Slow Healing For New Mexico's Office Market

The New Mexico office market has gained more traction and absorbed a healthy level of excess inventory this year. Vacancy fell to its lowest level in more than two years. This decline can be attributed to an absorption of vacant inventory and an increase in demand for medium-sized spaces. One of those purchases was carried out by the State of New Mexico, which acquired the 60,000-square-foot Plaza Maya, a vacant building that’s no longer competing for tenants. Downtown’s vacancy also declined when a 19,500-square-foot space was taken off the market by a new company that won the contract administering mental health services for the state.

Some of the most popular office spaces seem to be in the size range of 4,000 to 25,000 square feet. The state has had more than 73,000 square feet of this kind of space absorbed recently. A new charter school in the Airport submarket accounted for about one-third of this inventory, with engineering, legal and healthcare administration service companies taking up the balance.

Activity for smaller spaces of less than 4,000 square feet remained consistent with 2013 levels. This strong demand has led to larger Class A spaces being master leased by national executive suite companies. One new executive suite space in the North I-25 submarket took less than two months to become almost fully occupied.

Overall, however, the office market has yet to reach a full recovery mode. One concern is the large amount of new available occupied spaces that is still being brought to market. More than 100,000 square feet of new space became available in the past quarter. Most of this new space will not become vacant until the fourth quarter and into 2015.

One of the major challenges this year is dealing with the large spaces that will be vacated during the year. More than 450,000 square feet of space is scheduled to be vacated by three large tenants. We hope this story will have a positive outcome and that these spaces will eventually be purchased by owner/users. This could essentially remove them from the building inventory and reduce the number of buildings competing for tenants in the leasing market.

The trend for larger tenants to right-size their spaces will be another big threat. The general trend to “right size” will occur primarily in larger spaces of more than 10,000 square feet. Unused shadow spaces are the most susceptible and almost certain to be given back during renewals. Since right-sizing may not be possible in many existing suites, tenants may have to consider relocating to other spaces in the building. The challenge for landlords is finding a balance between necessary tenant improvement costs that are required to retain the tenant, relative to the desired renewal rate.

From a submarket perspective, the North I-25 and Uptown markets will likely garner the majority of interest. Completion of the Interstate 25 and Paseo Del Norte Interchange renovation is scheduled for completion this December. The improved access and centralized location should dramatically increase demand for space in the North I-25 submarket. Demand for space in Uptown will also grow as a result of more retail projects that will include national retailers and restaurants. Downtown is the wild card of the bunch. Its success hinges on the approval of the proposed Innovation Corridor, which is spearheaded by the University of New Mexico.

By Ken Schaefer, Director of Research, Colliers International. This article originally appeared in the May 2014 issue of Western Real Estate Business magazine.

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