WESTERN SNAPSHOT, APRIL 2012, as published in the Western Real Estate Business, April 2012

The office market continues to experience uncertainty as job growth remains weak in the Albuquerque metropolitan area. The government sectors are still working on budgeting and cost-cutting measures that include the reduction of office space costs. This had a trickledown effect on the private-sector ownership of office space as the government reduced its requirements for space.

Companies continue to rack up sublease space, which is forecast to be more than 250,000 square feet in 2012. When you combine the amount of subleased space with shadow space it becomes evident that a return to normal supply and demand for office lease space is not in the foreseeable future.

The current office vacancy rate is 18.6 percent for the overall market, creating options for tenants to relocate and achieve lower rates. They also have the power to renegotiate with current landlords, achieving concessions that could include "blend and extend" strategies.

A trend to watch that could have an impact on the area's vacancy rate and pricing is the absence of any new construction. Only 46,953 square feet of space was delivered in 2011. Lease rates could rise and the vacancy rate could quickly evaporate if the economy starts to heat up.  

Lowe's Home Improvement Warehouse signed a 65,000-square-foot lease for a call center at 6301 Jefferson.

Some notable transactions included the 46,953 square feet that REDW had built to suit; Titan Development's completion of 99,000 square feet for the Forest Service; and the subsequent sale of both buildings for $51.5 million to Easterly Partners. Substantial leases included 65,000 square feet leased for a Lowe's Home Improvement call center at 6301 Jefferson; Sandia Research Corporation's lease of 25,000 square feet; Aspen Avionics leasing 23,472 square feet; and SAIC moving into 23,472 square feet in the Uptown market.

Landlords Struggle to Court Tenants

Tenants are in demand, and landlords are aggressive in acquiring and renewing leases whenever they can. Tenant improvements and concessions like free rent have become a problem for some landlords, as diminished cash flows have reduced the funds necessary to secure tenants.

The current overall vacancy rate in office buildings of more than 10,000 square feet is 18.6 percent, with Class A asking lease rates hovering at $20 per square foot to $22 per square foot, per year. Class B asking lease rates are $15 per square foot to $17.75 per square foot, per year.

In analyzing Albuquerque's submarkets, the downtown area has a vacancy of 22 percent, with asking lease rates in Class A buildings of $22 dollars per square foot, per year. The North I-25 corridor vacancy is 20 percent, with Class A asking lease rates of $22.50 per square foot, per year, and the Uptown Market has a vacancy of 20 percent, with Class A asking rates of $19.50 per square foot, per year.

The Albuquerque market's net absorption is a negative 171,216 square feet. Vacancy is up by 50 basis points from a year ago, to 18.6 percent, and construction completions were up slightly, while asking lease rates remain relatively unchanged from a year ago.

- Walt Arnold, Sperry Van Ness/Walt Arnold Commercial Brokerage in Albuquerque