During the third quarter of 2009, the Las Vegas commercial retail market expanded as several pre-leased, user-specific buildings completed construction during the quarter. Overall, the market expanded by 516,300 square feet during the third quarter, bringing total retail inventory in anchored centers to 51.8 million square feet. Expansions during the quarter included two Target stores, a Glazier’s Food Marketplace store and a The Home Depot. Projects that remain actively under construction totaled approximately 809,800 square feet, while planned space of 7.5 million square feet remains on the drawing board.
The completion of several pre-leased buildings contributed to overall positive net absorption, which included occupancies associated with Kohl’s expanded footprint. Kohl’s opened three storefronts in former Mervyn’s locations. The increase in occupied space resulted in positive net absorption of 545,100 square feet, which snapped the negative net absorption trend that persisted for the preceding three consecutive quarters.
With vacant inventory of 5.1 million square feet valley-wide, the vacancy rate moderated at 9.9 percent by the close of the third quarter. Vacancies during the second quarter of 2009 were 10.1 percent, but compared to the prior year (Q3 2008) vacancies remain up 3.3 points from 6.6 percent. For comparison purposes, the historical 10-year average in anchored retail centers is 3.9 percent, which is well below current levels.
With a new market dynamic in place, retailers will be squarely focused on cutting costs, stabilizing their balance sheets and right-sizing their business structure. These adjustments will result in further price adjustments, and landlords will become more creative to partner with potential sources of revenue.
With the U S economy beginning to show slight signs of improvement, so has retail leasing. Tenants in the discount, wireless, drug store, automotive and quick serve restaurant categories are looking to expand. There has never been a better time for expansion with bargains galore, available in locations that previously were too costly, or unavailable. Many landlords have had to face difficult decisions on the benefits of filling up vacant spaces and keeping tenants or holding out for transactions that make economic sense in the future. Filling space is not easy or cheap. To make deals, landlords are offering: rent of up to 30% less than two years ago; increased tenant improvement allowances; time to build out spaces; and free rent. The time to negotiate a lease now takes months rather than weeks and during that time, tenants often come back to the table to “re-trade” the deal.
Although the overall vacancy rate is the highest in history, it has remained relatively level this year with the third quarter ending at 15.4% versus the national average of 10.3% as reported by Bloomberg. Because store closings are not reaching anticipated levels, we expect the year-end vacancy number will remain stable, which is a bright spot in a year of gloom. However, the bad news is that retailers did everything they could in 2009 and those retailers that are still struggling, despite lease restructuring and cost cutting on all controllable expenses (including labor), may have to close their doors during the first half of 2010. Overall average asking rents decreased slightly to $1.77 per square foot from $1.79 the previous quarter and $1.85 year-end 2008. There is currently 2.36 million square feet of vacant space on the market, of which eighteen spaces are over 20,000 square feet. Net absorption totaled 25,693 square feet for the third quarter and 186,000 square feet year-to-date, which is due primarily to stores opening in Legends at Sparks Marina.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno