WESTERN SNAPSHOT, MAY 2008

Albuquerque, New Mexico, Multifamily Market

Fox

Albuquerque’s multifamily market continues to garner national attention as one of the bright residential spots in the country. Albuquerque was recently ranked at or near the top in several important categories, including one of the smartest places to live, best city for business and careers, and most creative mid-size city with exceptional quality of life and career opportunities.

The case for investing in Albuquerque is quite a compelling one, given the city’s expanding economy, rising population and limited new apartment development. Rents are rising rapidly as vacancy rates remain fairly constrained, supported by steady job growth and in-migration.

Apartment sales volume totaled more than $300 million in 2007, with the average cap rate at 6.1 percent. A total of 22 properties changed hands in 2007, down from 28 the previous year. Prices noted strong appreciation, however, with the average price per unit rising 23 percent to $70,060, while the average price per square foot rose 17.5 percent to $82.05. More than half of all buyers in 2007 were private, out-of-state investors — in particular, Albuquerque has attracted a large number of California buyers in recent years.

The strong local economy has supported apartment demand, with unemployment falling to 3.1 percent in December 2007, the lowest rate for that month since 1999. With the labor market more constrained, new job creation slowed to 1 percent for the year from 3.6 percent in 2006. Job growth will remain fairly steady in 2008, but is expected to trend up during the next few years. CitiCards, Fidelity Investments and Schott Solar are among the firms with substantial job creation plans for the area.

The information sector, in particular, is growing due to New Mexico’s rising prominence as a film and television production center. In the past several years, film and TV production has contributed $1.5 billion to the state’s economy, and several new studios recently opened or are under construction in Albuquerque. The film business not only raises the area’s prestige and creates jobs, it also creates demand for related services, including rental housing.

Apartment demand outstripped new construction from 2000 to 2006, with approximately 3,000 new units entering lease-up while more than 6,500 units were absorbed. As a result, the average vacancy rate fell from 6.7 percent to 4.8 percent during that period. The city’s relatively youthful population supports demand — according to Albuquerque Economic Development, the number of residents within the 20 to 34 age group will increase by about 10 percent in the next 5 years, roughly twice the projected national rate. In addition, the University of New Mexico (UNM) is a major demand generator, with about 70 percent of its 25,800 students living off campus.

During 2007, no new units came online, and this lack of new product dampened leasing activity. At the same time, the condo-conversion trend hit the area, removing nearly 100 rental units from the market. Conversions have centered on the UNM area, where older apartment properties and commercial buildings are being converted into for-sale residential units, targeted at both investors and parents of UNM students.

As a result of these factors, absorption in 2007 was negative for the first time in more than a decade, pushing the overall average vacancy rate up slightly to 5.5 percent. However, rent growth accelerated since vacancy rates remained near equilibrium. The average rent rose 4.6 percent during the year, approaching the $700 mark; this gain was the highest recorded for this period in several years.

This year will bring an upturn in new construction, with about 450 to 500 units reaching completion. However, in keeping with the trends seen in recent years (with the exception of 2007), new development activity will continue to lag demand. High land and construction costs, coupled with impact fees and development taxes, make development of all but the most high-end rental product unfeasible. In addition, Albuquerque has a limited supply of land zoned for apartments.

Upscale, mixed-use developments are becoming popular in Albuquerque. One example is the 198-unit Uptown Village, part of the ABQ Uptown retail and hospitality center in northeast Albuquerque. Hunt Development Corporation is building the project; lease-up began in April 2008. Alliance Residential is building the 240-unit Broadstone Town Center, which will also contain 45,000 square feet of commercial space, in southeastern Albuquerque. Monthly rents at both of these projects are expected to be well above the current average.

To the south of Albuquerque and west of Kirtland Air Force Base lies the 13,000-acre Mesa del Sol development, destined to be a commercial and residential hub. A total of 18 million square feet of commercial space and 37,500 housing units (including some apartments) are planned for the project, which has already attracted corporate expansions and relocations totaling 6,600 jobs.

West of Albuquerque lies the site of another master-planned development, the 57,000-acre SunCal property. Planning is already underway for the first phase, a 1,500-acre mixed-use center with retail space and 1,500 homes, including both single-family and multifamily units.

As these and other developments take shape, Albuquerque’s future looks bright. The city is emerging as a major growth center, with new job opportunities fueling population gains and housing demand. This dynamic area will continue to attract multifamily investors as well, due to its strong fundamentals and positive outlook.

Bill Fox is a senior investment advisor in Hendricks & Partners’ Albuquerque office.

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