," he replied. "All that stuff that used to be important isn't anymore. The computer works, the phone works – what more do you need?"
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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