The Las Vegas Valley industrial market continued to weaken as pricing declined among an increase in vacancies. The vacancy rate edged upward to 16.9 percent as 417,700 square feet of negative net absorption was reported during the quarter. For comparison purposes, the vacancy rate is up 0.4 percentage points from the previous quarter (Q3 2010) and up 2.4 percent points from the same period a year ago (Q4 2009). During 2010, the market reported total additions of 350,900 square feet, the lowest total since we began tracking the data in the early 1990s, while negative absorption totaled 2.2 million square feet in the calendar year.
The latest period reflects a new high in the vacancy rate, which has increased for 17 consecutive quarters. During this period, nearly 14.6 million square feet of industrial space has been added to the market. As only 22,000 square feet remain actively under construction and an additional 120,000 square feet planned for future development, the market is positioned to absorb second-generation space when demand turns positive.
Pricing in the industrial sector continued to decline, reporting an average asking rent of $0.56 per square foot per month during the fourth quarter of 2010. This is the second consecutive quarter in which pricing fell a modest one cent per square foot. Compared to a year ago, pricing remains down 11.1 percent, from $0.63 per square foot per month.
On a national level, indications of expanding economic activity in the manufacturing sector have been present for more than a year according to the Institute for Supply Management. With national improvements in the manufacturing sector on the horizon, the Las Vegas industrial market may follow suit, but timing will lag due to the current state of the construction and hospitality sectors. The oversupply of manufacturing space on the market at deeply discounted prices provides Southern Nevada the opportunity to persuade out-of-state businesses to consider Las Vegas as a viable alternative.
Has the tide turned? After 5 consecutive quarters of negative net absorption, we have finally turned positive. The number of expansions and new move ins outweighed the closures resulting in positive fourth quarter net absorption of 350,239 square feet. This in turn led to the vacancy rate dropping from 15.73% at the beginning of the third quarter to a current rate of 15.1%. Although vacancy remains high, we are encouraged by increased market activity as we enter 2011.
There were 43 deals completed in the fourth quarter totaling 795,630 square feet of gross absorption. Notable transactions for the quarter included leases by Benco Dental (100,000 sf), Swanson Health (52,500 sf), Velux (50,900 sf) and SK Foods (40,000 sf) as well as a purchase by Ranshu of 45,600 sf.
Although conditions are looking more favorable, building owners are continuing to be aggressive with low rental rates and sale prices to fill buildings. The market will need to experience a few quarters of declining vacancy before landlords firm up rents. The median asking rents for large bulk distribution space was $0.29 per square foot, while median asking rents for smaller flex and R&D space was $0.50 per square foot. Effective rates are negotiated 10% to 25% below asking rates.
Construction in 2010 was a paltry 104,558 square feet, comprised of five build-to-suit projects. There were no speculative industrial buildings constructed in 2010. As we head into 2011 with high vacancy and low rents, there is nothing planned and little justification or hope for a speculative project to be built this year. Currently, there is one build-to-suit of 90,000 square feet under construction in the Tahoe Reno Industrial Center for Schluter Systems. We anticipate a few more build-to-suit announcements as the year progresses.
Over the past two years, most landlords have felt like Mohammad Ali playing rope-a-dope. The long awaited drop in vacancy is the first sign that the abuse from tenants could be slowing. It is certainly not time to get aggressive but if you are a landlord, there is now a sign of hope. Some landlords have had enough and will fall. If the tide has turned, we hope most landlords stay in the fight as we gradually head towards a balanced market.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno