The office sector vacancy rate fell slightly during the second quarter of 2013, but remains elevated. The rate fell to 26.0 percent by the end of the quarter, down 20 basis points (0.2 percentage points) compared to the prior quarter (Q1 2013). However, compared to a year ago (Q2 2012), the vacancy rate remains up 40 basis points (0.4 percentage points).
The office sector reported approximately 115,200 square feet of positive net absorption during the second quarter of 2013. Net absorption through the first half of the year was negative 104,700 square feet due to nearly 220,000 square feet of net move-outs in the first quarter sourced to the Nevada Cancer Institute (143,000 square feet) and the University of Phoenix (40,300 square feet). Class B space reported the greatest amount of positive net absorption during the second quarter with 118,800 square feet of net move-ins, partially attributable to the sale of the 25,000-square-foot Palisades Business Park.
Three office projects totaling 220,700 square feet are currently actively under development throughout the valley. Construction on the Federal Justice Tower (129,000 square feet) and Robert T. Eglet Advocacy Center (46,000 square feet) continues to move forward in downtown Las Vegas. In addition, the second phase of Seven Hills Plaza; the 45,700-square-foot building will be the headquarters for Prudential Americana Group when completed.
The Las Vegas office market continues to trail other commercial real estate sectors in terms of recovery. However, a review of the amount of occupied office space per employee suggests improving conditions may be on the horizon. Employers have been increasingly more efficient with their office space. Assuming these trends continue through the end of 2013, office users will be required to acquire more space to meet their needs.
The data does not accurately depict the activity levels sustained throughout the summer months; an unusual change of pace compared to years past. This activity was primarily a product of local expansions. Although out-of-state inquiries for office product continues, the benefactor of this activity is primarily in the manufacturing and distribution market; a trend typical to Northern Nevada as a tax friendly distribution hub to the northwest. Yet, local expansions within service industries; namely insurance, mortgage and billing companies, is a sign of continued recovery. The out-of-state inquiries continue to be tech or call center/back office related.
Second quarter absorption was decelerated to 24,000 net square feet, nearly 30,000 square feet behind Q1. The Meadowood submarket led the charge with 29,000 net square feet while South Meadows saw a loss of nearly 25,000 net square feet. The overall effect of the ebb and flow of absorption quarter over quarter brought our overall vacancy down to 15.3 percent. The Meadowood submarket continues to be the stronghold at 12 percent vacancy while Downtown continues to see signs of health at 14.42 percent vacancy.
The outlook is appreciative in values and leasing activity. Although not yet made public, a major office business center is opening in Reno, which is a reflection of the continued small business growth in the community. The trailing deterrent is the Affordable Care Act (ACA). Small business owners, from staffing and executive recruiting agencies all the way to the nonprofit industries, have reported that the ACA has held back small business owners from full-time hiring fulfillment. The Northern Nevada market continues to improve despite this based on ingenuity and quality of life.
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