The New MexicanCommercial real-estate activity in Santa Fe is better than might be expected, given the economy’s weakness, some brokers say.
Several real-estate brokers noted Santa Fe’s commercial development hasn’t suffered the way it has in big cities, including Las Vegas, Nev., Los Angeles and Phoenix, where lending and construction were much more active and, as it turned out, riskier.
Rusty Wafer, a commercial broker with Santa Fe Properties, said much of the building activity around town involves projects that have been in the works for a year or two, slowed by the city’s lengthy permitting process. If it weren’t for those delayed developments, he said, construction activity would be quieter.
Santa Fe hasn’t completely escaped the economic slowdown – downtown landlords lowered the rent of three national retail tenants (whom Wafer declined to name) to keep them from closing shop and leaving town.
“They didn’t lower it a lot, about 20 percent,” Wafer said. “They dropped it a bit knowing it will go back up,” once the recession ends.
Santa Fe landlords, Wafer added, “are a lot smarter than in 1982, when they lost a lot of tenants at the time of an economic downturn by not lowering rents. Now they want to keep the tenants there.”
The numbers show a fair amount of commercial building in Santa Fe:
McGraw Hill, a research firm that tracks monthly construction figures, said commercial contracts for future construction in Santa Fe County came in at $8 million in February 2009, up 166 percent from a year earlier. (The category also includes manufacturing, educational, religious, administrative, recreational, hotels, dormitories and other buildings.)
City building-permit numbers, which are annual and more comprehensive than McGraw Hill’s, show 19 permits for new industrial construction valued at $13.74 million were issued in 2008 compared with 10 permits for new industrial construction valued at $5.4 million issued the previous year.
The city issued five permits for new office construction costing $7 million in 2008 compared with nine permits for $22.3 million issued in 2007.
Current projects include remodeling of the DeVargas Center’s northeast end, a new courthouse complex on Sandoval Street and a new FedEx Ground facility near the Santa Fe Municipal Airport.
But commercial real-estate brokers, property owners and developers have varying takes on Santa Fe’s commercial market.
One broker sees softness in the demand for office and retail space in the recessionary economy. The local commercial real-estate industry could slow considerably, another says, following the downward turn of residential real estate.
Meanwhile, one longtime broker says he’s “really busy” and has experienced an uptick in commercial rental activity since the beginning of the year.
Wafer was the broker in the sale of land in the Valdes Business Park, where New Mexico Educators Federal Credit Union plans to build one of its two new branches in Santa Fe.
The other branch is going in the St. Michael’s Village shopping center, off St. Michael’s Drive at Llano Street, on a site formerly occupied by a Carrow’s restaurant. Credit union spokeswoman Stephanie Kozemchak said that branch is expected to open in the fall of 2009.
David Nydes, who owns St. Michael’s Village, also is building additional retail spaces along Llano Street, between Lowe’s supermarket and a storage-locker complex Nydes owns. Further construction is planned for a space in the center between the Kmart store and Cornerstone Books and Gifts.
“Our timing is bad,” Nydes said. “It’s taken two years to get to this point, and we already spent a lot of money. Hopefully by the time we’re done, the economy will have turned around.”
Nydes said the entire project will cost about $3 million and should be finished before the end of the year. Parking spaces will rise from 950 to 980 when the development is finished, he added.
Anthony Allegretti, who is a commercial leasing broker with Barker Realty, is looking for a new tenant for a space at 132 E. Marcy Street, at the corner of Otero Street. It was formerly occupied by Galisteo Furniture, which closed.
“We’ve had a lot of inquiries about it,” he said. “There seems to be strong demand. We had one inquiry from a furniture store, another from a restaurant. One person wouldn’t say what he wanted to use it for.”
Allegretti said he felt “pretty confident” about leasing the 5,290-square-foot property fairly quickly. The building is leasing for $16 to $18 per square foot.
For developer Jeff Branch, “overall, things are pretty good.”
“We’re not even close to going through what those guys in Las Vegas and Phoenix are going through,” Branch said. In those cities, overbuilding and the frozen credit market have led to defaults and foreclosures.
As a result of the tough economy, “it’s made everybody sharpen their pencils,” Branch said. “People who are not astute business people are getting out of the market. I went to a capital market seminar in New York, and they’re calling it the detoxification of commercial real estate. It’s really shaken up the industry.”
As for his San Isidro Plaza retail development off Zafarano Drive, “we’ve had a couple of closings,” Branch said. “Patsy’s New York Pizza closed, but we relet the space to Lucci’s Pizza. Wild Wild Wok closed, and we’re negotiating with another operator to take that space. At the end of the day, we will bring in stronger operators. Businesses that aren’t flexible will struggle. Overall, that’s good.”
At the Regal Santa Fe Stadium 14 movie complex, “they’ve had their best year yet,” Branch said. “They’re very happy. And the Santa Fe Lowe’s is one of the few in the country that’s still hiring people.”
Branch said his Capital Bar and Grill is expected to open in May, while a second Sunflower Market – a Boulder, Colo.-based retail grocery chain specializing in fresh produce – (the first will be in DeVargas Center) will debut by fall. Work on the new Plaza Cafe in San Isidro Plaza has just started. It’s owned by the same family that owns and operates Plaza Café businesses downtown and at the Quality Inn on Cerrillos Road.
Over in the Guadalupe district, John Hancock, a commercial real-estate broker with Barker Realty, is listing the 14,500-square-foot Jean Cocteau building, which is on the market for $3.8 million. Discussions about moving The Screen, an art-house movie theater on the beleaguered College of Santa Fe campus, began in February.
All but about 2,000 square feet of the building is occupied by a variety of tenants, Hancock said, adding that he has had “a couple of very serious lookers” considering purchase of the property.
The commercial real-estate market “has its challenges,” Hancock said, “but it might be a better place than other markets. The stock market has dropped 50 percent, and we haven’t seen anything close to that. A good solid building with good solid tenants can be a very desirable place to be.”
John Shepler with Grubb and Ellis in Santa Fe is “very busy” because of an uptick in leasing activity around town.
“I’ve leased 7,500 square feet in Rodeo Park to United Health Services,” he said, adding that he also has leased space to a local law firm, Hatcher and Tebo, downtown at 150 Washington Ave.
Another, larger law firm is considering a move to the same office complex but has yet to sign a lease. Shepler said he couldn’t disclose that firm’s name.
Shepler said he tried to get a restaurant for Santa Fe like Carrow’s, which closed several years ago, “but our (Santa Fe) demographics wouldn’t support a good price point. Plus, operators out of state aren’t expanding right now, and when they see our living wage ($9.85 an hour), they tell me not just no, but heck no,” he said.
Shepler doesn’t expect to have difficulty filling an office space left vacant when Thornburg moved to a new office campus on the outskirts of town.
“There are some nice values” for the vacated office space, he said, “so it’s not going to go to fire-sale levels” to be rented.
Dentist William Parker, owner of Cedar Park, a business and residential condominium complex off Don Gaspar Avenue at St. Michael’s Drive, said the units he has available are for sale or lease.
“We just started leasing our residential units” recently, he said. “The sales market is very difficult because of the lending crisis in the country. There’s much more interest in leasing than selling.”
Charter Bank has provided the financing and “has bent over backward to help me wherever they can,” Parker said.
Allen Branch, who is involved in developing the Santa Fe Railyard through his Railyard Co. development firm, said the REI store in the Railyard is doing “phenomenally well” and should do even better when the planned Flying Star Cafe opens in the spring.
But Railyard Co.’s planned Maya theater, which was supposed to open this year, is waiting on financing, said Rick Jaramillo, a partner in Branch’s development firm.
Branch, who tracks retail and office markets around town and puts out a market-statistics newsletter, said “office vacancy is up more than retail,” but inquiries are coming in for both.
Retail market vacancy rates in 2008 ranged from 2.11 percent in the medical district to 4.40 percent on the south side of town. The average retail vacancy rate in 2008 was 3.92 percent.
The office market vacancy rate ranged from 3.88 percent downtown to 12.46 percent in the Cerrillos Road corridor. The average office vacancy rate was 5.83 percent. Office market statistics indicate the lowest occupancy rate in 2008 was 2.05 percent in the South Capitol district.
(Comparable rates for 2007 for both retail and office occupancy rates were not immediately available, Branch said. But he pointed out that between 2007 and 2009, the absorption rate for office space was much stronger than it was for retail space.)
“An important trend that Santa Fe retail will benefit from in years to come is the … Rail Runner,” Branch said. “In these uncertain times,” Albuquerque residents “are less and less going to Disneyland and instead will do short stays closer to home,” he said.
“Santa Fe’s relative office overbuilding trend may be attributable to construction in the wrong locations, developers building for the ease of office permits and also because of the local disdain for retail development that causes developers to build offices for the sake of building,” Branch said.
There is one major development in the retail area, and that’s the vacated Mervyn’s space.
“I think we have a user for the Mervyn’s space” at the Santa Fe Place mall, Branch said. “Hopefully, it will pan out.”
(Mervyn’s, one of four anchor stores at Santa Fe Place, closed at the end of 2008 after more than 20 years at the mall).
There are other commercial developments going on around the city.
On the outskirts of town across from the Santa Fe Municipal Airport in the Hart Business Park, a large free-standing building is going up that will become a distribution center for FedEx Ground.
Construction manager Jim Dickey said the 47,400-square-foot building will be done at the end of May.
Between 40 and 50 people are expected to work in the center, he said.
The new building replaces the FedEx Ground building in Valdes Business Park, which was only 4,800 square feet in size and was one of the oldest in FedEx Ground’s system, a spokesman for the company said.
Off Cerrillos Road, near the new Discount Tire Store, work has started on the construction of a new, $14 million, 92-room Hyatt Place Hotel. It is expected to open in the spring of 2010.
The hotel is owned by local businessman Carlos Garcia-Salgado and his wife, Sylvia.
Rim Hospitality, a Modesto, Calif., firm with 25 years in the hotel industry, will manage the hotel, which is the first new hotel along the Cerrillos Road corridor since the Sleep Inn, now the Inn at Santa Fe, opened in 1999.
Another major commercial project in downtown Santa Fe, the renovation of the former Marian Hall and St. Vincent Hospital for a Drury hotel, isn’t likely to begin construction until very early in 2010, and that’s not a final date, said Brian Nenninger, Drury’s project manager.
The hotel could have as many as 280 rooms and suites by the time the $60 million to $80 million project is finished.