The Northern Nevada office market is starting off a bit bumpy in 2019 with vacancy increasing from 11.8 percent at the end of 2018 to 12.5 percent this quarter. This was due to 78,154 square feet of negative net absorption, continuing the downward trajectory seen in the fourth quarter. Vacancy was as low as 11.0 percent in the third quarter of 2018.
While last quarter’s give-back of space was relegated to a few buildings with a high amount of vacancy and large blocks of Class C space, the first quarter of 2019 was different. Instead of large blocks of space being returned in specific locations and classes of buildings, the give-back this quarter was a variety of small vacancies in all classes and submarkets and the delivery of new space to the market.
As vacancy increases, the market is starting to see rent decrease with average asking rates dropping from $1.79 per square foot at the end of 2018 to $1.72 per square foot per month full service in the first quarter of 2019. Average asking rents for each class are as follows: $1.98 per square foot for Class A, $1.70 per square foot for Class B, and $1.47 per square foot for Class C.
Sales continued in 2019 the way they ended, with several significant transactions over 20,000 square feet closing in the first quarter. Many of these were investment sales, including two that were 100 percent occupied at the time of sale. With the flattening leasing trends occurring in Northern Nevada, it is a breath of fresh air to see investment sales continue with enthusiasm.
Southern Nevada’s office market continued in 2019 to post the strong demand experienced in 2018, presaging a lucrative 2019 if the economy remains strong. With a general lack of new office development in the Valley, even somewhat lower levels of net absorption could see vacancy reach 11.5 percent by year’s end. Asking rates for office space are increasing, and will either stimulate additional office development or decrease demand, depending on just how strong the economy is in 2019.
After two years of significant improvement, Southern Nevada’s medical office market slowed down a bit in the first quarter of 2019. Demand was still positive and vacancy still decreased, but not as much as in 2017 and 2018. This probably means that the pent-up demand for medical office space that drove performance in 2017 and 2018 has now largely been met, and the market is returning to a more normal level of demand. The medical office market is expected to continue to grow in 2019, but at a slower pace than last year.
The chances of a recession in the next 12 months appear to be low, but if those chances increase over the course of the year then short-term investors may begin accumulating cash to take advantage of foreclosures in a recession. For long-term investors, the danger is overpaying at the height of the market. Nobody can tell precisely what lies ahead, but due diligence always pays off in the end.