The Las Vegas Valley industrial market remained relatively flat, reaching 102.5 million square feet by the end of the first quarter of 2009. Inventory levels grew modestly as one project completed construction (104,000 square feet), resulting in an expansion of 3.8 million square feet over the preceding 12-months. This is the lowest new inventory level reported in a similar period since the first quarter of 2005 and well below the five-year annual average of 4.8 million square feet.
From a demand perspective, the industrial sector reported negative net absorption of 1.4 million square feet, which contributed to nearly 10.8 million square feet of vacant space. These market forces have pushed market-average pricing to $0.74 per square foot, a 3.9-percent decline from the prior year and the lowest average asking rent since the third quarter of 2006.
The disparity between supply and demand resulted in a rising vacancy rate that reached 10.5 percent by the close of the first quarter. During the preceding quarter, the market reported vacancies of 9.0 percent, well above the 7.6 percent average rate reported in Q1 2008. At the close of the first quarter, approximately 810,000 square feet of space was under construction, suggesting limited new supply will come to market during the balance of 2009.
As the current economic recession lags on, we can expect the discussion of expansion and relocation plans to move to a point beyond 2009. While vacancies rise during this cycle, expect asking rents to diminish further as property owners react to market forces, competitively filling space with tenant-favorable leases. This poses an opportunity for well capitalized operators and those willing to expand in or into a down market.
The overall velocity of the industrial real estate market continued to slow in the first quarter of 2009. The market experienced another significant increase in the direct vacancy rate, an increase in the sublease vacancy rate, negative net absorption, and the announcement of more industrial tenants leaving the market. Reno/Sparks continues to experience weakening demand, market contraction, downward pressure on market rents and values, and an oversupply of almost every industrial product type.
Net absorption registered a negative 1,000,859 square feet this past quarter. Despite seventeen completed lease transactions totaling 566,582 square feet and five sale transactions totaling 119,989 square feet, the first quarter of 2009 continued a trend of strong market contraction which started in the fourth quarter of 2008 (negative net absorption of 904,683 square feet). One bright-spot in the market is an increase in activity from third-party logistics providers. It would seem that, in a down economy, companies consider outsourcing their warehousing, trucking, and overall distribution functions to reduce operating costs.
Market leasing activity is expected to remain significant, but that the resulting market impact will be flat or negative. Industrial tenants will continue to take advantage of favorable leasing conditions to either trade-up into like-sized spaces or contract into smaller spaces. A continued stream of industrial properties are projected to be sold as more properties become available. Overall vacancy may increase slightly, but the large jumps from new speculative construction completions are over for the time being. Construction starts will remain flat until market fundamentals change.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno