The Las Vegas Valley office market has yet to stabilize as vacancies edged upwards exerting downward pressure on average asking rents. During the second quarter, the market reported 426,800 square feet of negative net absorption, pushing the amount of occupied space down for the seventh consecutive quarter and to a level not seen since late 2006.
No new inventory was added to the office market during the second quarter of 2010. A handful of projects totaling 611,000 square feet remain under construction and are likely to complete by late 2010 or early 2011. The majority of the 2.5 million square feet on the drawing board will likely remain that way until market conditions improve.
Local economic conditions continued to contract during the quarter, challenging the office market and its ability to reverse its two-year down cycle. The vacancy rate rose to 24.1 percent by the end of the second quarter, up from 23.3 percent in the previous quarter (Q1 2010) and significantly higher than the 21.8 percent reported one year ago (Q2 2009). Excluding owner-occupied and built-to-suit properties, vacancy rates in speculative buildings rose to 26.5 percent by quarter end, which represented an increase from 25.7 percent during the first quarter of 2010 and 24.2 percent one year ago.
With market fundamentals correcting to levels existing well before the recession that began 30 months ago, it is likely that it will take at least that long to recover. That being understood, the typical leasing cycle will allow for the majority of the office users to take advantage of the historic price lows with lease expirations or renewals taking place during this window.
Rents have stayed depressed, but have not continued to spiral down further. The $1.50 per square foot full service range seems to be the current bottom in South Meadows. While there are some offerings at $1.00 per square foot full service, these are teaser rates with quick escalations in subsequent years. Meadowood still commands a $.10 to $.20 premium to South Meadows.
Overall, the vacancy rate increased to a new market high of 22.1%. However, there was some good news in certain submarkets. Meadowood and the South Reno Corridor were the only two markets to show an improvement in vacancy for the quarter. Meadowood fell from 16.4% to 15% and the South Reno Corridor fell from 25.1% to 23.4%. The worst performing market was downtown that went from 23% to 28.8%.
As the activity in discounted class A space increased, the vacancy rate in this category of building has fallen from 20.7% to 19.9%. This trend is expected to continue as tenants resume their flight to quality.
Construction is nearing completion for several buildings in Meadowood and South Meadows. The Customs Immigration Services building on Sandhill and the Williams Gaming Building on Trademark, should be completed in the 3rd quarter. This should provide a boost to net absorption, assuming other market conditions stay static.
The overall market lost 38,746 of net absorption. This brings the yearly total loss of net absorption to 79,648. If we follow the trend of last year, the loss in the 3rd and 4th quarters will be significantly less. The occupancy of the Williams Gaming Building and the CIS building in South Meadows will help in this effort.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno