ALBUQUERQUE
After seeing one of the biggest vacancy increases in the past 10 years, the office market found stable footing during the third quarter with challenges looming.
Vacancy improved 20 basis points and even managed a modest 64,000 square feet of absorption. A few sectors were active and were responsible for a majority of the space absorbed. These include the insurance, medical and legal service sectors, which accounted for 70% of the overall space absorbed.
One sign of concern is a big increase in the amount of available space hitting the market. Compared to the same period last year, an extra 300,000 square feet of space became available during the quarter. This increase was the result of tenants who will be making planned moves out of large spaces and into new or existing spaces early next year. Fidelity Investments’ human resources division, which is part of FMR LLC, is moving into new space in Mesa Del Sol, and the University of New Mexico Hospital Administrative Services is moving into an existing location near the Albuquerque International Sunport Airport.
During the quarter, 124,000 square feet of new speculative construction was underway in four projects. As these projects move toward completion, they will begin competing for tenants and add even more available space to the market. Combine this with almost 300,000 square feet of office condominium space now being offered for lease, and the market is beginning to turn back to the tenants’ favor. The challenge will be convincing tenants not to stay on the sidelines during the economic slowdown. The dramatic increases in available space may trigger more concessions from landlords. Look for new projects to be especially aggressive by offering attractive first generation build out allowances.
LAS VEGAS
Compared to other markets nationwide, Las Vegas has remained considerably resilient to major economic downturns. While several mixed-use projects have been delayed or canceled, and many financial institutions have gone through changes in ownership, projects such as MGM Mirage’s massive CityCenter development and Tivoli Village at Queensridge continue to move forward.
The population of Las Vegas continues to grow by about 5,500 people every month. Even though the local unemployment rate jumped 120 basis points to 7.1% in the third quarter, numerous jobs will become available upon the completion of projects currently under way. The increase in available jobs is expected to fuel the demand for office space in 2009.
Construction activity, focused in the south, southeast and southwest submarkets, remains healthy at 1.1 million square feet and is scheduled for a late 2008, early 2009 delivery. While there is about 2.2 million square feet still planned, most of these projects will not begin to show signs of progress until the middle of next year, when many developers and brokers are expecting the economy to stabilize.
Currently, it’s a tenants’ market. Land-lords continue to aggressively negotiate with new tenants by offering higher tenant improvement allowances and increased amounts of free rent, practices that have been exceedingly more common now than in the past. Asking prices for shell office buildings in desirable submarkets have decreased to levels compared to the prices offered two to three years ago.
Tenants are watching the market with eyes wide open. Whether choosing to delay relocation or expansion until the financial market improves, or taking advantage of landlord/seller eagerness to absorb vacant space, expectations for a better year ahead are high.
SEATTLE
The national economy, reeling under the weight of the spiraling credit crisis, remains barely above water and threatens to drag down the Puget Sound. The Boeing Co. strike, the Washington Mutual Inc. collapse and layoffs at other blue-chip locals such as Alaska Air Group Inc. have cast a pall over the region. Recent events have definitively shattered the myth that the Puget Sound could hide behind the Cascades and hope the whole thing would blow over.
Office vacancy rates increased by 60 basis points in the past quarter, hitting a two-year high of 10.5%. Predictably, lease rates continued to decline, with asking rates slipping on a regionwide basis as landlords sought to fill the growing blocks of empty space. Not immune to the
slowdown, the Seattle central business district saw a 50-basis-point increase in vacancy during the quarter as businesses retrenched.
The Bellevue central business district, long the envy of the region’s owners due to its high-end cachet and skyrocketing lease rates, saw the most dramatic rise in vacancy. Significant move-outs by Solucient LLC, part of Thomson Reuters PLC, and Yahoo Inc. (from its newly-minted northwest headquarters in Bellevue) helped push vacancy up 250 basis points to 11.2%.
Looking ahead, the local economy faces a murky future that could further hamper the commercial office market. Anemic job growth combined with twitchy credit markets and a glut of new office completions during the next 12 months has tenants and landlords on edge.
The sudden and dramatic implosion of Washington State’s third-largest public company, Washington Mutual, amid a modern-day bank-run leads unnerved real estate professionals to ask: Will this be a speed bump or a road block for Seattle’s commercial office market?
WaMu currently occupies roughly 1.6 million square feet of office space in downtown Seattle,enough to fill every inch of the 76-floor Columbia Tower,and almost all of it sits in the crosshairs of JPMorgan Chase & Co.’s synergy-seeking management. If all of that space were to hit the market immediately, vacancy in the Financial District would soar to nearly 20%. This, however, is highly unlikely. A more probable scenario involves JPMorgan announcing limited layoffs and restructurings in the near-term, while spreading the remaining consolidation over a number of years, softening the blow to the Seattle office market.
Analysis by Grubb & Ellis Co.
