Metro office vacancies stuck in slim range

“For the last 10 quarters, vacancy has fluctuated around the 18 percent level,” says the latest Office Trends Report by Grubb & Ellis New Mexico. “Holding in such a narrow vacancy range for this long of a time period is unprecedented.”

The office market, hard hit by the sluggish local economy, ended 2012 with a vacancy rate of 18.9 percent, the same rate as the preceding third quarter and a modest increase from 18.5 percent in the fourth quarter of 2011, according to Grubb & Ellis data.

The average office vacancy rate nationwide, which peaked at 18 percent in mid 2010, was 15.4 percent at the end of 2012.

Albuquerque’s office vacancy rate first passed the 18 percent threshold in the third quarter of 2010 and has remained at that elevated level ever since. Before 2010, the metro hadn’t seen an office vacancy rate of 18 percent and higher since the late 1980s.

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“The flow of the economy is against it,” said Terri Dettweiler of CBRE, a commercial real estate services firm, about the potential for a turnaround in the office market. “The office market is closely tied to jobs.”

The metro’s employed workforce has generally been shrinking since mid-2008. Roughly a year later, offices began to go empty, slowly at first, then at an accelerating rate in 2010.

The financial consequences of a high office vacancy rate ripple through the local economy, said Walt Arnold of Sperry Van Ness.

An increase in the vacancy rate from a historical average of 13 percent to the recent level of 18 percent translates to about 900,000 square feet of office space going empty in the metro, he said. At an average lease rate of $15.50 a square feet, the empty space “equates to $14 million per year of lost income in the Albuquerque office market,” he said.

While the landlords bear the brunt, Arnold said, “The lost revenue expands to all the vendors that would supply office products, copiers, furniture, carpet, paint, computers and the list goes on and on.”

Vacant office space also means government entities are not collecting tax revenue — gross receipts tax from business, income tax from wage earners — that would otherwise be forthcoming if the space were occupied, he said.

The office market’s static vacancy rate, stuck at roughly 18 percent for more than three years, has not been the norm.

Over the five years between the fourth quarter of 2004 and the fourth quarter of 2009, the vacancy rate had a four percentage-point range of about 11 percent to 15 percent, according to Grubb & Ellis data. The average quarterly change in the rate was 0.6 percent.

Since reaching the 18 percent threshold in 2010, the average quarterly change has been 0.2 percent.

The biggest bright spot in the otherwise-static office market during 2012 was the opening of the Lowe’s Customer Service Center in a 65,000-square-foot building at 6301 Jefferson NE early in the year. The center is projected to grow to 900 employees.

The Mooresville, N.C.-based home-improvement giant plans to expand the service center to a 30,898-square-foot building next door at 6401 Jefferson NE in March. The company also has 14 big-box stores in the state.

Lowe’s was the exception rather than the rule. Ken Schaefer, director of brokerage services at Grubb & Ellis, said, “during 2012, very few new tenants opened offices in the metro.”

Here’s a list of other large, positive lease deals last year compiled by Schaefer:

♦ The American Red Cross increased its space by almost 50 percent with its move into 14,700 square feet at 7445 Pan American NE in the second quarter.

♦ Lovelace Health Plan expanded to 19,581 square feet at 7850 Jefferson NE in the third quarter.

♦ Potomac, Md.-based Total Wine & More signed a lease to occupy 24,143 square feet at 6701 Uptown NE, which will convert the building from an office use — it formerly housed Morgan Stanley — to retail use.

Here’s a list of larger leased spaces that went vacant, which Schaefer said typically involved the tenant moving into higher quality buildings:

♦ REDW Business and Financial Resources vacated the 30,898-square-foot building at 6401 Jefferson NE, soon to accommodate the Lowe’s expansion, to move into a larger, build-to-suit building at Journal Center.

♦ The Drug Enforcement Administration vacated 32,756 square feet at 301 Dr. Martin Luther King Jr. SE to move into a 33,000-square-foot, build-to-suit facility at the Mesa del Sol master-planned community.

♦ The City of Albuquerque vacated 19,275 square feet at 1820 Randolph SE as part of a consolidation of operations elsewhere.

♦ Albuquerque-based Ultramain, a software company, vacated 13,837 square feet at 7500 Jefferson NE after purchasing its own 31,000-square-foot building at Journal Center.

♦ Culver City, Calif.-based Sony Pictures Imageworks vacated 23,503 square feet at 400 Tijeras NW after closing down its Albuquerque operation.

♦ Albuquerque-based Los Alamos Technical Associates vacated 15,900 square feet at 2424 Louisiana NE for a move to nearby One Park Square, one of the city’s Class A office buildings.