Demand for office space in the Las Vegas valley remains relatively weak as new product entered the market. Inventory rose during the quarter to 50.4 million square feet as two new projects were completed. Office space totaling 145,000 square feet as part of the first phase of Tivoli Village and nearly 8,200 square feet of space on Henderson’s historic Water Street completed construction during the second quarter.
Looking ahead, seven projects totaling more than 1.1 million square feet remain under construction, of which 910,000 square feet (79.8 percent) are non-speculative government offices, including new city halls for Las Vegas (310,000 square feet), North Las Vegas (210,400 square feet), and a 390,000-square-foot building for the Las Vegas Metropolitan Police Department. Of the 2.6 million square feet that remain in planning stages, nearly 800,000 square feet is from previously stalled or delayed projects, much of which will likely remain that way until fundamentals reverse course.
With a nearly 0.7-percentage-point increase during the quarter, the vacancy rate reached a new all-time high of 24.8 percent. On a year-over-year basis, the vacancy rate has increased 0.8 percentage points. The latest report indicates that more than five years of excess inventory now sits vacant, assuming normalized vacancies and historical demand trends. Pricing continues to be impacted as average asking rents across the valley fell to $2.03 per square foot per month, down from $2.05 in the preceding quarter (Q1 2011) and $2.13 one year ago (Q2 2010). Declines in effective pricing, or contracted rates on completed transactions that account for concessions, are off more dramatically.
A large amount of excess inventory is expected to remain on the market with both landlords and lenders continuing to feel the pressure of declining margins linked to falling rents and weak demand.
Southern Nevada analysis and statistics compiled by Applied Analysis.
Overall, the office market saw 39,421 SF of positive net absorption, which decreased the overall vacancy in Q1 from 18.23 percent to 17.71 percent in Q2. If this trend in positive net absorption continues, expect to see a 2 percent drop in vacancy this year. These positive signs in decreased vacancy rates were the result of the South Meadows and Downtown Submarkets, which had 30,391 SF and 17,127 SF respectively, of positive net absorption.
Even though the South Meadows Submarket experienced a very positive quarter, there is still a cautionary tale in the form of shadow vacancy-space available for sublease- within this submarket. The Downtown Submarket continues to benefit from low relative rental rates and companies relocating into Downtown from Class A, B, or even C properties previously in other submarkets.
Until the office market experiences several positive quarters in a row of declining vacancy, rental rates should stay relatively flat. Moreover, we could even see a slight decrease in rental rates within some submarkets. The South Meadows Submarket poses the most threat to decreased rental rates as thousands of square feet are set to hit the market in the coming months.
The arrival of space by years end, coupled with the continuous shadow inventory that seems to plague this submarket, rental rates should remain flat. Do not be surprised if a few buildings even lower the asking rental rate in the South Meadows Submarket. In that submarket, rental rates are $1.30-$1.65/sf/mo full service gross. In the Meadowood Submarket, rental rates remained flat in Q2, ranging from $1.45-$1.85/sf/mo on a full service gross lease. In the Central Reno Submarket, rates did not change, ranging from $1.25-$1.45/sf/mo full service gross. The Downtown Submarket remained flat in Q2, ranging from $1.40-$2.00/sf/mo full service gross.
Northern Nevada analysis and statistics compiled by NAI Alliance Reno.