The Las Vegas Valley office market reported its highest level of vacancy in recent history during the second quarter of 2008, 16.7 percent. During the quarter, a total of 1.3 million square feet completed construction, while a negligible amount of net absorption was reported at approximately 1,400 square feet.
Availability reached a new peak of 7.9 million square feet, a condition that is expected to remain elevated through the next several quarters. Compared to one year ago, vacancies are up 4.3 points from 12.4 percent, while vacancies 24 months prior were hovering at 9.5 percent. The 10-year average vacancy rate is approximately 9.7 percent, 7.0 percentage points lower than the level reported in the second quarter of 2008.
In addition to the existing inventory of 47.3 million square feet, the market is anticipated to expand by another 3.6 million square feet, or 7.7 percent, during the next year based on the amount of space in projects already under construction. In addition to active projects, plans for another 4.7 million square feet remain on the drawing board in the form of planned projects.
Consistent with historical trends, the commercial real estate sector lags residential and is impacted by not only the local economic climate, but also regional and national economic conditions. As confidence levels begin to report some improvement, the overall employment market firms up and stability in the housing market prevails, corrections within the office real estate market will follow.
The best we can say about the office market at this time is that the worst is behind us. In total, the market has returned about 270,000 square feet in the last year. This represents approximately 1,080 jobs based upon the typical occupancy load in the market. The net absorption for the 2nd quarter was a negative 125,619 square feet, our worst net absorption yet.
As you would expect this has caused the vacancy rate to rise accordingly. The overall vacancy rate rose to 19.2 percent. This is the highest it has been in the last ten years. In the South Reno Corridor, which includes South Meadows and Damonte Ranch, the total vacancy now stands at 28 percent. Even Downtown experienced a rise in vacancy from 18.4 percent to 20.6 percent. This will put a huge damper on any speculative construction in the next few years. In fact, we suspect the only office construction in the near future will be for a build to suit.
Rents have also continued to fall as aggressive landlord’s battle for the few tenants on the market. Free rent seems to be the concession of choice as landlord try to maintain a higher face value on their lease rates. There are only a few shell spaces available in larger buildings so tenant improvement incentives have not been as prevalent.
We think the worst may be behind us, but the near term outlook is not rosy. We project there will be slow market for the next 12 to 18 months as the local economy recovers.
Southern Nevada analysis and statistics compiled by Applied Analysis
Northern Nevada analysis and statistics compiled by Colliers International Reno