When a city grows, where does it go?
With vacancies at an all-time low in the industrial real estate market and growing demand in all real estate markets, it is becoming increasingly difficult to find affordable space around Albuquerque.
Ongoing supply chain issues and labor shortages have contributed to rising costs, reducing new construction – and therefore supply – in commercial, industrial and office real estate.
“The market is really everywhere,” said Steve Lyons, retail broker at SVN/Walt Arnold.
The industrial commercial real estate market has been particularly tight, with historically low vacancy rates in the city, as well as across the country. Albuquerque has industrial vacancy rates nearly identical to the national average, but slightly less available space than similarly sized markets.
Industry broker Bill Robertson, senior vice president and director of Colliers International, said he had never seen such low levels.
“Not in my lifetime,” Robertson said. “And I’ve been working in this for 40 years.”
In a context of high demand, low supply and national inflation, prices are rising; a recent report from CBRE revealed that in the third quarter of this year, the median rental price increased by 38%.
Robertson said many people looking for warehouses are desperate enough to find space that they’ll “make do” with what they have. And if Albuquerque doesn’t have that supply, they’ll look elsewhere.
Jim Smith, senior vice president of CBRE, said there has been little new industrial construction in Albuquerque over the past decade.
But that is starting to change.
“There’s probably more speculative building of industrial properties than ever before,” said Smith, who specializes in industrial properties. “There had been a lull for about a dozen years – and that has changed in the last 18 months.”
According to the October CBRE report, there are 528,636 square feet of industrial property under construction, with a speculative 15,715 square foot development under construction in Rio Rancho. However, Smith noted that much of this new build won’t be usable for some time. Supply chain issues have extended construction times, delaying the incoming wave of new properties.
“Everyone is tearing their hair out,” Smith said.
Albuquerque has a bit more wiggle room in office real estate, with more properties available for rent than Tucson and Colorado Springs. But the number of office spaces available for rent has stagnated in the city for many years.
“There have been very few new offerings in Albuquerque over the past 20 years,” said Walt Arnold, general manager of SVN/Walt Arnold Commercial Brokerage Inc. “I mean, we haven’t built any space considerable office space for quite a while.”
A July Colliers report said there were no new offices being built in the city.
Arnold said rising costs have reduced the construction of new office space, with more developers choosing to adapt existing properties for office use rather than build new ones.
But even the rehabilitation of buildings and general maintenance have also increased in price.
“Everything: taxes, insurance, janitorial, landscaping, heating, ventilation, air conditioning, all those costs needed to run an office building are going up,” Arnold said. “But the cost of doing that doesn’t go up as much as rents go up.”
Arnold said office rents in Albuquerque have held steady or increased only slightly, despite rising costs for landlords. Competition from other markets has kept rents relatively affordable in the city.
Arnold sees more changes on the horizon as employers assess how they want to use space in a post-pandemic era.
“Having people in the office is what a lot of business leaders think is the right thing to do,” Arnold said. “And a lot of employees feel like they can work from anywhere. So I think those two dynamics will continue to clash over the next few years… As the 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 handle less space? »
Like offices, the commercial real estate market shows higher vacancies than the industrial market.
But, a nationwide boom in new small businesses has sparked increased demand for smaller retail spaces, SVN/Walt Arnold broker Lyons said.
According to data from the US Census Bureau’s Business Training Statistics, New Mexico saw a nearly 10% increase in the number of business Employer Identification Number applications between August and November. ‘last year.
“It’s not as tight a market as the industrial market, but it’s still very healthy, very strong,” said Ben Perich, vice president of Colliers International in New Mexico. “It’s still a homeowner’s market, more than a renter’s market.”
This demand is not even present in the market; the best spaces — Class A and new construction — are filling up fast, 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 is a “persistent vacancy,” Perich said.
Lyons echoed that sentiment.
“I have properties that are lagging to be rented, and then I have properties that are 100% rented,” Lyons said.
The types of properties renters are looking for are also changing, Lyons said. He has seen increased interest in smaller properties that house a single business rather than large multi-tenant malls.
“You have to turn around and charge them premium rents to justify the construction costs (for multi-tenant properties),” Lyons said.
Likewise, he said rehabilitating old buildings for new uses is more popular in the retail market as it saves some of the cost of new construction.
Between labor shortages and supply chain issues, Perich said he sees problems increasing supply in some areas of the city.
“We have negative headwinds that are going to limit, you know, the ability to add more supply quickly,” Perich said.
The city grows
CBRE’s Smith said many developers and companies are heading to “tertiary” markets like Albuquerque – with Amazon’s move to Albuquerque last year as an example.
“Amazon had an expansion into this market a year ago,” Smith said. “They didn’t need expansion in Los Angeles, Dallas or Seattle because they had 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 taxes, an increase of about 22%.
“I’m so excited about our economy in the Albuquerque area because it’s growing really well,” Lyons said. “After years of being slow, 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 a lot of growth ahead of it. I think the forecast for us is good.
Although Robertson said his warehouses have soared, he ultimately said the market might balance out.
“It’s cyclical and it changes,” Robertson said. “There is a rosy ending to the story at some point.”