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Posted 13 Jul 21 By: No comments yet

Unstoppable Forces, Immovable Objects

By Riley McKee, NAI SunVista Land and Industrial Advisor

What happens when an unstoppable force meets an immovable object?

This long-debated paradox is nothing more than a mind game, but occasionally, real-world circumstances align that present a similar conundrum.

The industrial real estate market in Albuquerque, New Mexico is a good example.

The seemingly unstoppable force of declining vacancy rates is rapidly approaching a showdown with the heretofore immovable object that is the near total lack of new construction. Pressure between the two has been mounting for years with relief—in the form of higher lease rates or lower construction costs—long awaited.

That wait will continue until a developer comes along who is able to recalibrate the balance between lease rates and construction costs. Successfully doing so will require breaking from entrenched attitudes about the market’s capacity for higher rents and bold action in spite of an unpredictable cost environment.

Lease Rates

The fundamental driver of new construction in a given market is lease rate growth. During periods of economic expansion, the supply of immediately available space decreases which, by the enduring law of supply and demand, applies upward pressure on the cost to rent space. Tenants active in such a market are often willing to pay these higher rates in exchange for the growth potential, access to markets, or efficiency gains a new facility offers.

Unfortunately, this is not the story in Albuquerque’ industrial real estate market, where rent increases have been nominal and far from compelling enough to capture the attention of developers. In a market with less than 2% vacancy, this runs contrary to the demand curve and suggests that landlords may not be charging enough.

Construction Costs

Tepid lease rate growth is not the only factor limiting new development—construction costs have also been a significant hurdle. Historically higher in New Mexico relative to the rest of the country, they have increased further since the pandemic disrupted supply chains across the globe.

Materials costs are expected to be up for some time as the post pandemic economy reorients itself while the supply of labor is constrained by issues on several fronts. Long-term construction projects in the Albuquerque MSA, including the Facebook data center and Amazon fulfillment center, have pulled large concentrations of tradesmen to a few jobsites while supplemental unemployment insurance has slowed what should have been a rapid recovery in the labor market.

With the competing problems that are low lease rates and high construction costs bringing new industrial real estate to the market is a difficult task. Development is risky, involving a host of tradeoffs with outcomes that are never a sure thing.

There is, however, undeniable opportunity—opportunity that can be seized by abandoning the safe approach many landlords have fallen into through not challenging the lease market with higher asking rates. Investment performance metrics like quick absorption and high occupancy seem to be rated higher today than what should be an investor’s primary target: financial return. Increasing—and realizing—lease rates in response to the obvious demand a sub 2% vacancy market presents will open the door to the new construction that is sorely needed, despite the high-cost environment.

At a certain point, the unstoppable force of declining vacancy rates could effectively meet an immovable object: the prospect of no space available. Should that happen, it would be evidence of the worst assumptions about our market—that growth is anemic.

Hopefully well before then an astute developer will initiate a new phase of growth and be richly rewarded as a result.

Albuquerque needs more industrial space—who is going to fill the void?

Riley McKee is a Senior Advisor in our Office Division. For more information on his properties click here. 

NAI SunVista is a full-service commercial real estate company serving New Mexico since 1996. The company is a dynamic commercial real estate firm offering best-in-class real estate services in brokerage, property management, asset management, business brokerage and development services.

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