Office vacancy rate could hit 30 percent in parts of valley

By Buck Wargo

Fri, Jul 17, 2009 (3 a.m.)

Newly completed office space remains mostly empty, contributing to record-level vacancy rates that should drag down that economic sector into 2010.

Applied Analysis reported a vacancy rate of 22.1 percent in the second quarter, up from 19.6 percent in the first quarter. The vacancy rate was 16.9 percent at the end of June 2008, the firm reported.

Colliers International also pegs the office vacancy rate at 22 percent, a 39 percent increase since the second quarter of 2008. That doesn’t bode well for Las Vegas, and the valley’s office market recovery may lag behind the rest of the country’s by as much as a year, Research Manager John Stater said. He said the office vacancy rate may not level off or decline until late 2010 or early 2011.

Las Vegas has 49.3 million square feet of office space after 400,000 square feet were added during the second quarter, according to Applied Analysis. Much of the empty space is in the southwest valley where the vacancy rate was 27.8 percent at the end of June.

More than 900,000 square feet were vacated in the second quarter, Applied Analysis reported. The amount of space occupied at the end of the second quarter was the same as it was two years ago.

Applied Analysis Project Manager Jake Joyce said the office market is poised to reach its tipping point with vacancies approaching 30 percent in many areas. That will force landlords to rework terms with their lenders or face foreclosure because there isn’t any demand to fill space, he said.

“The time span for (the office market’s) unraveling and ultimate correction may extend well beyond 2010, a scenario that many cannot financially sustain,” Joyce said. “Much like the residential debacle that ensued during the past two years, office (space) will likely face the same snowball effect in the coming years.”

Currently, 1.4 million square feet of office space is under construction, which is below the 1.9 million square feet in the first quarter and 3 million square feet in 2008’s second quarter.

CB Richard Ellis reported the amount of planned office space dropped by 75 percent since last quarter as the reality of the recession set in. Most of that space is around McCarran International Airport.

Applied Analysis Principal Brian Gordon said several office buildings — about 400,000 square feet — have stalled in the construction process, suggesting investors or lenders may have written them off. With market expectations running thin, prices will be the release valve, he said. That means reduced rents and lower sales prices, he added.

The average rent during the second quarter was $2.32 a square foot, 1 cent higher than the first quarter and 6 cents lower than the second quarter of 2008.

The average lease rates for high-end Class A space was $2.81 a square foot, up 2 cents from the first quarter. Class B space went for $2.20 a square foot, down 2 cents from the first quarter. Class C space was $1.81 a square foot, down 3 cents from the first quarter.

Class A space had the highest vacancy rate at 24.5 percent, and Class C space had a 13 percent vacancy rate.

CB Richard Ellis reported the southwest valley, which has 12 percent of the valley’s space, had one of the highest vacancy rates at 32.4 percent. The northwest valley, which has 6 percent of the office space, had a 38 percent vacancy rate. The west valley had the lowest vacancy rate at 12.6 percent, and downtown Las Vegas had a 14 percent vacancy rate.

The airport area had the highest lease rate at $2.74 a square foot, followed by the southwest valley at $2.63 per square foot. Downtown Las Vegas was third with a lease rate of $2.56 a square foot.

The least expensive space was found in central Las Vegas with $2.02 on the west side and $2.06 on the east side. North Las Vegas average leases were $2.09 a square foot.

Colliers International reported Class A office space has a 30.6 percent vacancy rate and rents dropped 6 cents in the quarter to $2.97 a square foot. That is the first time rents have dropped below $3 a square foot since the recession began in late 2007, the firm reported.