The Albuquerque Industrial market is the tightest it has been in decades. You may hear it is due to growing space needs of 1) movie and film industry use impacted by Netflix acquiring Albuquerque Studios, pushing other tenants to alternative locations, and 2) legalized cannabis use. Although these new and expanding industries have exacerbated the shortage of industrial space, projections show usage of just 1%-2% of the total space in the market. Alternatively, the biggest driver of industrial space demand is eCommerce.
While there has been a steady growth in online shopping over the years, the annual growth of eCommerce sales increased from 15% to 40% with the 2/20 arrival of COVID-19. Despite an 18% overall increase in consumer spending since the beginning of the pandemic, nationally more retailers have closed their doors over the last 15 months than at any time in our history. As these storefronts close, the demand for eCommerce industrial space has increased.
Nearly two decades ago, in 2004, an out-of-state developer surveyed the New Mexico market seeking Class A Industrial Space . At the time, Class A industrial space was defined as a minimum 24’ clear height, sprinklered space with dock levelers. In our work together, we explained that the going rate of existing industrial space was $4.75 psf and that new Class A construction required rental rates of $6.50 psf. We shared feedback from tenants in our market that they were unwilling to pay higher rates. After reviewing our market, this developer responded that the rent ceiling was because there was no Class A inventory, simply, the market rents reflected the absence of higher quality product in the market.
We continued to work with this developer and eventually teamed up with him to market a two-phase, 200,000 square foot building, with a rental rate of $6.50 psf. The response was immediate because once the developer poured the foundation for phase 1, we had already secured leases for the entire 200,000 square foot project. What followed was a significant spike in rental rates for all classes of industrial space in Albuquerque. Several new industrial projects were constructed, ending only with the financial crisis in 2008.
Fast forward to 2019, and the average rental rate was still around $6.50 psf. During this last decade, the market experienced 3.5 million square feet of gross absorption with only approximately 1.1 million square feet of new construction, for net absorption of 2.4 million square feet. While this growth resulted in a steady decrease in vacancy rates from a high of 10.4% in 2013 to approximately 3% in 2019, rental rates remained relatively flat.
Six months ago, I met with an Atlanta developer who considered entering the Albuquerque market. We identified the market’s absence of the new generation of Class A warehouse distribution space. Today Class A industrial space must have a minimum clear height of 28’ (32’-36’ preferred), an Early Suppression Fast Response (ESFR) Sprinkler System, and 150’ minimum truck court depths. Albuquerque has less than 1.3 million square feet of comparable Class A Industrial Space. While representing less than 5% of the market, the Class A Industrial Market is currently 0% vacant.
In a follow up call he shared that he was not going forward in pursuing development in Albuquerque based on insight from a top local industrial specialist – that it was not possible to get over $7.50-$7.75 psf and that new construction would require rental rates in the $8.50-$9.50 psf range. This conversation immediately reminded me of 2004, when that other out of state developer told me the reason tenants were unwilling to pay higher rates is because the new generation of Class A product did not exist.
Fortunately, we now have four separate local developers announcing they are constructing significant speculative industrial projects for delivery summer/fall 2022 at asking rates ranging from $8.50 to $9.50 psf. Together, these projects would add almost 1 million square feet to existing inventories and represent more than 10X the average annual speculative industrial space constructed in Albuquerque over the last decade.
As a tertiary market, Albuquerque/Santa Fe offer opportunities that often do not require the same level of risk, innovation and creativity needed to be a market leader in primary markets. As office and industrial experts, we are knowledgeable of trends and demands in other markets and work with our clients in identifying prospects that do not exist in our local market. At Real Estate Advisors, Our Focus is Your Success.