Analysis - Jun 15th, 2009

Las Vegas Commercial Office Market

First Quarter 2009 Market Update

by Jake Joyce

    The Las Vegas Valley office market continued to accelerate downward as the combination of new supply and tenant exodus within existing space resulted in rising vacancies. Economic contraction has resulted in fewer office-using business expansions and relocations, pushing the vacancy rate to a record-high 19.6 percent.  The latest availability figures represented a 2.0-point increase from the 17.6-percent vacancy rate reported in the preceding quarter (Q4 2008) and were 4.9 points ahead of the same period a year ago (Q1 2008).

Supply and Demand

    During the first quarter of 2009, the office market witnessed the addition of 329,400 square feet of new space, a 33.5-percent increase from the previous quarter (Q4 2008).  Active construction projects continued to retreat, with limited new supply expected to commence construction while vacancies remain at elevated levels.  Major projects that completed construction during the first quarter included: (a) the 186,300-square-foot Montecito Point in the northwest submarket; (b) approximately 77,700 square feet as part of the Summerlin Medical III expansion; and (c) approximately 39,900 square feet at Asset Central in the southeast.  At quarter-end, the market reported 1.9 million square feet of space under construction, while plans for another 4.6 million square feet remained on the drawing board; where they will likely remain until fundamentals improve.

    From a demand perspective, the market witnessed negative net absorption of 708,100 square feet during the first quarter.  Negative net absorption suggests a net loss of occupied office space during the quarter.  While this is higher than the previous quarter’s (Q4 2008) negative net absorption of 86,700 square feet, it does represent the second consecutive quarter of net out-migration among office users.

Key Market Considerations

    The decline in office market performance measures appears to be accelerating, which may create a longer-run challenge as pricing will likely erode further.  The current environment in the office market may look similar to trends reported in the residential sector two and three years ago; should these trends continue the rate of foreclosures will likely rise and tenants will be hesitant to lock into long-term pricing.  Shorter lease terms, increased concessions and an unstable economic environment will create challenges for landlords while banks will face tough decisions on newly-constructed properties and recently-acquired assets.

    It is worth noting that the Southern Nevada market has less office space occupied today than it did one year ago.  Looking forward, limited proposed projects are likely to gain financing, which may have commercial office developers seeking out alternative product types to focus on.  The market is poised for a commercial construction standstill within the next year as some of these properties enter a less-than-welcoming market and others fail.  Expect extended lease-up periods and falling land prices as the number of exit strategies become fewer.

Jake Joyce
Jake Joyce Project Manager, Applied Analysis