When a city grows, where does it go?
With rock bottom vacancies in the industrial real estate market and increasing demand in all real estate markets, finding affordable space is becoming more difficult around Albuquerque.
Persistent supply chain issues and a labor shortage have contributed to rising costs, reducing new construction – and thus, supply – across retail, industrial and office real estate.
“The market is really all over the place,” said Steve Lyons, retail broker at SVN/Walt Arnold.
The industrial commercial real estate market has been particularly squeezed, with historically low vacancy rates around the city, as well as across the nation. Albuquerque has almost identical industrial vacancy rates to the national average, but slightly less available space than similarly sized markets.
Industrial broker Bill Robertson, senior vice president and principal at Colliers International, said he’s never seen levels this low.
“Not in my lifetime,” Robertson said. “And I’ve been working in this for 40 years.”
Amid high demand, low supply and nationwide inflation, prices are up; a recent CBRE report found that in Q3 of this year, the median leasing price increased by 38%.
Robertson said many people looking for warehouses are desperate enough for space that they’ll “make do” with what they have. And if Albuquerque doesn’t have that supply, they’ll look elsewhere.
Jim Smith, first vice president of CBRE, said there’s been little new industrial construction in Albuquerque for the past decade.
But that’s starting to change.
“There is more speculative construction of industrial property, probably, than there’s ever been,” Smith, who specializes in industrial properties, said. “There had been quite a lull for about a dozen years – and that has changed in the past 18 months.”
According to the October CBRE report, there’s 528,636 square feet of industrial property under construction, with a 15,715-square-foot speculative project under construction in Rio Rancho. However, Smith noted that much of this new construction won’t be usable for a while. Supply chain issues have extended construction times, delaying the incoming wave of new properties.
“It’s got everybody pulling their hair out,” Smith said.
Albuquerque has slightly more wiggle room in office real estate, with more properties available to rent than in Tucson and Colorado Springs. But the number of office spaces available to rent has remained stagnant in the city for many years.
“There has been very little new supply in Albuquerque for the last 20 years,” said Walt Arnold, managing director of SVN/Walt Arnold Commercial Brokerage Inc. “I mean, we have not built any considerable office space for quite a while.”
A July Colliers report said that there was no new office space under construction in the city.
Arnold said that rising costs have pinched new construction for new office spaces, with more developers choosing to adapt existing properties to office use rather than build new.
But even building rehabilitation and general maintenance have raised in price as well.
“Everything: the taxes, the insurance, the janitorial, the landscaping, the heating, ventilation, air conditioning, all those costs that it takes to run an office building are increasing,” Arnold said. “But the cost to do that is not rising as much as the rents are rising.”
Arnold said office rents in Albuquerque have remained flat or risen only slightly, despite the increasing costs for landlords. Competition from other markets has kept rents relatively affordable in the city.
Arnold sees more change on the horizon as employers evaluate how they want to use space in a post-pandemic era.
“To have people in the office is what a lot of the leaders of companies feel is the right thing to do,” Arnold said. “And a lot of employees feel that they can work from anywhere. So I think those two dynamics will continue to kind of battle each other for the next several years … As leases start to expire, I think a lot of people will say, how much space will we need? Do we need what we have? Or can we deal with less space?”
Like office space, the retail real estate market has a higher vacancy than the industrial market.
But, a nationwide boom in new small businesses has sparked increased demand for small retail spaces, said SVN/Walt Arnold broker Lyons.
According to data from the U.S. Census Bureau Business Formation Statistics, New Mexico saw an almost 10% increase in the number of Employer Identification Number business applications between August of this and last year.
“It’s not quite as tight of a market as industrial, but it’s still very healthy, very strong,” said Ben Perich, vice president of Colliers International in New Mexico. “It is still a landlord’s market, more so than a tenant’s market.”
That demand isn’t even across the market; the best spaces – Class A and new construction – are filling up quickly, Lyons said. Class A office spaces are generally in prime locations, in good condition, and have more amenities than other office spaces – and charge higher rent.
But, for less desirable properties, there’s a “persistent vacancy,” Perich said.
Lyons echoed that sentiment.
“I’ve got some properties that are slow to lease, and then I have some properties that are 100% leased,” Lyons said.
The types of properties that renters look for are changing as well, Lyons said. He’s seen more interest in smaller properties that house just one business instead of large, multi-tenant strip malls.
“You have to turn around and charge them top-of-the-market rents to justify the construction costs (for multi-tenant properties),” Lyons said.
Similarly, he said that rehabbing old buildings for new uses is more popular in the retail market because it saves some of the cost of new construction.
Between labor shortages and supply chain issues, Perich said he’s seeing problems in increasing supply in certain areas of the city.
“We’ve got some negative headwinds that are going to keep a lid on, you know, the ability to quickly add more supply,” Perich said.
The city grows
CBRE’s Smith said that many developers and corporations are moving into “tertiary” markets like Albuquerque – with Amazon’s Albuquerque move last year as an example.
“Amazon had expansion in this market a year ago,” Smith said. “They didn’t need expansion in LA, or Dallas or Seattle, because they’d already built warehouses in those markets. … They look at places like Albuquerque and say, ‘Well, we don’t have a facility there, so let’s invest in that market.'”
Between June 2021 and 2022, Bernalillo County collected $51 million more in gross receipts tax – an increase of about 22%.
“I’m so excited about our Albuquerque-area economy because it’s expanding very nicely,” Lyons said. “After years of being sluggish, it’s not flat. And I think that’s great for our city.”
“I’m bullish on Albuquerque,” Arnold said. “I still think Albuquerque has got a lot of growth ahead of it. I think the forecast for us is good.”
Although Robertson said that his warehouses have been flying off the shelf, eventually, he said that the market might even out.
“This is cyclical, and it does change,” Robertson said. “There’s a rosy end to the story at some point.”