While Las Vegas’ world-class Tourism sector depends chiefly on attracting out-of-area (including international) clientele, the small local general purpose, multi-tenant office market, by no means a major corporate address, is rooted within the local economy, including the Tourism sector and its trends. Thus the recession wreaked as much havoc on the office market as on tourism: four successive years of negative net absorption ending with 2011, alongside additional supply deliveries made along the way resulted in a doubling of the volume of vacant stock and of the vacancy rate, which rose above 25.0%. That dreary trend may now be coming to an end, however. “As visitor volume and convention business increase,” writes Marcus & Millichap in its third quarter report on the local market, the Las Vegas economy “will expand, supporting modest improvement in the local office sector.”
“Modest,” at present, is the operative word. A total of 115,000 square feet of positive net absorption reported by Reis for the first quarter of 2012 were followed by negative 76,000 square feet the quarter after. Vacancy ended the latest quarter at 25.6%, highest on Reis’ records for this market. A full 76,000 square feet of additional positive absorption along with a 10 basis-point decline in the vacancy rate followed in July. Additional modest net absorption over the remainder of the year should result in a modest decline in the vacancy rate, to 25.4%, just 10 points lower than the rate recorded a year earlier. Rents, meanwhile, have continued to struggle. At $23.81 psf and $18.09 psf, second quarter average asking and effective rates were down 0.4% and 0.3% for the period and were down 0.6% and 0.5% year-to-date in the wake of last year’s respective losses of 0.7% and 0.5%. Each rate lost an additional cent in July. While modest gains are expected for the remainder of the year, they will not be sufficient to return overall growth rates for 2012 to positive ground.
The year’s sole completion of competitive general purpose office space will be the 79,400-square-foot first phase of the Seven Hills Plaza complex in Henderson, which completed in July. A second phase, described as a medical-office property, completed the same month. Also classified as under construction but without specified completion date is the 125,000- square-foot Building 1 at Summerlin Center within the Summerlin master- planned community in northwest Las Vegas (outside of current submarket boundaries). Construction began in 2007 but was waylaid by the recession and the bankruptcy of developer General Growth Properties. According to an August report in the Las Vegas Business Press citing a research manager at Colliers International, however, the Summerlin Center office development “is apparently ‘rising from the dead’ and [is] scheduled to finally complete construction sometime over the next two years.”
In another positive sign reported by this source, “the amount of distressed office space, or properties that are in some stage of foreclosure, dropped by about 400,000 square feet between the end of 2011 and the middle of 2012.” In addition, the return of activity to the housing sector also is expected to benefit the office market. Thus, writes Marcus & Millichap, “the improving housing market should directly translate into office demand as mortgage and finance companies reoccupy space vacated during the recession.” In addition, adds this source, increasing numbers of owner-users are leaving leased space “to purchase properties while prices are low and SBA programs offer attractive financing. As a result, leasing activity could increase in the quarters ahead as fewer competitive buildings have space available.”
Reis expects slow but steady improvement in all market parameters for the remainder of the year and after. “As we continue to see improvements in the market and vacant space starts to become harder to come across we should start to see slightly higher asking lease rates over the next few years,” observes Cushman & Wakefield. “This market improvement is dependent on continued job growth and an improved economy.”