The Las Vegas Valley office market continued to deteriorate with rising vacancies and diminishing rents. Net absorption, or the change in the amount of occupied space between periods, remained negative for the sixth consecutive quarter. The market reported total first quarter negative net absorption of 81,200 square feet.
The office market expanded by 84,800 square feet during the first quarter, resulting in total inventory of 49.7 million square feet. During the last twelve months, a modest 843,100 square feet was added to the market, a level not seen since the 1990s. With 221,000 square feet of space currently under construction, Southern Nevada is expected to see the amount of new supply contract further throughout 2010 and beyond.
As the local economy continued contracting and demand for office space shrank, the vacancy rate rose to 23.4 percent by the end of the first quarter, up from 23.1 percent in the previous quarter (Q4 2009) and significantly higher than the 19.6 percent reported one year ago (Q1 2009). Excluding owner-occupied and built-to-suit properties, vacancy rates in speculative buildings rose to 25.7 percent by quarter end, which represented an increase from 25.2 percent during the fourth quarter of 2009 and 21.6 percent one year ago.
By quarter-end, average asking rents fell to $2.16 per square foot per month, a decline of 3.1 percent from the $2.23 reported during the previous quarter (Q4 2009), and 6.5 percent from the $2.31 posted during the same period a year ago (Q1 2009). The average asking rent valley-wide is at a point not witnessed in nearly five years.
The convergence of multiple factors is changing many of the traditional dynamics of the office market.
The most dominant has been the influence of the federal government. While the state, county and city are all contracting, the feds continue to expand, much to the delight of office landlords. In order of magnitude; Immigrations Customs Enforcement (ICE) leased 35,000 square feet (SF) on Sierra Corporate Center, The FBI leased 20,000 SF from Panattoni Development on Sandhill, Customs and Immigration Services (CIS) is having an 18,000 SF building built on Sandhill and the GSA expanded by 4,000 SF in Museum Tower downtown. This represents nearly 50,000 SF of net absorption.
Even so, the market registered a negative net absorption of just over 40,000 SF. This is similar to last year when the market returned 95,000 SF. It appears those businesses hanging on at year end threw in the towel in the first quarter. This year most of the space returned was downtown. This is a divergence from previous years where most of the space was returned in the suburbs.
Tenants are also starting to seriously consider upgrading their office, taking advantage of the huge surplus of prime Class A space for direct lease and sublease. Interestingly, Class A buildings had positive net absorption for the quarter, while space was returned to the market in Class B and C buildings.
When all the factors are combined, there is a new total vacancy of 21.6%. This is slightly higher than the 21.0% from the end of the year and a new record for the market.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno