A new phase of industrial development?

Copyright © 2021 Albuquerque Journal

For the first time in years, Albuquerque developers have started building industrial space on a large scale without having tenants lined up, which may mean relief is on the horizon for the city’s notoriously tight industrial real estate market.

“It’s finally been pushed over the edge … in terms of getting developers to pull the trigger on projects without necessarily having leases in place,” said Riley McKee, senior advisor for NAI SunVista in Albuquerque.

SunVista’s most recent quarterly report on the industrial market, published in late October, shows the industrial vacancy rate has dropped lower than ever, to 1.39%, after years of decline.

However, the report also notes that four large projects, totaling around 500,000 square feet, are in various stages of construction, design and planning.

Erick Johnson, managing broker at Johnson Commercial Real Estate, said one warehouse, a 150,000-square-foot facility located at 7200 Bluewater NW, is currently under construction, with others in the pipeline.

Other developers, including Albuquerque-based Titan Development, declined to comment on the specifics of projects in the works before construction begins. However, McKee said the new projects are largely concentrated on the city’s West Side, near Interstate 40.

Additional projects, totaling 665,000 square feet, have been proposed with no timeline yet, according to the report.

McKee said the new developments in progress, which would nearly double the amount of industrial space available for lease, would be a welcome relief for bulk distributors and large manufacturers.

However, the builders venturing into the speculative market are facing challenges of their own, from labor shortages to high commodity prices, that threaten to delay or derail at least one of the long-awaited projects.

“We’ve got to figure it out,” said Scott Goodman, vice president at Goodman Realty Group. “… Otherwise, no new industrial (space) will be built for a very long time.”

Current challenges

The new projects are significant in a city that has historically not seen a lot of industrial construction built on spec, or without a tenant lined up.

“Our market has historically not been a very speculative market,” Johnson said.

Bill Robertson, senior vice president and principal at Colliers International’s Albuquerque office, said Albuquerque has not seen a large-scale industrial property built without a tenant lined up since before the Great Recession.

As a result, the industrial vacancy rate has been trending down in Albuquerque for years, as growing companies work through the city’s existing supply of industrial space without much new development in the pipeline.

“It’s a supply and demand issue: lots of demand, no supply,” Robertson said.

Robertson said a pair of recent changes in Albuquerque have exacerbated the shortage. First, the COVID-19 pandemic and associated restrictions caused stores to close, prompting a number of retailers to pivot to an e-commerce model. Robertson said he expects the trend to continue, even as the pandemic abates, noting that the sector still has room to grow in Albuquerque and across the country.

Secondly, Robertson said other markets that have legalized recreational cannabis have seen industrial vacancy rates drop as producers look for space to grow and extract cannabis.

“They’re out looking and there’s nothing available,” he said.

Consequently, Albuquerque’s already-low industrial vacancy rate has plummeted in the past 12 months. SunVista’s report notes that 543,363 square feet of industrial space were available in the third quarter of this year, down 49% from the same quarter in 2020, itself a near-record low at the time. Robertson said the space that is still available is generally older, and not suitable for modern manufacturers and distributors.

Local and state economic development leaders have noticed that the lack of space leaves Albuquerque at a competitive disadvantage when bidding on projects. A report commissioned by the state Economic Development Department urges the state to pursue industries that need warehouse space, including the advanced manufacturing industry, but acknowledges that the lack of shovel-ready industrial sites is a weakness.

“Despite abundant land in the state, site selectors have had difficulty in finding land that is suitable for light manufacturing and industrial activity,” the report reads. “Specifically, the lack of facilities, infrastructure and building specifications desired by manufacturers have led some out-of-state manufacturers to decide against locating in New Mexico.”

Shocking costs

Even with projects in the pipeline, developers are finding it challenging to bring them to fruition. One of the largest planned developments, an approximately 400,000-square-foot complex being developed by the Goodman Realty Group, is likely to be scaled back, Goodman confirmed Wednesday.

Earlier this year, the company announced plans for a three-building industrial complex at the corner of Central Avenue and 118th Street, totaling 400,000 square feet. However, Goodman said the company is looking to “value engineer” aspects of the project, which could include shrinking the footprint of the building.

“We’re trying to figure out how to make it work, because we need for it to work,” he said.

Goodman cited the high cost of materials and the shortage of labor as reasons for the delay. He noted that concrete prices, which have soared this year due to supply chain challenges, and high construction demand, came back higher than expected.

Multiple brokers noted that contractors have been busy with build-to-suit projects for Amazon, Facebook and other large companies. Goodman said labor shortages are also a contributing factor, meaning that contractors have less capacity to take on new projects.

“They’re just slammed with what they have,” he said.

Goodman said developers in other states have told him they’re surprised at how much more expensive building in New Mexico can be, which Goodman believes is due to New Mexico’s tax structure and the state’s relatively small industrial construction sector.

“Everybody’s shocked at how much it costs to do construction here,” he said.

As a result, Goodman said his team will look at all aspects of the West Side project, considering removing some of the dock doors or having fewer buildings.

“As a developer, you always hit hurdles and you just need to figure out how to go through it,” he said.

The future of industrial?

Despite the challenges, brokers remain heartened that lease rates have finally risen to the point where it’s cost-effective for builders to build on spec going forward.

The SunVista report shows that lease rates inched above $8 per square foot earlier this year and currently sit at $8.70. McKee said this recent uptick put leases in the range where more developers would look at building without a tenant lined up.

“Landlords and developers are confident they can get the deal done before the building is complete, just because of the energy that’s in the market,” he said.

McKee said most of the new development in the city is clustering on the western edge of the city near I-40, which offers easy transportation access to other markets. The area has been popular among new arrivals to the city, with Tempur-Pedic and Amazon each establishing locations near the east-west interstate.

“That’s where a lot of the future growth is. … It’s really the only place we can grow,” McKee said.

McKee added that he’s hopeful the planned developments will help the city meet demand for space, but he acknowledged that most of what’s being built is on the larger side, intended for bulk distributors. Even with new projects in the pipeline, smaller distributors and manufacturers may not find the space a good fit. McKee said he’s hopeful rates are high enough to make some smaller spaces feasible for developers in the next few years.
”It’s just another segment of the market that’s currently untapped,” he said.