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El Paso Office Market Seeing Strong Absorption Through 2017

Strong absorption in El Paso's office sector continues to be the anchoring force within the market.

Strong absorption in El Paso's office sector continues to be the anchoring force within the market.

The border economy of the United States and Mexico is complex and deeply intertwined, to say the least. As such, the sister cities of El Paso and Juarez should be  viewed as one economy.

The region ended 2016 on a high note. According to the Federal Reserve Bank of Dallas, El Paso’s total nonfarm employment rose 1.7 percent during the year, besting the state average of 1.6 percent.

Brett Preston, Cushman & Wakefield/Pires International

Brett Preston, Cushman & Wakefield/Pires International

The city added more than 5,000 jobs, with strong gains in service-providing sectors offsetting losses in the manufacturing sector. Leisure and hospitality led the way, according to the Fed, adding more than 1,700 jobs. At the same time, employment in Juarez’s manufacturing sector was up 5.4 percent from the previous year for a projected total of 263,000 new jobs.

The downtown El Paso office market currently totals about 3.2 million square feet across 65 buildings. It breaks down into about 1.1 million square feet of Class A space, 1.2 million square feet of Class B space and 900,000 square feet of Class C space.

For years, vacancy in the city’s Central Business District hovered around 20 percent, with virtually no new construction. But lately, conditions have dramatically improved. According to CoStar Group, downtown El Paso  clocked in an overall vacancy rate of 6.5 percent for the second quarter of 2017. This is nearly half the 12.5 percent vacancy rate reported for the previous quarter.

Net absorption of office space for the second quarter totaled 192,597 square feet, compared to 28,807 square feet of positive absorption in the first quarter.

Growing demand for product and lower vacancy rates have fueled upward pressure on office rental rates to levels not possible a year ago. Street rates have increased too, approaching $20 per square foot, full-service for true Class A assets. We expect them to climb even higher in coming quarters.

Market Dynamics in Play

So what’s driving the uptick in demand? As one might imagine, El Paso’s office market is closely tied to its industrial activity, which has been robust. Beyond that, the city has benefitted from revitalization efforts initiated over the past five years, such as a new ballpark. These improvements make a strong case for office users considering a relocation.

The initiatives also created a new entertainment district, which has helped lure venues that require pedestrian traffic, such as restaurants, nightclubs and retail shops.

But the biggest driver, of course, is job growth. As mentioned earlier, the market added more than 5,000 new jobs in 2017, ending the quarter with an unemployment rate of 6.5 percent.

So far this year, El Paso has added nearly 4,500 new jobs, according to the Dallas Fed. Professional and business services have accounted for 1,690 new positions and leisure and hospitality for 1,200 new jobs. The University of Texas at El Paso’s Borderplex Business Barometer currently reports that the city’s unemployment rate now sits at 4.8 percent.

Regional Outlook

At the midway point of 2017, we are seeing positive trends continuing, with relatively few headwinds in sight. However, it’s not unreasonable to think that some high-altitude clouds could gather as we progress toward the fall months.

The election of Donald Trump created some uncertainty among economists and business executives that has finally begun to subside in light of dialogue that suggests a renegotiation — and not an invalidation — of NAFTA. Industry leaders who had opted to take a wait-and-see attitude are beginning to make decisions about the future. Additionally, foreign-based companies are moving more aggressively and have begun to consider space on the El Paso side of the border.

On a broader scale, relationships between the medical, aerospace, automobile, durable goods and agricultural industries are interdependent, and it is the fabric of NAFTA that holds them together. Expected changes to this agreement could, and likely will have far-reaching ramifications on lives and jobs throughout El Paso, the state of Texas and North America.

— By Brett Preston, managing partner, Cushman & Wakefield/Pires International. This article originally appeared in the September 2017 issue of Texas Real Estate Business magazine. 

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