Office construction slows to crawl in 2008 as vacancy rate keeps climbing

By Buck Wargo

Friday, Jan. 16, 2009 | 2 a.m.

The Las Vegas office market has been hit hard by the recession.

The amount of new space completed in 2008 was 36 percent of its 2007 level and the total space leased was half of what it was in 2007, according to Patricia Nooney, managing director of CB Richard Ellis, a commercial brokerage.

Several projects under construction have stalled, including 250,000 square feet in the mixed-use developments at Sullivan Square and 150,000 square feet at ManhattanWest.

Developers and investors are waiting to see how the markets and access to credit shake out, and construction should be sluggish throughout 2009, she said.

Because of the market uncertainties, the total amount of planned office space is less than a third of its level a year ago, Nooney said.

That’s good news because it prevents overbuilding while demand is down, Nooney said. Only 170,000 square feet of space was completed in 2008’s fourth quarter, down from 750,000 square feet in the fourth quarter of 2007.

The vacancy rate rose to 17.2 percent at the end of the fourth quarter, up nearly 2 percentage points for the year, CB Richard Ellis reported.

Grubb & Ellis, another commercial brokerage, reported a vacancy rate of 18.5 percent in 2008’s fourth quarter, well above the 13.1 percent reported in the fourth quarter of 2007.

“Existing building owners who have aggressively sought tenants to fill their properties continued to offer larger tenant improvement allowances, higher than normal commissions to brokers and generous amounts of free rent,” said Dave Dworkin, a research analyst with Grubb & Ellis.

But the lack of money made it difficult for some owners to finance tenant improvements, and that inability to fill space prevented many from refinancing loans, Dworkin said.

The office market has been hit hard by increasing unemployment and the cancellation of hotels and other projects, Dworkin added. Because company revenues are down, many don’t have the money to expand.

The highest vacancy rates were in the northwest and southwest valley, where it approached 25 percent, Nooney said.

Downtown and the western valley had the lowest vacancy rate at 11.3 percent because those areas have high-end space that is still in demand, Nooney said.

The average lease rates were $2.40 per square foot for full service in most areas, except in North Las Vegas, the central west, central and east valleys, where rates were closer to $2.10 per square foot, CB Richard Ellis reports.

Applied Analysis

The research firm reported the office market expanded by 246,800 square feet in the fourth quarter, a small portion of the 2.8 million square feet added for the year — the lowest amount since 2004. There were 3.7 million square feet of space completed in 2007.

The firm calculates a 17.3 percent vacancy rate, up from 13.6 percent in the fourth quarter of 2007. North Las Vegas had a 21.4 percent vacancy rate, followed by unincorporated Clark County at 20.2 percent, Henderson at 19.4 percent and Las Vegas at 12.7 percent.

Applied Analysis Principal Brian Gordon said he expects vacancies will continue to rise because of the slowdown in home construction and retail sales have business owners proceeding with caution.

The average rent was $2.34 per square foot, which is 2 cents lower than the third quarter.

The lowest vacancy rate was high-end Class A space at 11.8 percent. Speculative space had an 18.8 percent vacancy rate.

Some of the major projects completed in the fourth quarter were 144,300 square feet in Eastgate Plaza II in Henderson, about 65,000 square feet at the Hughes Airport Center and 22,000 square feet in the Plaza at Whitney Ranch.