Office sector enjoys resurgence in 2014, anticipates challenges in 2015
LAS VEGAS – Following two consecutive quarters of negative net absorption in the retail sector, the second quarterly market report of 2014 by Colliers International – Las Vegas highlighted more than 200,000 square feet of retail net absorption and more than 30,000 square feet of new completions in the retail sector. Compiled by John Stater, research director for Colliers International – Las Vegas, the report also demonstrates year-over-year decreases in vacancy in the industrial and office markets, validating the positive expectations of 2014 that the firm’s 2013 reports predicted.
Across the valley, retail vacancy stands at 9.1 percent, a decrease of 0.4 percent from the previous quarter, and retail employment in April, the most recent month of available data, shows a year-over-year increase of 5,800 positions. Investment sales have sparked interest in this sector; to date in 2014, sales of 15 centers have totaled 732,844 square feet with a total sales volume of more than $94 million, and single-tenant retail investment sales in 17 buildings have totaled 150,310 square feet, with a total sales volume of $87.9 million.
Strong preleasing in projects now under construction and nearing completion are expected to continue the trend of positive net absorption for the next two quarters, making 2014 a good year for retail in Southern Nevada. Plans to redevelop some existing retail centers will help take less desirable space off the market permanently, and thus also contribute to lower vacancy rates and a stronger market overall.
“Despite gross absorption being lower in 2013 and 2014 than in 2012, net absorption has been higher,” Stater said. “This suggests that fewer of Southern Nevada’s retailers are now downsizing or closing their doors.”
The industrial sector saw several important increases this quarter as well. The average asking rent has increased by three cents per square foot, and industrial occupancy increased for the sixth consecutive quarter, with net absorption nearly 250,000 square feet higher when compared to one year ago. More than 200,000 square feet of new product entered the market this quarter as well, and nearly 5,000 new jobs in the industrial sector were added.
“All in all, 2014 looks as though it will be the best year for Southern Nevada’s industrial market since 2007,” Stater said.
The office market also saw positive growth this quarter, with more than 440,000 square feet of net absorption. The sector added 2,770 jobs. Vacancy, which has been decreasing for four consecutive quarters, reached a low of 19.8 percent. Year-over-year, the amount of distressed office space, office properties that have received a notice of default or are at some stage in the foreclosure process, decreased by 175,000 square feet. Nearly 300,000 square feet of office space is expected to be completed in 2014, and demand for office space is predicted to remain stable in the second half of this year.
The first half of 2015 is expected to present challenges for the office market when some larger speculative developments are completed. Aside from Summerlin One and The Gramercy, office development will remain subdued, and asking rents will continue to remain near $1.87 full service gross until vacancy drops below 18 percent.
“The office market bounced back from weakness in the first two quarters of 2013 to produce four quarters of fairly strong demand,” Stater said. “Demand for office space will remain stable in the second half of 2014, with the potential for higher vacancy rates in the first half of 2015 when some larger speculative developments are completed.”
The medical office sector saw gains and losses this quarter. Despite positive net absorption in the first quarter of 2014, the medical office market posted negative net absorption this quarter, and vacancy in this sector rose by 1 percent. Despite this, however, the average asking rent increased by four cents per square foot, and the sector added 1,300 new jobs as well.
“A return to job growth outside of hospitals bodes well for the medical office market, assuming it can capture the expansions and new medical practices these job gains represent,” Stater said. “Increased demand for professional office and retail properties should drive asking rents up for those property types, and this alone might make medical office buildings more competitive in the marketplace.”
Southern Nevada’s land sales, while still significantly below prerecession levels, have seen gains in the first half of 2014. The first two quarters of the year saw more than 110 acres of industrial land sales, more than 425 acres of commercial land sales, and more than 460 acres of residential land sales. Until population growth increases, the land market in Southern Nevada is expected to continue to improve at a slow pace.
“While land sales are not booming, they are better than in the dark days of the Great Recession in 2009 and 2010,” Stater said.
Other key findings of the report, broken down by market segment:
Industrial vacancy now stands at 10.1 percent, down from 12.8 percent one year ago.
The industrial average asking rent now stands at 53 cents per square foot. This is one cent higher than a quarter ago and three cents higher than one year ago.
Industrial net absorption was 1,403,579 square feet, up from 1,156,393 square feet one year ago.
There was 219,490 square feet of new completions this quarter, down from 489,320 square feet one year ago.
Southern Nevada’s industrial job market improved in April 2014 compared with April 2013 with 4,970 new jobs in employment sectors associated with industrial buildings.
For the sixth consecutive quarter, Southern Nevada experienced positive net absorption in industrial product. Net absorption has now been positive in eight of the last nine quarters.
It is notable that 2014’s lower gross absorption occurred along with higher net absorption, indicating the industrial market experienced fewer vacancies of space now than one year ago.
Industrial vacancy has been on the decline since the first quarter of 2012, dropping from a high of 14.4 percent then to the current rate of 10.1 percent.
The weighted average asking lease rate for industrial space increased by one cent this quarter, going up to 53 cents per square foot on a triple-net basis. This quarter’s asking lease rate was three cents higher than in the second quarter of 2013.
Sales volume and average sales price are up in 2014 versus 2013.
If there were any doubts whether 2014 would live up to 2013’s excellent performance, the second quarter of 2014 should put those doubts to rest.
“When effective rents exceed asking rates, it indicates that asking rates are ready to increase,” Stater said.
Office vacancy stands at 19.8 percent. This is a 1.2-point decrease from one quarter ago, and a 2.1-point decrease from one year ago.
The average asking rent now stands at $1.87 per square foot. This is a one-cent decrease from one quarter ago, and the same as one year ago.
Net absorption was 444,818 square feet. This is a significant increase from one year ago, which saw negative net absorption of 32,167 square feet.
There were no new office completions this quarter, a decrease of 10,000 square feet from one year ago.
According to the Nevada Department of Employment, Training & Rehabilitation, between April 2013 and April 2014, a net of 2,770 jobs were created in employment sectors associated with professional office product.
Forward supply of office space now stands at 961,934 square feet, with approximately 13 percent of that space being in build-to-suit projects. Approximately 35 percent of the 833,000 square feet of speculative office space, or 291,000 square feet, that is planned or under construction is slated for completion in 2014.
Southern Nevada’s office market had 444,818 square feet of net absorption in the second quarter of 2014 and 572,312 square feet in the first half of 2014.
Office vacancy has been decreasing for four quarters, reaching 19.8 percent in the second quarter of 2014.
The amount of distressed office space decreased to 3,956,000 square feet in the second quarter of 2014, compared to 4,131,000 square feet of distressed office space at the end of 2013.
The weighted average asking rental rate for office space in Southern Nevada decreased by one cent this quarter to $1.87 per square foot on a full service gross basis. Asking lease rates have hovered around $1.87 for the past seven quarters.
The number and the total square footage of investment sales in the first half of 2014 decreased from the pace set in 2013.
Retail vacancy now stands at 9.1 percent. This is a 0.4-point decrease from one quarter ago, and a one-point increase from one year ago.
The average retail asking rent now stands at $1.30 per square foot. This is a two-cent decrease from one quarter ago and a four-cent decrease from one year ago.
Net absorption was 200,995 square feet. This was a significant increase from last quarter, which saw negative net absorption, and an increase of 100,229 square feet from one year ago.
There were 30,318 square feet of new completions this quarter. This is up from a quarter ago and one year ago, which both saw no new completions.
After two quarters of net absorption dipping into negative territory, the retail market turned around in the second quarter of 2014.
According to the Nevada Department of Employment, Training & Rehabilitation, retail employment in Las Vegas increased between April 2013 and April 2014 from 96,700 to 102,500 retail employees, an increase of 5,800.
Clark County’s taxable retail sales in the first quarter of 2014 totaled $2.11 billion, an improvement from the $1.93 billion of taxable retail sales recorded in the first quarter of 2013.
The Sprouts at Green Valley Crossing was completed in the second quarter of 2014, adding approximately 30,000 square feet to total retail inventory.
The remainder of 2014 should see 328,000 square feet completed in anchored suburban retail centers, and another 1.18 million square feet of other retail projects, including 875,000 square feet at the Downtown Summerlin regional center.
Retail vacancy in Southern Nevada was on the decline for nine consecutive quarters before it increased in the fourth quarter of 2013 to 9.2 percent. Fortunately, demand for retail space increased in the second quarter of 2014, bringing retail vacancy down to 9.1 percent.
From 2001 to 2014, retail vacancy averaged 6.6 percent, giving the market 2.5 percentage points to go before reaching the long-term average vacancy. At the current rate of net absorption, it could take the market more than three years to get to this long-term average.
The average asking rental rate for retail space in Southern Nevada stood at $1.30 per square foot on a triple-net basis.
Shopping center investment sales to date in 2014 totaled 732,844 square feet in 15 centers, with a total sales volume of $94.2 million. Single-tenant retail investment sales have totaled 150,310 square feet in 17 buildings so far in 2014, with a total sales volume of $87.9 million.
“When retail’s fortunes began to turn downward two quarters ago, we said that it was likely a temporary condition brought about by the normal business cycle,” Stater said. “It looks as though we were correct.”
Taking only the first four months of 2013 and 2014 into account, room occupancy has jumped from 84.3 percent to 87.7 percent, and the average daily rate jumped from $112.43 to $120.42. This suggests that Las Vegas is back in a big way. With significant expansions in room inventory on the way, it could not have happened at a better time.
Visitor volume in the first four months of 2014 was 13.7 million people, up slightly from the 13.0 million visitors recorded in the first four months of 2013.
Gaming revenue for Clark County stood at $3.15 billion in the first four months of 2014, down from the first four months of 2013’s 3.28 billion.
So far in 2014, revenue per available room (RevPAR) is $105.61, a significant increase over the first four months of 2013 when RevPAR stood at $94.70.
In April 2014, there were 273,000 jobs in the leisure and hospitality sector, an increase of 5,300 jobs since April 2013.
A total of 166 rooms were added to Southern Nevada’s inventory in 2013. In the first two quarters of 2014, 188 rooms have been added to inventory, representing the completion of the Cromwell, a renovation of the old Barbary Coast.
Future additions to the room inventory include the 3,500-room Resorts World Las Vegas project that will replace the defunct Echelon Resort project that halted construction in August 2008, and several smaller limited service properties, all likely to enter the market in 2017.
Limited service sales have been improved so far in 2014 with 827 units in five properties trading at an average of $44,595 per room.
On the casino hotel front, 2014 has seen the sale of the Cosmopolitan Las Vegas, a 2,995 room property for $1.73 billion.
It looks as though Southern Nevada will be able to accommodate the completion of the Cromwell and SLS without much difficulty; this will put property owners on a more secure footing moving forward, and not only increase their ability to renovate and reinvent the local hospitality sector, but also make their properties more attractive to investors.
“While visitor volume and gaming revenue have not shown any significant improvement, room occupancy and average daily rate have, and that suggests that the quality, for lack of a better term, of visitors to Southern Nevada is on the rise,” Stater said.
Medical office vacancy now stands at 19.8 percent. This is a one-percent increase from one quarter ago and one year ago.
The average medical office asking rent now stands at $2.15 per square foot. This is a four-cent increase from one quarter ago and one year ago.
Medical office net absorption was negative 61,189 square feet, up from one year ago, which saw negative net absorption of 100,802 square feet.
There were no new medical office completions this quarter. This is the same as one year ago.
Despite a glimmer of hope in the first quarter of 2014, Southern Nevada’s medical office market returned to form in the second quarter and posted yet another quarter of negative net absorption.
According to the Nevada Department of Employment, Training & Rehabilitation, between April 2013 and April 2014, a net of 1,300 jobs in the health care and social assistance sector were added in Southern Nevada.
No new medical office space has been completed in Southern Nevada since the fourth quarter of 2011, when a 57,600 square feet building was completed.
Vacancy in medical office space increased in the second quarter of 2014 to 19.8 percent, from 18.9 percent in the first quarter of 2014.
Medical office net absorption was negative in six of the past ten quarters, with total net absorption over that period of negative 196,079 square feet. This suggests that the medical office market, far from recovering, is still bouncing along the bottom.
While annual gross absorption has shown a slight improvement in the past two years, current levels of gross absorption are approximately one half to one third of what they were in 2009 and 2010.
Sales of medical office space have been weak so far in 2014.
Medical office space languished over the past four quarters due to a lack of job growth in the health care sector.
“We think that health care employment will continue to grow through 2014,” Stater said. “Ultimately, this job growth should stimulate demand for medical office space, but this demand may not be sure and steady.”
According to statistics provided by REIS, multifamily vacancy in Southern Nevada decreased in the first quarter of 2014 (the most recent quarter of available data), extending a three-year-long streak.
All submarkets, except University and West Central, showed positive net absorption in the first quarter of 2014, with the highest net absorption found in northeast with 79 units and Henderson/Green Valley with 77 units.
Effective rents stood at $859 per unit in the first quarter of 2014. This represented a rather significant 4.9 percent quarterly rent growth and seven percent annual rent growth.
REIS predicts that the next two years will see multifamily vacancy dip as low as 4.9 percent in 2015 before new construction begins driving vacancy rates back up.
Population growth, a key driver of Southern Nevada’s economy and of demand for multifamily, continued to recover from the lows of 2010. On average, the number of people turning in out-of-state driver’s licenses in 2014 increased by 3.3 percent from 2013, and is more than 20 percent higher than in 2010.
Multifamily sales decreased in the second quarter of 2014 compared to the second quarter of 2013, with only 2,178 units selling at an average price per unit of $85,800. In the second quarter of 2013, 5,584 units sold at an average price per unit of $69,900.
Investment sales of new homes, which are usually intended for the rental market in the near term, have declined over the past two quarters, and thus should stimulate demand for rentals in multifamily projects.
“Southern Nevada has seen vacancy rates in multifamily projects fall from a high of 11.2 percent in 2011 to the current low of 5.7 percent,” Stater said. “The continuance of this trend is by no means assured, but renewed migration into Southern Nevada and rising home prices should help to maintain it.”
Total sales volume for land in Southern Nevada remains well below the levels seen in 2007, but the market has recovered dramatically since the years of the Great Recession.
During the first two quarters of 2014, 112.25 acres of industrial land was sold, with a total industrial land sales volume of $44 million. The average sales price of industrial land in the first half of 2014 was $392,475.50 per acre.
During the first half of 2014, 429.1 acres of commercial land was sold. Total commercial land sales volume was $123.96 million. The average sales price of commercial land in 2014 was $577,605.50 per acre.
During the first two quarters of 2014, 464.3 acres of residential land was sold. The total residential land sales volume was $166 million. The average sales price of residential land was $357,192.00 per acre, a marked increase from a year ago, and a sign that the market is improving.
During 2013, 1,782 acres of residential land was sold, a 123 percent increase more than 2012 when 799 acres were sold.
Many elements of the local economy have recovered to pre-boom levels, but new home sales and in-migration into Southern Nevada are not among them. This has a negative impact on land sales.
Developers are on the hunt for residential land. A lack of improved lots should keep development low for now, and experts seem to agree that there will be no significant increase in residential construction until 2016 at the earliest.
“Until population growth increases, the land market in Southern Nevada will probably continue to improve at a slow pace,” Stater said. “Still, slow improvement is better than no improvement at all.”
About Colliers International
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