The Las Vegas Valley office market turned downward again as vacancies rose amid additional price declines. While no new space completed construction during the quarter, the market reported 118,800 square feet of negative net absorption, pushing the vacancy to a new high of 24.2 percent. For all of 2010, a record low 105,800 square feet completed construction while the market reported negative absorption of 559,200 square feet for the 12-month period.
Looking ahead, four projects totaling 617,000 square feet remain under construction, the majority of which is in a single 390,000-square-foot, build-to-suit government building. Projects actively under construction will likely be completed within the next 12 months. Of the 2.6 million square feet on the drawing board, nearly 800,000 square feet is from previously stalled or delayed projects, the majority of which will likely remain that way until the broader economic environment improves.
At the end of the fourth quarter, the vacancy rate increased to 24.2 percent, from 24.0 percent in the previous quarter (Q3 2010), and remains 1.3 percentage points higher than the 23.0 percent reported one year ago (Q4 2009). Measured among historical averages, the 12.1 million square feet of vacant space corresponds to more than four years of excess inventory. The 37.7 million square feet of occupied space represents a level not seen in four years. The average asking rents across the valley fell to $2.07 per square foot per month, or a decline of 0.8 percent compared to the previous quarter (Q3 2010). On an annualized basis, average asking rents declined 7.2 percent from the $2.23 reported during the same period a year ago (Q4 2009).
It is important to understand the ramifications of a market oversupplied with vacant space. With millions of square feet remaining vacant for several years and little demand anticipated in the near term, it is likely much of this space will be returned or restructured by lenders. This will likely have long-term consequences on the overall market, driving down prices for an extended period.
Ending 2009 with a record high overall vacancy rate of more than 20%, the office market is beginning to see positive activity ending 2010 at 17.84%. Most of the activity has been internally driven, with upgrades in space classification being optimized as prices continue to trade at ten-year lows. The Downtown submarket has recently seen a good deal of activity as more businesses are attracted to the revitalization of Downtown Reno and the amenities offered. Overall pricing continues to be stagnant, but this should improve as vacancy declines due to no new construction in place or planned.
The activity producing most benefit is that of local expansions and new business to our community. Notable transactions for the quarter included leases by Western Title Company (10,228 sf), Delphi Asset Management (5,524 sf), Greater Nevada Credit Union (5,400 sf) and Stifel Nicholaus & Company (5,117 sf). The quarter over quarter total office vacancy rate decreased slightly from 18.42% to 17.84%. This reflects the lowest overall vacancy rate since 2006.
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 more quarters of declining vacancy before landlords firm up rents. The median asking rents for Class A office space was $1.58 per square foot, Full Service, while median asking rents for Class B and Class C office space ranged between $1.20 and $1.30, Full Service. Effective rates are negotiated 10% to 25% below asking rates.
The pattern of stabilization Northern Nevada is experiencing is approximately one year old. Yes, in its infancy, there is cause for optimism. The end of 2010 brought in a positive net absorption of just over 1,000 square feet. The first positive within this data set since 2006. Baby steps indeed, but as no new speculative construction was built or planned and the build-to-suits for Williams Gaming and Customs Immigration Services are complete, look to cautiously develop this trend through 2011.
Southern Nevada Analysis and statistics compiled by Applied Analysis, Northern Nevada Analysis and statistics compiled by Colliers International Reno