Commercial Real Estate Market - December 2007

Office Market Summary

3rd Quarter 2007

Las Vegas Market

According to the Nevada Department of Employment, Training and Rehabilitation, 230,600 office-related jobs were recorded in September 2007, an increase of 4,000, or 1.8 percent, from September 2006.

The office market is showing signs of transition. Rents have been stable at $2.51 to $2.52 per square foot for the past three quarters.  Net absorption is down both from the previous quarter and the previous year.  While absorption to completions is down from a year ago, this ratio has steadily increased over the past three quarters. While asking rents have remained flat for the past three quarters, the Q3, 2007 rent of $2.52 FSG represents a $.25 increase over rents from a year ago. All product types experienced positive changes in year over year rents.

At 10.9 percent, the Valley’s fourth quarter office vacancy rate represented a 2.3 percentage point increase. Class A vacancy increased by 2.7 percentage points to 7.9percent; Class B vacancy was up 3.2 percentage points to 11.4 percent; and Class C reported a vacancy rate of 13.3 percent, up by 2.7 percentage points over the previous year.  Absorption reached 664,476 square feet, down from 861,600 square feet in the second quarter. The amount of office space in under-construction and planned projects in the third quarter amounted to 2,328,223 square feet and 4,129,769 square feet, respectively. Residential market office space tenants have represented a notable share of tenants and recent reductions in these employment sectors will send ripples throughout the rest of the economy.

Reno/Sparks Market

Due to the slowdown in housing construction, as well as the sub-prime melt down, a large amount of recently vacated space was added to the market in the third quarter. The sub-lease list includes: Centex, 14,000 square feet; Lennar, 14,470 square feet; Pulte, 12,000 square feet. The downsizing of the Covance office added 17,000 square feet, and the shutdown of the Hartford Reno Office added 28,000 square feet added to the vast amount of sublease space in the South Reno Corridor. In addition, MLSG shut down adding 25,000 square feet of direct vacant space to the market. Lastly, a new 80,000 square foot build-to-suit for Employers Insurance is underway which, when vacated, will leave 76,000 square feet vacant in the Thomas Creek office park.

In total, 107,000 square feet of sublease space and 101,000 square feet of direct vacant space will push the sub-market vacancy rate toward the 25 percent range at the end of the first quarter 2008. It is apparent that the market is in favor of the tenants, who will have a good time playing “Let’s Make a Deal.”  

We suspect rents are down about $0.10 to $0.15 per square foot due to sublease competition. Other submarkets have fared much better with Meadowood at a 9.5 percent vacancy rate and the Old Southwest vacancy rate dropping from 18.7 percent to 10.3 percent. The fundamental reasons companies and people move to Northern Nevada, such as quality of lift and low taxes, have not changed. In the long run, we will be a more diverse and healthy economy because of it.