The office sector in the Las Vegas valley continues to show signs of weakness as approximately one fourth of total inventory remains vacant across the valley. The vacancy rate reached yet another all-time high at 25.2 percent (12.8 million square feet) by the close of the third quarter of 2011. On a year-over-year basis, the vacancy rate has increased 1.5 percentage points.
Despite relatively weak fundamentals, new office space entered the market during the quarter, pushing total inventory to 51 million square feet. Completing construction during the third quarter was the 390,000-square-foot office space built specifically for the Las Vegas Metropolitan Police Department.
More than 750,000 square feet throughout six projects remain actively under construction across the valley. Of this total, 69.4 percent consists of non-speculative government offices, including new city halls for Las Vegas and North Las Vegas. Of the 2.6 million square feet that remain in various stages of planning, nearly 800,000 square feet is from previously stalled or delayed projects.
As vacancies have continued to trend upward, pricing levels have continued to deteriorate. The market reported a 1.5-percent price decline in average asking rents during the third quarter as compared to the previous quarter (Q2 2011). Valley-wide average rents fell to $2.00 per square foot per month, well below the pre-recession price point of $2.33. Compared to the same period one year ago (Q3 2010), pricing remains down 4.1 percent. Effective rents remain well below these price points after accounting for concessions offered by landlords.
A supply-demand imbalance remains in the Las Vegas office market, forcing price points to levels not seen since the middle of the last decade. Until significant investments resulting in private sector job creation occur, the valley will continue to experience elevated levels of office-market vacancy.
Southern Nevada analysis and statistics compiled by Applied Analysis.
The U.S. economy and labor markets start – stop momentum continues to influence the local market of Northern Nevada. Coming off a relatively positive Q2, market-wide vacancy stood still at 17.88%. The one noticeable difference quarter over quarter was the reduction in available sublease space; a sign of master leases expiring and the continuation of companies taking advantage of short term sublease opportunities at advantageous pricing. Neither way presents a fortifying net absorption gain to the local office market.
The long term and very large master leases of the home builders and associated trades that signed during the residential fizz have expired or nearing expiration. This has left those building owners with the decision to market the space in its entirety or to appeal to the Northern Nevada average tenant of 3,000 to 5,000 square feet by employing creative demising plans. Those building owners that have been proactive, such as is the case in the South Meadows submarket, have been able to redesign floor plates and back fill at market rates; an imperative strategy in today’s office market, if the building owner can afford to do so.
Pockets of the Meadowood submarket, namely the Kietzke Lane corridor, and specific buildings within the Central Business District, have seen gradual gains in lease rates. Although the free rent concession continues to play its key role, starting lease rates for quality space in these areas have touched the $2.00/sf/mos mark. Quality space in these two submarkets is limited and with no sign of new construction on the horizon, there will be instances when building owners will be able to push lease rates once again.
Overall, Class A office space averages between $1.70 – $1.80/sf/mos. Starting at the top, there is an approximate 20% discount between product classes throughout the Truckee Meadows.
Northern Nevada analysis and statistics compiled by NAI Alliance Reno.