Office market depressing land prices in valley

By Buck Wargo

Friday, June 12, 2009 | 3 a.m.

The glut of office space that has resulted in the slowdown in development is contributing to depressed land prices.

Consulting firm Applied Analysis reported that the average price per acre in the Las Vegas Valley during this year’s first quarter was $240,000 — a 60 percent decline from $598,700 the first quarter of 2008. The price per acre in 2008’s fourth quarter was $391,900, meaning prices have fallen 39 percent since then.

Demand for land is weak with only 281 acres sold. None of the acreage sold during the first quarter was on the Strip, the firm reported.

During the economic boom, land changed hands at 10 times a greater rate, it reported.

Applied Analysis Principal Brian Gordon said the combination of stricter lending requirements, lack of demand by tenants and other buyers, and sharply declining profit margins have softened the land market.

During the first quarter, trustee sales and deeds in lieu of foreclosure increased because demand has subsided and forced many landowners into foreclosure, Gordon said. These types of transfers accounted for most of the transactions.

The average was affected during the first quarter by 72 acres in Henderson that traded hands for $55,400 an acre as part of a foreclosure sale, Gordon said. Excluding that transaction, the average value of sales was $304,400.

Gordon said that because national and local economic conditions worsened during the first quarter, many business reduced their operations or closed their doors — all of which affects the demand for land. With demand for new homes weak, landowners have few options to sell their properties, he said.

Despite the price drops, investors and developers have retreated from the market, he said.

“Commercial vacancy rates in all sectors continue to climb with no end in sight, and as long as unemployment continues to rise, we will ... see demand for vacant land diminish,” Gordon said.

Jake Joyce, Applied Analysis project manager, said many investors and developers are struggling to make sense of the uncertain market. Investors are taking the opportunity to benefit from bank-owned sales.

“We will continue to see market conditions worsen before they get better as a full recovery will be measured in years, not months,” Joyce said.

Derek Rafie, vice president of CB Richard Ellis, said the land market remains in a holding pattern because sellers haven’t lowered prices. The only buyers out there are those who plan to use it while investors are looking for bargains, he said.

What is happening is a lot of landowners are seeing a few sales and using them as bench marks to stick with their prices, Rafie said, adding that there aren’t enough buyers out there to do so.

In a normal market, there might be 30 to 40 sales to make a comparison, Rafie said. Even appraisers have problems in assessing values because of the lack of sales, he said.

What will determine prices are fire sales when they happen en masse, Rafie said. When they do, they will be evident to the market, he said.

“That is coming and it will be almost like the dam will break,” Rafie said. “The values will drop dramatically. It is going to reset prices. We are getting closer to it.”

There has been little demand for office space with a 20 percent vacancy rate, Rafie said. It doesn’t make sense to invest that much in property if there is enough to take care of needs for the next three to four years, he said.

Rafie said he wouldn’t be surprised if some land that has been selling for $25 a square foot goes for $5 to $6 a square foot, especially with the Federal Deposit Insurance Corp. disposing of property.

Groups are buying packages of property and discarding parcels they don’t want to keep long term, he said.