Commercial vacancies climbing higher

By Brian Wargo (contact), In Business reporter

Fri, Jul 10, 2009 (3 a.m.)

Commercial developers, lenders in 'stare down' (6-26-2009)
Worst in nation: Las Vegas commercial properties in distress (6-19-2009)
Office market depressing land prices in valley (6-12-2009)
Vacancies don't deter longtime LV developer (6-12-2009)
Housing collapse gets the blame for industrial market's woes (5-1-2009)
Phoenix's commercial market shows what awaits Vegas (4-24-2009)
Industrial vacancy rate soars in Southern Nevada (4-17-2009)
Las Vegas braces for commercial foreclosures (4-17-2009)

Real Estate in Crisis

More stories about business and the economy

Unemployment and the recession are taking a toll on Las Vegas’ commercial real estate, driving up vacancies and prompting landlords to trim lease rates.

Three brokerages agree that the office vacancy rate passed 20 percent at the end of the second quarter.

CB Richard Ellis reported an office vacancy rate of 21.1 percent on June 30, up from 18.8 percent at the end of the first quarter. Grubb & Ellis reported a 20.6 percent vacancy rate, and Colliers International said it is 22 percent — up 39 percent from the second quarter of 2008.

Retail and industrial vacancies, although much lower than office, are rising sharply as well, according to the firms.

“Jobs are the story,” said John Stater, Colliers International’s research manager. “If you want to know when the commercial market is going to bounce back, look at the jobs ... We are expecting the recovery to be rather slow. Jobs are connected to real estate, and the demand over the next two to three years is going to be lower than we would like.”

A six- to nine-month gap exists between changes in employment and changes in the number of occupied square feet, Stater said. Economic growth and development have been spurred by the gaming industry and residential construction, and their recovery is crucial for the commercial market, he said.

The industrial sector has lost 35,000 jobs since 2007’s second quarter. The office sector has lost 17,000 jobs since that year’s first quarter, and retail employment has fallen by 4,700 jobs from May 2008 to last May, Stater said.

The vacancy rate for retail space reached 8.9 percent in the second quarter, according to Colliers. That is more than double the 4.1 percent vacancy rate during 2008’s second quarter.

CB Richard Ellis reported a retail vacancy rate as high as 12.6 percent in the second quarter.

“Given that we are losing jobs right now, we are probably going to continue to see occupancy decrease through the rest of this year,” said Stater, who added, “we are dealing with more than just the problem of the recession ... We have a lot of issues to work through in Las Vegas. It will probably be two to three years before we have any major new development.”

The problem with commercial real estate is too much supply, Stater said. There is a supply of 3.3 years of industrial, 7.9 years of office and 2.7 years of retail space. A normal level would be eight to 10 months, he said.

There is an excess of 6 million square feet of industrial, 4.7 million square feet of office and 2 million square feet of retail space, Stater said.

Absorption of that space could begin by the end of 2010 at the earliest and pick up in 2011, Stater said.

“These are big numbers, and this will take awhile for us to work through,” Stater said. “That is the story we need to look at. If we see a turnaround by the third or fourth quarter, which seems unlikely for Las Vegas, we can start seeing positive numbers by early next year.”

The problem is distressed commercial real estate that faces or is in foreclosure, Stater said. Residential has gone through its problem with foreclosures that commercial has yet to confront, he said.

There are 87,000 square feet of distressed industrial space. Complexes have been hurt because major tenants related to the construction industry have vacated their space, Stater said.

There are 850,000 square feet of distressed anchored retail space that increases to 2.2 million square feet when malls and other specialty space are added, Stater said. There are 900,000 square feet of distressed office space of which 450,000 square feet are owned by banks or the Federal Deposit Insurance Corp.

This distressed space will be sold at low prices and when it comes on line, that will push down rents, Stater said.

Office rents fell to $2.36 per square foot in the second quarter, a 13 cent or 5.2 percent drop from the second quarter of 2008, Colliers reported. Rents for industrial space were 71 cents in the second quarter, a 9 cent or 11 percent drop over the past year. Retail rents were $1.88 per square foot in the second quarter, down 27 cents or 12.6 percent over the past year, Colliers reported.

Further breakdown of the market

Despite a 21 percent valleywide office vacancy rate, CB Richard Ellis reports the western valley had the lowest rate at 12.6 percent, followed by downtown Las Vegas at 14 percent.

The southwest valley had a vacancy rate of 32.4 percent and the northwest valley had a 38 percent vacancy rate.

Downtown Las Vegas had the biggest decline in rents, falling 17 cents in the second quarter, said Brad Peterson of CB Richard Ellis. Landlords are offering more tenant improvement allowances, rent reductions, free rent and other incentives to attract tenants. These tenants, however, are negotiating shorter lease terms, he said.

As for the industrial market, CB Richard Ellis reported that tenants continued to move out of space in Henderson and the southwest valley.

“In the last half of 2009, we will see more tenants consolidating or leaving the market,” said Karolina Janik, CB’s industrial expert.

CB Richard Ellis puts the industrial vacancy rate at 8.3 percent during the second quarter, and Janik said it will approach double digits.

Colliers has the vacancy rate higher at 12.4 percent, up from 8.4 percent in the second quarter of 2008.

In the retail sector, CB Richard Ellis reports North Las Vegas has the highest vacancy rate at 20.7 percent, followed by the southwest valley at 17.1 percent.

Discussion: 8 comments so far…

By markp

7/10/09 at 8:30 a.m.

Suggest removal

this is round 2 of the property asset boom and bust, this in itself will plunge the USA into further turmoil, no amount of bailouts will help as this needs to be left to work itself out of the system, all a bailout does is prolong any recession / depression, whatever the governments state, we are not out of the woods yet, the financial system is still in depression state and will be for a few years more, as for the real economy any spending of bailout monies will be temporary and will serve as a false boom, causing more havoc..

any investor getting into property now really needs their heads testing!!!
By Dynamo

7/10/09 at 9:32 a.m.

Suggest removal

Actually....in response to markp, if the government doesn't create jobs through their stimulus, we will go the way of President Hoover. He was a very good business man and thought the same as markp: The economy will work it's way out. Well, four years later, he was out of office and it took Roosevelt two years to get his programs started and in 1938, he decided they had invested enough. He was wrong. The depression lingered on. My parents grew up through the depression and they said -- taking it to their graves -- that WWII saved the American economy.
The goverment's orders for military production of tanks, ships, trucks, etc. shut down commercial production. But, it put people to work. And, there were so many jobs and too few workers, that it enabled woman the opportunity to enter the work force. (Ever hear about: Rosie the rivetter?)
As for today, I am seeing property being forclosed upon at (for example) $1 Million with the lender turning around and trying to sell that same property at $600,0000 -- with no takers.
So, unless there are good paying jobs created, that will be what prolongs this depression. And, with the way banks lended money in the last ten years, they should be skiddish now. (Who thought up the 100% financing with stated income for non-occupied homes, anyway?)
By revtomperl

7/10/09 at 8:25 p.m.

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Tough times - I mall walk in Boulevard Mall- last summer it was almost completely occupied - I don't know the numbers but there are many empty stores now and some others which are apparently kind of temporary situations where management has put some of the kiosk people into empty stores and maybe gotten other stores to open in two spaces. I suspect the number is approaching 25% vacant and of course the Dillards which has moved out. It will get somewhat worse. Hopefully in the next two years we will finally see a turnaround. If you have a job keep it.
By markp

7/11/09 at 3:34 a.m.

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dynamo

I agree WW2 brought the country out of depression, however this time is different, how is the bailout money going to be paid back?

1) High taxes

2) Cheap money

both are a recipe for disaster
By stevem

7/11/09 at 9:28 a.m.

Suggest removal

the tourism numbers say it all.

this town is done.
By KillerB

7/11/09 at 10:28 a.m.

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Dynamo -- the flaw in your Depression to WWII logic is shown by questioning why, since we've been at "war" for almost seven years, it's getting worse for us on the home front? Plus America is no longer the production dynamo (not a pun) it once was.

Personally, I think this economic crisis was purposely created to (1) show who's REALLY in charge (the powers behind big global banking), and (2) bring the U.S. the rest of the way into federal socialism here and one world government globally.

Just my opinion. I could be wrong.
By fogcity

7/14/09 at 11:47 a.m.

Suggest removal

WWII did take American out of the depression, but the differences is we were supplying the rest of the world with goods and resources because America was the only industrialzied country not damaged by the war. Secondly, we were net exporters of oil at the time and now that we import 60 per cent of our energy our wealth is slowly being transferred outside the country. Social Security was in it nascent stages at the time and was not a major part of the budget as it is now. A huge stimulus to me was necessary but we definitely are not the same country as we were in 1940.
By vegas104

7/14/09 at 5:06 p.m.

Suggest removal

We need real production here in the USA. We no longer make actual things.

We do have a lot of natural resources and farmland luckily if it wasn't for that we would have been screwed a long time ago.

To fix the USA

1) We need to deport all illegals
2) Figure out how to bring production of goods back to the USA
3) Maximum our natural resources and farmland
4) Figure out how to create green energy fields in the non-arable tracts of land and export the surplus energy
5) Figure out how to get oil from the shale fields in the great basin

IMHO

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