As the office real estate market begins to regain its footing after the major drop in September of 2001, many within the industry believe we are in the midst of a slow yet consistent upward trend. Although the current numbers seem to be improving at a snail-like pace, the improvement is there, according to the experts we interviewed. It might be hard to spot with the naked eye, but the “baby steps” to recovery are quietly making their way toward a complete revamping of the market.
“I am seeing a steady increase in leasing activity, but not a huge jump,” said Chuck Witters of Lee & Associates. “Leasing is up, especially in the areas of the northwest, southeast and southwest (Las Vegas).”
While last year’s market was simply trying to stay consistent after the tragedy of Sept. 11, this year’s market seems to be heading toward improvement, not merely survival. Much of the leasing market might be down slightly, thanks to lower interest rates, but the real estate market as a whole has benefited from the lower rates.
“The low interest rates have given more purchasing power as of late to buyers,” said Christopher LoBello with Marcus and Millichap Real Estate and Investment Company. “That’s really been driving the investment sector. But, with that, the capital rates are coming down, so it is becoming a double-edged sword.”
It seems as if the smaller business are utilizing the lower rates, while the large corporations are using more restraint. “A lot of people are now looking to own their own buildings instead of leasing,” said Tom Stilley, of Colliers Las Vegas. “The major corporations aren’t buying more right now, but the smaller entrepreneurs are looking to buy and are starting to buy their own buildings.”
Many see the decrease in leasing as something positive, so long as the larger companies keep their distance and let the smaller businesses make the moves. If smaller businesses buy instead of lease, it opens up a seemingly stronger market for the bigger companies. When smaller entrepreneurs begin making moves with confidence, it seems to cause a positive snowball effect around the community.
While many inside the industry are reporting minor growth between the final quarter of 2002 and the first quarter of 2003, the situation is still positive. The most profitable investors will be the ones who can maintain patience throughout the slow growth, as the inevitable speed-up of the market approaches at the end of 2003 or the beginning of 2004.
“I see this as probably a positive situation,” LoBello said. “There hasn’t been much change from the fourth quarter of 2002 to the first quarter of 2003. It still should be more improved and more stabilized than last year. I think we’re coming out of it, but it really won’t happen this year. We’re just at the beginning of the improvement.”
Stilley sees the market as a consistently flat line thus far in 2003. Many agree with Stilley’s belief, which reinforces the need to maintain patience as the market begins to slowly right itself after a rough last few years. “The good news for Las Vegas is that we’ve been fairly flat,” Stilley said. “In some places in the country, the office market is struggling, but here, we have had great net absorption. It all really depends on what you own in the markets as we continue to go on and get decent activity.”
As Southern Nevada continues to expand, especially near the newly finished Beltway, as well as in Summerlin and Green Valley, land remains at a premium. With the option of finding prime land, investors can find tenants who are looking to locate their own business in those areas.
Smaller “mom and pop” businesses vital to a community are far more likely to lease space in the expanding areas in the southwest, northwest and southeast. Residents of the master-planned communities there need dentists and insurance agencies, for example, and prime office space in these areas is exactly what the prospective tenants need to fill the community’s demand for their services.
“When you build in a certain area, you have to know the tenants you will be going after, and what the demands for the area are,” said Stilley on the growing needs of newer, budding communities. “Smaller buildings built in secondary locations are doing fairly well, because there are greater needs for local tenants like insurance agents or dentists.”
It seems as if some of the older areas in town are struggling for other reasons besides lack of available space or high cost. In the northeastern part of town, there has been cannibalism of sorts among the businesses. Moving from location to location for almost the same price has began a troubling trend, especially when the businesses are only moving one or two blocks away from their original locations in town.
As the outlying areas of town like Summerlin and locations near the Beltway continue to thrive and grow, the “inner city” of Las Vegas seems to get harder and harder to sell to prospective tenants. “There has to be an increase in concessions in certain markets,” said Randy Broadhead, senior VP in office leasing for CB Richard Ellis. “The places that are doing the best are the Beltway area, Summerlin and Green Valley. The older buildings in the sub-markets east of town are having more difficulty attracting consistent tenancy.”
While many agree with Broadhead’s perspective, some within the industry are more optimistic about a revival of the same areas. “We have a higher vacancy rate in the inner core, and owners have been hurt because many tenants wanted to move out to Summerlin and Green Valley,” said Kathy Campbell, a senior vice president at NAI Horizon. “Now, things are starting to improve. To fill the second- and third-generation space that was vacated, owners are offering more tenant improvement allowances to lure new tenants. Some are also lowering the leasing rates, at least for the first year. These concessions are showing some positive results, and these spaces are gradually filling up.”
There is a great deal of confidence in the Summerlin area, as well as in Green Valley and near the Beltway, but land availability still worries some. “It’s becoming more of a problem,” Stilley said. “It’s coming to a point where the land owner needs to have a better understanding of the best usages of the land. You want to find opportunity where you can create your own environment.”
Though certain areas of Southern Nevada are struggling, the numbers still depict a solid amount of business all over the Valley. “Pretty much all of last year was anemic,” said Broadhead. “It was that way until we had two major tenants occupy close to 300,000 square feet in a short period of time. Those two moves dropped the vacancy rate from 16.5 percent to 14.42 percent in the fourth quarter. Last year’s absorption rate was better than the year before, so we’re heading in the right direction.”