The Las Vegas Valley industrial market continued to show signs of weakness although the sector reported a decline in the vacancy rate during the past three months. The vacancy rate retreated slightly to 18.0 percent as 145,800 square feet of positive net absorption was reported during the third quarter. The current quarter is a turn-around from the prior ten consecutive quarters, which all reported negative net absorption. For comparison purposes, the vacancy rate is down 14 basis points from the previous quarter (Q2 2011), but remains up 1.6 percentage points from the same period a year ago (Q3 2010).
As vacancies remain near all-time highs, pricing has been negatively impacted as landlords compete for a limited number of tenants. Pricing in the industrial market continued to decline, falling 1.6 percent on a quarter-over-quarter basis to an average asking rent of $0.53 per square foot per month during the third quarter of 2011. Pricing adjustments continue to take place as elevated levels of supply persist; average asking rents remain down 7.0 percent from the $0.57 per square foot per month reported one year ago. The declines are much more dramatic when compared to peak levels reported in 2007, when the average asking rent reached $0.82 per square foot. Rents have been cut by more than one-third and effective pricing remains substantially lower.
The current industrial market vacancy rate is nearly double its 10-year historical average. At current inventory levels, approximately 12.0 million square feet of positive absorption would be required to bring the vacancy rate to a pre-recession level of 6.5 percent; a scenario unlikely to prevail during this decade. Looking ahead, a single build-to-suit project totaling 120,000 square feet remains actively under construction in the southwest submarket. Limited planned development remains on the drawing board as existing supply continues to outstrip market demand.
Southern Nevada analysis and statistics compiled by Applied Analysis.
There were 29 deals completed during the quarter which was down 37% from the prior quarter. In the third quarter, the average transaction size was 29,441 square feet with only one deal over 100,000 square feet. Total gross absorption was a sleepy 851,928 square feet which was well off the 1,905,557 square feet booked in the second quarter. Even though the gross absorption was small, lack of new space being added to the market enabled the quarter to end with a positive net absorption number of 315,633 square feet. This in turn led to a modest reduction in the vacancy over the last three months from 15.1 % to 14.6%.
With exceptional deals being offered on class A product, older buildings continue to suffer. Barring any new closures, the market is just a few deals away from a tight class A rental market and likely upward pressure on rents in that category. Lease comps continue to favor the tenant with low rates, but this will soon change. Class A rents will rise, but not enough to validate new construction. The question remains, will this tightening push users out of the market or will some turn to the forgotten class B & C product to meet their needs?
The only building constructed in the third quarter was High Power Investments’ building of 7,020 square feet within the Spanish Springs Business Center. The good news is there are three buildings under construction due to be completed in the fourth quarter. If all the roofs go on before the end of the year as planned, construction numbers for 2011 will be 721,615 square feet which is encouraging following 100,427 square feet in 2009 and 104,558 square feet in 2010.
The stage is set to see good fourth quarter numbers with a few deals close to completion in existing buildings and the three build-to-suits coming on line. With good first half and fourth quarter numbers, the year will end with overall good numbers and lowering vacancy as the market heads into 2012.
Northern Nevada analysis and statistics compiled by NAI Alliance Reno.