Commercial Real Estate Market - March 2010

Office Summary

Fourth Quarter 2009

Las Vegas    

    The Las Vegas Valley office market reported its worst year on record, posting record-high vacancies, net move-outs and price declines in 2009.  Net absorption, or the change in the amount of occupied space between periods, remained negative for the fifth consecutive quarter. At the end of the fourth quarter, there were 38.1 million occupied square feet, the lowest level reported since the first quarter of 2007.

    The office market expanded to 49.5 million square feet by the close of 2009 as one build-to-suit project (48,000 square feet) completed construction during the fourth quarter.  New supply during 2009 totaled nearly 1.0 million square feet, which was roughly one-third of the 2.8 million square feet of additional supply reported in 2008.

    Positive net absorption associated with the pre-leased medical office building that came on-line during the fourth quarter was offset by space vacated in existing buildings.  The fourth quarter witnessed 163,700 square feet of negative net absorption, bringing the annual amount of net absorption for 2009 to -1.9 million square feet.  Since Applied Analysis began tracking the commercial office market in the early 1990s, this past year represented the only one in which annual net absorption was consistently negative for a calendar year.

    Continued contraction in demand for office space increased the vacancy rate to 23.0 percent by the end of 2009, up from 22.6 percent in the previous quarter (Q3 2009) and up significantly from the 17.6 percent reported one year ago (Q4 2008).  Excluding owner-occupied properties, vacancy rates in speculative buildings rose to 25.2 percent by year end, which represented an increase from 24.8 percent during the third quarter of 2009 and 19.1 percent one year ago.

Reno-Sparks    

    We finished the last quarter with slight negative net absorption, -2,208 square feet. This is for all intents and purposes a rounding error and indicates the market has been flat for the last three quarters. In each of the last the three quarters the net absorption as been 3,731, 2,614, and -2,208 on a total market of 6.77 million square feet.  However, we did finish the year with a total negative net absorption of 115,187 square feet. Ninety eight percent of the negative net absorption came in the first quarter.

    The vacancy rate came off its high of 21.2% to finish slightly better at 21.1%.  The vacancy rate has been relatively stable since the first quarter.  This makes sense since the there has been no new construction since first quarter and net absorption has been flat.

    We continue to see tenants moving around in the market.  There appear to be two dominant themes. One, tenants are moving laterally to get better lease terms and increase their operating margins.  Two, tenants are upgrading to nicer buildings for equal or less rent than their current building.  As mentioned last quarter, this leaves the class C buildings holding the bag.

    Most of the activity has been in either the South Reno Corridor or in Meadowood.  Clearly the best lease rates are in the South Reno Corridor, where the yearend vacancy rate is at 27%.  Meadowood has fared much better with a yearend vacancy of 16.2%.  Downtown finished the year with a vacancy rate of 22.4%.  All of these vacancy rates are yearend records.

Lease rates are still at 12 year lows, but do not appear to still be in free fall.  Clearly, the best deals are for sublease space, but many of these deals will go away this year as the master leases terminate.  Rates will not see much upward pressure this year.

    It is still a great time for tenants that have leases terminating.  For landlords, this will be another difficult year, but there appears to be some light at the end of the tunnel.

Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno