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Albuquerque Journal, N.M., Commercial Real Estate column: Recession waylays commercial real estate [Albuquerque Journal, N.M.](Albuquerque Journal (NM) Via Acquire Media NewsEdge) Nov. 23--Rising unemployment and reduced consumer spending, which are two hallmarks of the economic recession, have taken the wind out of the sails of commercial real estate, according to a panel discussion held last week. Vacancy rates are rising, while property values and rental rates are falling both here and around the country. A substantial turnaround could still be years away. The forecast a year ago was for the turnaround to begin in the spring of 2010, noted John Ransom of Grubb & Ellis New Mexico, moderator of this year's office and industrial market update for the New Mexico chapter of NAIOP The Commercial Real Estate Development Association. Given the economic uncertainties, last year's forecast of a turnaround will certainly be wrong, he said. Adding that it could be another year before the picture becomes clearer when the market rebounds, Ransom quipped, "That'll be a good reason not to miss next year's market update." Approximately 380 people attended the Nov. 16 update presented each year by local members of the Society of Industrial and Office Realtors at the Albuquerque Marriott. There are only 18 commercial real estate brokers in New Mexico with the SIOR professional designation. The opening speaker was Suzanne Mulvee, senior economist at Property & Portfolio Research Inc. of Boston, who presented a national perspective of the office and industrial markets. With 7.2 million jobs lost and one out of every 10 Americans unemployed as of November, she said, "We need to get those jobs back in order to get our buildings filled." But a jobless recovery is likely over the next two years, she said. The financial services sector, traditionally a major user of office space, isn't expected to recover its lost jobs until after the end of 2013. As a result, landlords are going to have to look at other job sectors for potential tenants to fill their buildings, she said. Reduced consumer spending plays out in commercial real estate with the demand for warehouse space to stock sales inventory. Many retailers were caught by surprise when "retail sales fell off a cliff last October (2008)," Mulvee said. Since then, retailers have gone through an inventory correction, which has generally meant reducing their need for warehouse space. "This year, shelves won't be as full," she said. During her presentation, Mulvee had a funny, although somewhat awkward, moment when addressing supply and demand for warehouse space. "Construction will stay down for a while -- that's good news," she said in a comment that triggered grumblings from the audience. "That's right," she continued in a thinkingout-loud kind of way. "I'm talking to developers. It's good news for building owners." While buying and selling commercial real estate is down, refinancings continue on existing loans coming due. Often, it appears property owners need cash to bridge the gap between the more lax lending standards in the past and the more stringent standards of today. "Writing a check at refinancing to keep a building is becoming more common," Mulvee said. "We're seeing a lot of keys coming back." From a local perspective, commercial real estate in the Albuquerque metro area is suffering from many of the problems seen nationwide but is generally holding up better, said local panelists Jim Smith of CB Richard Ellis and Debbie Harms of Maestas & Ward Commercial Real Estate. The vacancy rate for industrial space is expected to increase from 9.1 percent in the most recent third quarter to 9.5 percent in 2010. The average industrial vacancy rate over the past 10 years is 8.6 percent. "In the last four quarters, the industrial vacancy rate has about doubled," Smith said. "The rate will grow as job loss grows." The vacancy rate for office space is expected to increase from 15.1 percent in the third quarter to 15.7 percent in 2010. The average office vacancy rate over the past 10 years is 13.9 percent. "No one needs more space for less jobs," Harms said. Increases in vacancy rates put "downward pressure on asking lease rates," she said. The average asking lease rate for office space is expected to drop from $17.30 a square foot in the third quarter to $16.75 a square foot in 2010. The lease rates do not reflect the trend of landlords offering free tenant improvements and free rent as incentives, she said. The same scenario holds true for industrial space. The average asking lease rate is expected to drop from $6.68 a square foot in the third quarter to $6.25 a square foot in 2010. "Softness is caused by lack of demand, not excess supply as was seen in the last downturn," Smith said. In terms of commercial real estate, what separates Albuquerque from more distressed cities is the fact that the market wasn't overbuilt heading into the downturn and the fact that banks are not foreclosing on properties here. Foreclosures can lead to "fire sales" -- for dimes on the dollar -- which can really disrupt commercial real estate values in a market. Advent building for lease Advent Solar's 87,596-square-foot manufacturing plant, the first building to go up at Mesa del Sol, is available for lease in the wake of the company's acquisition by Santa Clara, Calif.-based Applied Materials Inc. There's no timeline yet as to when the building would be ready for a new tenant, said leasing agent Jim Smith of CB Richard Ellis. Applied Materials has a crew preparing to vacate the building as part of a consolidation of Advent's former operation elsewhere. The lead developer of the Mesa del Sol master-planned community, Forest City Covington, constructed the $4.5 million build-to-suit building -- meaning it was designed specifically for Advent Solar -- in 2006. The deal was announced with much fanfare by state and local officials, who said the photovoltaic equipment maker would employ as many as 1,000 people by 2010. The LEED-certified building is premium manufacturing space, with a 21,099-square-foot clean room and 23,396 square feet of process support space. The rest of the building is office and warehouse space with five dock-high doors, four drive-in doors and one ramped drive-in door. The electrical service is oversized. The asking lease rate is $12.50 a square foot, plus expenses, which puts it somewhere between the metro averages of $6.68 a square foot for industrial space and $17.30 a square foot for office space. The asking rate reflects the value of the building's design and infrastructure for a photovoltaic manufacturer, Smith said. When the building was cleared for marketing two weeks ago, Smith said a campaign was launched immediately to contact every known solar company in this country and beyond. "We've had inquiries already," he added. Richard Metcalf covers commercial real estate for the Journal. You may reach him at 823-3972 or [email protected]. To see more of the Albuquerque Journal, or to subscribe to the newspaper, go to http://www.abqjournal.com. Copyright (c) 2009, Albuquerque Journal, N.M. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |