The Las Vegas Valley industrial market continues to report rising vacancies and further pricing adjustments. The vacancy rate moved upward to 19.0 percent as 418,900 square feet of negative net absorption was reported during the first quarter of 2012. For comparison purposes, the vacancy rate is up 0.4 percentage points from the previous quarter (Q4 2011), and is up 1.3 percentage points from the same period a year ago (Q1 2011).
As vacant inventory pushes to new highs, pricing continues to be negatively impacted, with landlords incentivizing the limited number of potential tenants through additional price reductions and concessions. Average asking rents in the industrial market continued to decline, falling 1.9 percent on a quarter-over-quarter basis to an average asking rate of $0.51 per square foot per month during the first quarter of 2012. Pricing adjustments continue to take place as elevated levels of supply persist; rents remain down 6.6 percent from the $0.55 per square foot per month quoted rate reported one year ago. Compared to peak levels reported immediately prior to the Great Recession, rents are down 37.8 percent.
The fallout from the latest economic downturn, including the impacts of weakened levels of development activity, has created a hardship in the industrial real estate sector. The mass exodus of industrial product has continued for the better part of the past three years, with few signals that a turn-around is on the horizon. This is not to suggest transaction activity has come to a standstill. Quite the opposite has occurred as sales and leasing transactions have gained momentum, investor-driven purchases continue and tenant movements within the market take place. The cure to the current supply-demand imbalance is time. As the economic recovery takes hold, hard hit sectors of the economy will benefit, including the industrial real estate sector.
It’s a yo-yo market and this quarter was another throw down. Unexpectedly, a number of large tenants announced their departure or downsizing leaving more space vacated than absorbed. Vacancy started the first quarter at 14.6% and ended at 15.3% (13.5% direct plus 1.8% for sublease).
There were 39 deals completed 5,000 square feet or greater this quarter which is in line with an average quarter. What lacked was large deals making an impact on absorption. Gross absorption for the quarter was 797,897 square feet (down 43.2% from the prior quarter) with an average deal size of 20,459 square feet (over 20,000 square feet less than the average deal size for the prior three quarters). Closure or downsizing announcements showed tenants are not finished giving up space, leading to a negative net absorption of 499,662 square feet. The Q1 2012 is an abnormality as there are a number of large deals pending to help the market bounce back in the second quarter.
Although Class A rents are stable and set to increase when a few more large transactions occur, Class B & C product still languishes with years of supply. There is plenty of competition amongst the older building owners so rents are low.
Sales interest this quarter was primarily from owner/user purchases as opposed to investor purchases. Interest rates and prices are low enticing some tenants to become owners.
Contractors were encouraged last year as sizable projects by Urban Outfitters and Now Foods were built. Although there is talk of some new projects, overall construction activity has gone quiet once more.
Developers, contractors, architects, bankers and brokers alike all wish for the days of 2006 and 2007 but there may be a few more years in the Twilight Zone before we get back to normalcy.
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Southern Nevada analysis and statistics compiled by Applied Analysis; Northern Nevada analysis and statistics compiled by NAI Alliance Reno