Office vacancies climb as rents head south, analysts say

By Buck Wargo

Friday, April 17, 2009 | 2 a.m.

The office vacancy rate in Las Vegas surpassed 20 percent during the first quarter and rents are tumbling with no sign of slowing, according to a consulting firm.

Restrepo Consulting reported the vacancy rate jumped from 18.4 percent at the end of 2008 to 20 percent by the end of March. That number is even higher at 21.7 percent when subleased space is included.

That’s quite a jump from the 14 percent vacancy rate at the end of March 2008. Of the 40.6 million square feet in the valley, 8.1 million square feet is vacant, the firm noted.

The office vacancy rates should increase even more this year because of the weak economy and because more than 600,000 square feet of speculative space is under construction, Restrepo Consulting Principal John Restrepo said.

“I don’t expect the office market to see signs of a sustained recovery until some time in late 2010 or early 2011 at best,” Restrepo said.

Nearly 700,000 square feet of office space was completed in the first quarter, but 500,000 square feet became empty than at the end of 2008.

That upswing in vacancy makes 2009 the year of the tenant, said Maria Guideng, Restrepo Consulting’s research manager. Tenants will have many options to make excellent long-term deals with landlords, she said.

The average monthly rents were $2.28 a square foot at the end of March, down from $2.40 a square foot at the end of 2008. A year ago, office landlords were seeking $2.52 a square foot.

The one-time shining star of the office market, high-end Class A space had the highest vacancy rate at 26.6 percent, Restrepo said. The lowest vacancy rate was Class B space, the second tier of space that is prevalent in the suburbs, at 17 percent. Medical office had a 17.8 percent vacancy, Restrepo said.

Downtown Las Vegas had the lowest vacancy rate at 8.4 percent, followed by the west central valley at 13 percent and eastern Las Vegas at 17.8 percent.

The area around McCarran International Airport had the highest vacancy rate at 27.1 percent, followed by the southwest valley at 24.9 percent. North Las Vegas had a 23.7 percent vacancy rate, Henderson was 22 percent and the northwest was 21.1 percent.

CB Richard Ellis

The brokerage firm reported similar trends as Restrepo, putting the vacancy rate at 18.8 percent, up from 17.2 percent at the end of 2008. It reported downtown Las Vegas had the lowest vacancy rate at 11.6 percent, while the southeast valley had the highest level of vacant space at 1.3 million square feet.

CB puts the lease rates at $2.40 a square foot, the same as 2008’s fourth quarter, but said the real lease rate is lower because of concessions offered by landlords.

But the firm reports there has been movement in lease rates depending on the area. Downtown Las Vegas rates increased 15 cents to $2.73 and the rates for the area near the airport increased 11 cents to $2.72. Decreases of about 10 cents were reported in the northwest, $2.37; west, $2.39; and central west area, $2.03.

One good sign for the office market is that construction is much slower than the past, the firm notes.

Colliers International

The brokerage listed the vacancy rate at 20.9 percent, up from 18.6 percent at the end of 2008.

Colliers doesn’t forecast any recovery until late 2010 or early 2011, with most of the leasing activity this year consisting of tenants moving to find lower rents and smaller space.

It put rents at $2.41 a square foot, 1 cent higher than the fourth quarter of 2008. When adjusted for inflation, it actually fell 1 cent and is down 26 cents since 2007’s fourth quarter.

The reason for the increase is that jobs associated with office space decreased for the third straight quarter. Between February 2008 and February 2009, 7,900 office jobs were lost with the largest group in the professional and business services sector.

A bright spot has been rising employment in the health care and social assistance sectors, the firm notes. Any increase in space that is occupied tends to lag six to 12 months behind any employment gains and will be the best indicator of when the market will improve, according to Colliers.

The firm reported that vacancy in the newly created space stood at 76 percent. Some of the most recent completions were Montecito Point, the Arroyo Business Center, Breakthrough Way at the Nevada Cancer Institute, Summerlin Medical Center and Centennial Hills Center.

At the end of the first quarter, 904,000 square feet of space was either under construction or planned, down from 1.8 million that was under construction or planned by the end of 2008.

Some projects were halted and others were unable to get financing.

The firm reported that leases increased slightly in the first quarter because tenants were either downsizing or seeking lower rents. The teaser rates that landlords circulated in the fourth quarter became the advertised rates during the first quarter, the firm reported.

Valleywide, Class A’s vacancy rate is at 28.3 percent, with most of it near the airport and or in the southwest valley, both of which had vacancy rates exceeding 65 percent, the firm reports.

At Town Square, the office component represented 63 percent of the area surrounding the airport.

The demand for Class A space should continue to decline as should Class B, but the firm said Class C space should fare better because it has the lowest lease prices.

Grubb & Ellis lists the vacancy rate at 19.3 percent, up from 18.5 percent at the end of 2008.