Commercial Real Estate Market - December 2009

Office Summary

Third Quarter 2009

Las Vegas    

    The Las Vegas Valley office market reported its fourth consecutive quarter of negative net absorption, suggesting the amount of space being vacated continues to outpace move-ins.  

    Office market inventory expanded by 214,600 square feet during the past quarter, reaching 49.5 million square feet.  Additions to the market were concentrated in the south and southwest sub-markets, with 55 percent of completions sourced to owner-user buildings and the remainder in speculative developments seeking tenants.  Despite the positive absorption sourced to the occupancies of two owner-users in the third quarter, market-wide net absorption was negative with 154,600 square feet.  During the first nine months of 2009, net move outs totaled 1.8 million square feet, which will almost assure a negative performance for the entirety of the year, a scenario that has not occurred in recent history.

    The latest supply and demand movement resulted in a record-high vacancy rate of 22.7 percent as vacant space reached 11.2 million square feet.  Current availability remains ahead of the 22 percent reported in the preceding quarter (Q2 2009) and the 17 percent posted one year ago (Q3 2008).

    With weakening demand for office product, excess supply levels and only a handful of projects actively under construction, it is likely the market will see development activity essentially cease by mid-2010.  In the near term, pricing adjustments will continue to prevail as business contraction continues and lender-involved transactions set the bar.

    Assuming market demand returns to normalized levels, approximately three and a half years of excess, effective inventory remains on the books.  This timeline combined with the period at which market demand turns positive could result in elevated vacancies for a period of five years or more.

Reno-Sparks    

    The overall vacancy rate dropped from 21.2 percent to 21.1 percent, which is not statistically significant since it is less than a half of one percent difference. The good news is that it did not jump up significantly.  Because of the rapid deterioration of the local economy, most of the surplus office space was given back to the market in the first quarter of 2009.

    Reno did continue to see the trend of tenants in older buildings move into nicer and newer buildings in Meadowood and the South Reno Corridor.  This will put pressure on landlords of older buildings. If rents drop much more, owners will not be able to cover operating expenses. Blame cannot be placed on tenants for upgrading to class A buildings for the same or lower rents, not to mention safer neighborhoods.

    Banks are just beginning to make contact with the need to sell foreclosed office buildings.  Most office building buyers in the last three years that took out mortgages in the 75 percent loan-to-value range are probably upside down.  With many small businesses closing up or downsizing, expect to see more buildings sold out of foreclosure in the next twelve to eighteen months.

    So where is the market heading?  With office occupancy being a lagging indicator, and unemployment in Northern Nevada rising, expect to see a slight up-tick in vacancy between now and next summer.  Expect to see vacancy start falling a year from now.  Rents won’t fall much further, as to do so would force most landlords to lose their buildings to their lenders. Construction will cease except for the occasional build-to-suit.  Land sales will be very slow with little demand for ground up building.

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