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Downtown a bright spot in ABQ office market

Copyright © 2014 Albuquerque Journal

bizO-Metcalf_Richard_BizOA real dark horse has emerged this year as the top-performing submarket for office space in the Albuquerque metro area, according to the latest Office Trends Report from Colliers International.

Downtown, which chronically underperforms the office market as a whole, has shown more improvement through the first nine months of 2014 than any other office submarket, including the North I-25 corridor and Uptown.

“Vacancy has declined every quarter this year and Downtown has also posted the highest amount of space absorbed (or occupied),” the third-quarter Colliers report says, attributing the improvements to initiatives related to developing Albuquerque’s technology sector.

The CNM STEMulus Center's move into the First Plaza Galeria earlier this year contributed to the brightening Downtown office scene. (Albuquerque Journal File)

The CNM STEMulus Center’s move into the First Plaza Galeria earlier this year contributed to the brightening Downtown office scene. (Albuquerque Journal File)

Just over 20,000 square feet of office space were occupied in the second and third quarters by Fat Pipe ABQ, an incubator and collaborative for information-technology businesses at Old Albuquerque High, and Central New Mexico Community College’s STEMulus Center, a workforce training center at First Plaza Galeria.

The upshot is that, since the end of 2013, the Downtown office submarket has registered a net gain of 120,000 square feet of space filling up, according to Colliers data. The vacancy rate dropped from 29.4 percent at the end of 2013 to 26.1 percent in the third quarter.

Over the same period, the metro’s overall office market languished. More space went vacant than filled up to the tune of 295,000 square feet. The metrowide vacancy rate climbed from 19.3 percent at the end of 2013 to 21.5 percent in the third quarter.

Downtown’s high vacancy rate – 26.1 percent versus 21.5 percent overall – is largely the function of one property: the eight-story, 246,853-square-foot Alvarado Square at 415 Silver SW. After leasing it for decades, PNM Resources moved out last year after selling off its natural gas distribution system.

If Alvarado Square were to disappear from its inventory of office buildings, the Downtown submarket would suddenly look relatively robust.

“Alvarado Square accounts for 30 percent of the total vacant space Downtown,” said Ken Schaefer of Collier’s Albuquerque office. “Without it, vacancy would be 18.4 percent Downtown and 19.7 percent overall, putting Downtown at 130 basis points better than the overall market.”

The silver lining to Alvarado Square’s dark cloud of vacancy is the fact that it’s not on the market to be leased, thus it’s not competing for tenants with other buildings Downtown, Schaefer noted. Alvarado is only on the market for sale by Colliers International at a price tag of $11.1 million.

As unlikely as it sounds, office buildings do indeed disappear from the inventory tracked by commercial real-estate services firms such as Colliers and CBRE.

The reason is that, in simple terms, only leased buildings are tracked in the office market. If a vacant building is purchased and occupied by the new owner – a company, for example, or a government entity – then that building is removed from the inventory of leasable office buildings.

An example of a disappearing office building is the four-story, 62,287-square-foot Plaza Maya at 615 1st NW in Downtown, Schaefer said. Empty since 2004, Plaza Maya was alternately classified as vacant or off the market until early 2013, when the state of New Mexico bought it to house Department of Corrections offices.

The purchase by what’s called an “owner/user” resulted in Plaza Maya’s removal from the active office market once and for all.

Formerly leased by the Bureau of Indian Affairs, Plaza Maya is also a poster child illustrating one of the chief reasons for Downtown’s past underperformance as an office submarket.

“Downtown’s challenges can be traced to when all those (federal agencies) – the BIA, FBI, Interior Department – were leaving for new offices outside the city center in the 2004 to 2006 time frame,” Schaefer said.

From 2006-10, Downtown’s vacancy rate ran on average 4.7 percentage points higher than the metro’s overall office market. The margin grew as high as 8 percentage points in 2007 then later shrunk to as little as 0.4 percentage points in 2010.

The Alvarado Square vacancy skewed the statistics, helping to inflate Downtown’s vacancy rate from 21.7 percent in the fourth quarter of 2012 to 31.5 percent in the first quarter of 2013, a full 10 percentage points higher than the overall office market.

Downtown’s office market achieved the dubious distinction of having the highest vacancy rate of any central business district in the country in 2013.

Some of the improvements in Downtown’s office market in 2014 will likely be offset by San Francisco-based retailer Gap Inc.’s planned relocation from about 100,000 square feet in First Plaza Galeria to 61,140 square feet in the North I-25 corridor, a submarket that straddles Interstate 25 north of the Big I.

Industrial vacancy rate dives

The vacancy rate for the metro’s industrial real-estate market plummeted to a six-year low in the third quarter, dropping to 7.1 percent from 7.9 percent in the preceding second quarter and 9.9 percent in the third quarter of 2012, Colliers reported.

Normally, such a significant drop in vacancy rate would signal something dramatic in the local economy, like work was gearing up for construction of a new Tesla plant in the metro or homebuilding kicking into overdrive. None of that is happening, of course.

The plunge in the industrial vacancy rate stems in part from the absence of construction of what’s called speculative or “spec” buildings, which contain space that hasn’t been preleased and is thus available.

“The last time any major new speculative projects were developed was in 2008,” the Colliers industrial report says.

The lack of spec construction means the existing supply of industrial space is continually picked over, driving the vacancy rate down. Most of the activity in the industrial market has been generated by relocations within the metro and by nontraditional users of industrial space like schools, churches and gyms.

One detail to note is that there’s more occupied industrial space in the metro now than there was back when the economy was booming in 2007.

The vacancy rate for the retail real-estate market dropped in the third quarter to 6.9 percent, down from 7.3 percent in the preceding second quarter and 8 percent in the third quarter of 2013. The third quarter vacancy rate is the lowest it’s been in at least 12 years.

Only shopping centers, stores and other retail properties 10,000 square feet in size or bigger are tracked in the retail market.

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