Las Vegas
The Las Vegas Valley office market is facing significant challenges as the inventory base continues to expand even as office-using employment continues to contract.
During the latest quarter, the market reported two major project completions totaling 364,800 square feet, which brought total inventory to 49.3 million square feet.
Overall availability in the market reached 22.1 percent of inventory, representing a jump from the 19.6 percent reported three months prior and 16.9 percent posted one year ago. When excluding build-to-suit product, or owner-user buildings, the speculative vacancy rate reached 24.2 percent valley-wide. The rise in vacancy is attributable to substantial vacancies in new properties entering the market and negative net absorption (out-migration) of existing buildings (-920,600 square feet).
The commercial office market is poised for increasing instability as fundamentals reached a tipping point. With vacancies approaching 30 percent in key areas, many landlords will be required to re-work terms with their lenders or face foreclosure as the supply-demand balance within the sector is not expected to improve in the next few quarters.
A number of office buildings remain stalled in the construction process, suggesting investors or lenders have reserved against or written off these assets. This implies the alternative to complete construction and potentially hold as vacant was more costly than the option selected. With market expectations running thin for landlords and tenants, pricing will ultimately be the release valve. While immediate demand is unlikely to develop, corrections will include a resetting of price points in both rental and for-sale product. Until stakeholders faces this reality, unfinished and vacant product will continue to diminish the commercial office market.
Reno-Sparks
The Northern Nevada office market has hit bottom for this cycle, however our crystal ball is still fairly murky. There are some “green shoots” to indicate this may be the bottom. First, the vacancy rate did not increase from last quarter’s 21.2%. However, it did not fall either. The good news is that we had positive net absorption of 3,731 square feet. This is the first positive absorption for a quarter in about two years. Second, California company, Copart, purchased the 25,000 square foot, Thomas Creek Building Two on Double R Blvd., helping to reduce the vacancy in the South Reno Corridor, which has been the hardest hit submarket. The vacancy rate in this sub-market fell from 32.3% to 28.3%. Third, the vacancy rate reduction in the South Reno Corridor submarket also portends the beginning of a trend for tenants in class “B” and “C” office buildings in the older Reno and Sparks submarkets to upgrade to newer class “A” office buildings in the South Reno Corridor. In support of this theory, the vacancy rate in the Central Reno submarket jumped from 15.3% last quarter to 19.9% this quarter. Those tenants with expiring leases in older building can move to a true class “A” office building for little to no difference in rent. This shows confidence by those businesses willing to sign new leases to upgrade their offices. Fourth, we believe that Copart moving to Reno from California is the beginning of a larger overall trend of firms exiting California for the quality of life and favorable tax treatment in Northern Nevada. As the housing market in California starts to recover, look for an increase of firms moving to Nevada.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno