The office sector’s performance continues to struggle as pricing fell amid a continued supply-demand imbalance. Rising three-tenths of one percent from the prior quarter, the vacancy rate reached yet another all-time high at 25.3 percent by the close of the fourth quarter of 2011. For the year, the vacancy rate climbed 1.5 percentage points.
Despite weak market demand, new office space entered the market during the quarter, pushing total inventory to 51.6 million square feet. Projects totaling 238,000 square feet completed construction during the fourth quarter of 2011. The largest contributor of new space included 210,400 square feet sourced to the new North Las Vegas City Hall located near North Las Vegas Boulevard and Civic Center Drive.
Spanning four projects, more than 466,900 square feet remain actively under construction throughout the Las Vegas valley. Among all projects under construction, 68.3 percent of the square footage is being built for use by governmental entities, including a new Las Vegas City Hall (310,000 square feet) and a Department of Homeland Security facility. Of the 2.6 million square feet that remains in various stages of planning, nearly 800,000 square feet is sourced to previously stalled or delayed projects, much of which will likely remain that way until positive demand trends resume.
As contraction in the office market persists, the sector continues to experience declines in valuation as vacancies continue to escalate and rental rates remain relatively soft. The market reported a 1.4-percent price decline in average asking rents during the fourth quarter as compared to the previous quarter (Q3 2011). Valley-wide average rents fell to $1.97 per square foot per month, a decline of 4.7 percent when compared to the same period one year ago (Q4 2010). Effective rents remain much lower after accounting for free rent periods and other concessions.
Southern Nevada analysis and statistics compiled by Applied Analysis
Looking back to our Q1 2011 report of nearly 12 months ago, the adage repeats itself; activity breeds activity. The Northern Nevada office market closes out a two year trend of positive net absorption and a decrease in overall vacancy.
Ending 2011 with a decreasing overall vacancy rate of 17.36 percent, the office market continues to improve netting positive absorption of 27,200 square feet. Possibly the better news, the funnel of sublease space on the market is diminishing, a tell tale that the general office market is preparing for steady improvement.
From a submarket perspective, Meadowood, particularly the Kietzke Lane-McCarran Boulevard corridor, continues to outperform the overall market standing at 14.28 percent vacancy. Rents within the Meadowood submarket are exceeding an effective $2.00 per square foot, full service gross. Yet, downtown recorded the most improvement absorbing nearly 90,000 square feet year over year.
The outlook, although optimism persists, continues to hinge on the growth of GDP, consumer confidence and the woes of widespread deleveraging. These factors, affected gravely by the upcoming election and future legislation, will determine the organic and inbound office space absorption of 2012.
Specific market sectors such as alternative energy, tech infrastructure and mining substantiate innovation in the local economy, yet the anxiety level remains high and is the impediment for job creation. Northern Nevada must continue to focus on industry diversification and the quality of life, Reno-Tahoe experience to attract and retain emerging companies.
Northern Nevada analysis and statistics compiled by NAI Alliance Reno