The office space crunch

New Mexico Business Journal, Feb, 1997 by Rebecca Murphy

Ten years ago, renting office space in Albuquerque was a picnic for the tenants, that is. The market was so soft that renters could choose from a cornucopia of rental enticements. The most attractive, of course, was free rent - six months to a year in some cases. Offices were standing empty - and property managers and owners were bending over backward to fill them up. The vacancy figures weren't quite as bad back then as, say, Houston, where whole office buildings were unoccupied, but everyone in the business of renting out office space was worried.

Like everything else, things changed. Today, the Albuquerque office rental market is one of the top five in the country, says John M. Henderson III, associate broker with Lewinger Hamilton, Inc., the largest full service commercial real estate firm in New Mexico. Office space in the uptown area is renting for $15 to $16 per square foot for full service, meaning all gas, electric and janitorial services are provided and insurance and taxes are paid by the landlord.

"The office market is cyclical," Henderson says. "But I anticipate it remaining strong for the next 18 months or so." In fact, he adds, the market will probably continue to tighten up over the next few months, with office space more difficult to find and rents moving even higher. That isn't such great news for the businessperson looking for an office to rent. But despite the firm market, renters can still make a good deal, says Henderson, if they're careful and know what to ask for.

"Prospective renters should try to tie down their lease terms for as long as they can justify," he advises. "Go for a five-year lease instead of a three-year, with pre-negotiated terms and conditions."

If at all possible, renters should nail down an option to renegotiate the lease at a set rate when the current lease expires in three or five years. The lease may have a yearly step increase built in over the five-year term, Henderson says. But when that expires, renters should try to have an option available that lets them continue renting at a lower rate (negotiated back at the beginning of the rental period) instead of a new higher rate that reflects a tighter market.

He gives an example: "In five years, when the lease expires, the market could be very tight and rents may be high," he says. "If so, it's to the renter's advantage to exercise that option and keep the rent down. If the market is flat and rents are low, then you don't have to exercise the option - you can move or renegotiate a much lower rate." But property managers and owners are wising up to this tactic, Henderson acknowledges. They may agree to your terms, but they may make you pay for that option - to the tune of $20,000 in some cases.

There are other ways to keep the rent down. Until recently every respectable office lease was "full service." You moved in, paid your rent, and everything else was taken care of. The management paid gas and electric bills, mowed the lawn out front, shoveled the walk, paid the taxes and cleaned up the place every week. Today, in Albuquerque, some landlords are renting offices for less than the going rate -$14.50 per square foot in prime office space off Osuna in one case - and the tenant becomes responsible for all the extras. That's called "triple net" and it may be the wave of the future.

"It costs the landlord about $5 a square foot to provide all those services," Henderson says. "Utilities costs about $2. Janitorial costs about 70 cents. Throw in taxes and common area maintenance - and a rent that costs $14.50 a foot can turn into $19.50 very quickly. The landlord likes that - and there's absolutely no risk involved." Prospective tenants may decide to sign the lease anyway, anticipating that they can keep costs down and save money. The tenant might ask for separate utility meters that cost the landlord time and money but is far more equitable than dividing the total utility cost by the number of tenants, Henderson says.

Prospective tenants are becoming more sophisticated. "There was a time when they weren't as knowledgeable," he says. "Back in the '80s, tenants snapped up free rent offers, signed the lease, moved in and in six months when the free rent stopped, some of them found themselves in big trouble." Today, tenants arc negotiating longer-term leases, asking for options and bargaining over services.

Parking is a big issue with office rentals. Everyone has parking problems in Albuquerque. Zoning regulations call for one parking space for every 200 square feet of office space on the first floor. From the second floor on up, the rule is one space for every 300 square feet of office space. "Those standards are minimal," Henderson says. "The developer jams in every bit of office space he can on the land available." The result is lots of people, lots of cars and nowhere left to park.

"Some of the new businesses coming in - like America Online or MCI - have lots and lots of employees making phone calls out of little modules," he says. "They need massive parking space to accommodate all these employees. Some businesses are turning to office space in shopping centers with lots of parking, as MCI - with 1,300 employees - did at Del Norte Shopping Center off Wyoming." Other businesses move into buildings built specifically for their needs.