Industrial vacancy rates hitting record-high levels

By Buck Wargo

Fri, Jul 16, 2010 (3 a.m.)

Weakness in the Southern Nevada construction industry is pushing the vacancy rate for industrial space to record-high levels, and that sector’s recovery remains several years away, according to analysts.

Research firm Applied Analysis reported a 16.2 percent vacancy rate at the end of June, up from 15.4 percent in the first quarter and 12.2 percent in the second quarter of 2009.

Of the 103.3 million square feet of industrial space in the Las Vegas area, 16.8 million are vacant.

And prospects aren’t good with an unemployment rate at 14.1 percent and many of those jobs not expected to return anytime soon, Applied Analysis Principal Brian Gordon said.

“There will be an excess supply of industrial space for years, suppressing prices to levels not seen in more than five years,” Gordon said.

The average rent requested by landlords in the second quarter was 58 cents per square foot per month, down from 60 cents in the first quarter. It was 71 cents per square foot in the second quarter of 2009.

The industrial buildings under construction are built-to-suit projects. That includes the 97,000 square-foot FedEx distribution building at 7000 W. Post Road and Marnell Air Cargo Center with nearly 201,000 square feet near the airport, Gordon said

Unincorporated Clark County had the highest vacancy rate at 16.6 percent, up from 12.4 percent in the past year. That was followed by 16.4 percent in North Las Vegas, up from 11.1 percent in the past year. Henderson had a 15.1 percent vacancy rate and Las Vegas had a 14.9 percent vacancy rate, Applied Analysis reported.

CB Richard Ellis reported that the one encouraging note about the industrial market is that more than 800,000 square feet of industrial space was leased in the valley in the second quarter, bringing the total year-to-date leased space to more than 2 million square feet. That is double the amount of leasing activity through June 2009.

Attracting new tenants to Las Vegas is a key component to a market recovery, analysts said. Las Vegas competes for tenants with industrial hubs such as Phoenix and the Inland Empire in Southern California. Nevada remains a competitive place for manufacturing companies that have more than 150 employees, according to CB Richard Ellis.

“Nevada’s tax structure makes it an attractive locale for businesses considering relocating. However, rental rates have fallen so (fast) in competing regions that despite Nevada’s business-friendly environment, many distribution-type tenants are not choosing Nevada,” the firm said.

CB Richard Ellis projects the industrial market will remain stagnant through the end of the year, but it has a bright long-term future with the increasing leasing activity, halted new construction and tenants from outside the area exploring Las Vegas.

The most active businesses leasing industrial space during the first half of the year were involved in manufacturing, wholesale trade and construction, Colliers International Las Vegas reported.

Companies headquartered outside of Nevada took 68 percent of all the square footage occupied and that trend is expected to continue. Many were regional or national companies operating in multiple states, Colliers Research Director John Stater said.

North Las Vegas has the cheapest rents in the valley at 44 cents per square foot per month. That is 20 cents lower than the southwest valley, which has more than one third of the area’s industrial space, Applied Analysis reported.

Grubb & Ellis reported expectations among buyers and tenants are for leases to decline more and prices to continue to fall.

Lease rates and sales prices are at their lowest levels in a decade, but many think they are not low enough, the firm reported.

Colliers reported 3.7 million square feet of industrial space remains on the market for sale, down from 3.8 million square feet in the first quarter.

The sales price requested is an average of $124 per square foot, down from $156 per square foot a year ago. More than 65 percent of that space is in North Las Vegas and the southwest valley.

Dan Doherty, a senior vice president in the industrial division at Colliers International Las Vegas, said he thinks the market is close to hitting bottom for industrial space even though vacancy rates are still rising.

“We have seen downward pressure on rents and sales prices, and it won’t go down too much more,” Doherty said. “The one thing is nobody has a feel for the number of properties taken back by foreclosure.”

Those were obtained at lower than market prices, and that means rents will be lower than what the buildings were charging before, he said.

Doherty said he sees an increase in demand.

“It is not just companies moving from one building to another,” he said. “It is some local expansion, and we are starting to get calls from California companies. They are getting some confidence that their businesses have hit bottom, and they are starting to think it is time to lease or buy property in Las Vegas. At one point … that was 30 percent of my business, but I think the economy was in such dire straits that a lot of companies were afraid to do anything and were on the sidelines. They would like to get out of California.”

Many companies planning to move or that would like to move to Las Vegas from California thought Southern Nevada was too expensive five years ago, Doherty said. Not only does the reduced cost of industrial space help, but the lower home prices make it easier for their employees to join them as well, he said.

“I have gotten more calls in the last quarter than I have in all of 2009,” Doherty said. “They would like to get out of California, but they are waiting to see stability in the overall economy.”

California companies are dealing with the high cost of workers’ compensation insurance and power reliability, Doherty said. With unemployment in Nevada at 14 percent, labor is more affordable here, he said.

Doherty said by 2011, the bottom of the industrial market will be evident. It should be 2012 before rents and sales prices start increasing.

“You don’t have to buy or lease at the bottom,” Doherty said. “You just have to be close.”

Some have questioned whether the industrial market is the weakest of the commercial sectors, but Doherty said the office market is in worse shape.

The reason is there is much more office space than industrial space vacant and many more office properties are facing foreclosure and that drastically cuts rents, he said.