It’s a gut feeling: Las Vegas office market is recovering

By Buck Wargo

Friday, June 11, 2010 | 3 a.m.

None of the figures shows the Las Vegas office market is headed toward any recovery — but that hasn’t stopped commercial brokers from showing some optimism when they see any increase in activity.

“I don’t have any empirical evidence to show we are in a recovery — the numbers show a decline — but it is more of a gut feeling that there is more activity going on,” said Randy Broadhead, a senior vice president with CB Richard Ellis who covers the office market. “Maybe it means we are bottoming out.”

The office market needs it because Marcus & Millichap projects the vacancy rate will grow by 1.5 percentage points by the end of the year and top out at 25.6 percent. That’s a slower decline than 2009, when the vacancy rate rose nearly 5 percentage points.

Much of the interest in the Las Vegas office market lately has been from call centers and even trade schools that offer retraining, Broadhead said.

“The tenants we are seeing today are different from the heyday when everything was built around the housing market expansion,” Broadhead said. “The title companies, engineering companies and mortgage companies that fed the industry are gone or haven’t been expanding.”

Broadhead said call centers can gobble up some of the excess office space and that he’s working with prospects that can fill 30,000 to 50,000 square feet.

Call centers operating in other states are looking at Las Vegas because the cheaper rental rates and high unemployment rate can attract a lot of inexpensive labor at $10 an hour, Broadhead said.

In its latest report, Marcus & Millichap said the softness in the office market should continue, even though only 220,000 square feet of office space will be completed this year in Las Vegas, down from 600,000 square feet in 2009.

Businesses that reduced payrolls during the recession will be consolidating into smaller space once leases expire. The high-end Class A office space will struggle until the office job market improves in 2011, according to the report. The office market in the southwest valley, where vacancy has jumped from 16 percent to 38 percent in the past three years, will remain weak, the firm said.

“It is a tough market to predict,” Broadhead said. “It is more hope that it is going to be turning around. But we won’t see it until the unemployment rate goes down and some of the well-located office buildings fill up.”

Marcus & Millichap is predicting annual rents requested by landlords will drop 3.6 percent this year to $24.03 per square foot. Including concessions, the rents that are effectively charged this year will fall nearly 5 percent from 2009 to $18.09 per square foot for the year, the firm said.

A report from Restrepo Consulting Group and the Commercial Alliance Las Vegas projects rental rates to remain flat in 2010 and occupancy should slowly improve into 2011.

Landlords have been getting more aggressive in lowering rents and giving space for free for long-term deals, Broadhead said.

Landlords have been helped because tenant improvement costs have dropped from $60 a square foot 18 months ago to $40 a square foot today, Broadhead said.

Soozi Jones Walker, a corporate broker with Commercial Executives, said more tenants are looking for built-out space that is available and if they have pay for improvements, they expect significant concessions.

Smart landlords have been completing speculative build-outs for several months to lure tenants, Jones Walker said.

“It is almost like staging,” she said. “They talk about curb appeal in residential, but it works in commercial, too.”

Jones Walker said there are many basic floor plans that will work for most businesses, so landlords don’t always have to wait for a specific tenant.

Many tenants want to move within 30 to 60 days and if they have to wait for tenant improvements, it will take 90 to 120 days, Jones Walker said. And those tenants are still expecting amenities, she said. That means nicer carpet and high-end lighting.

“If landlords want to invest money to make space available in this type of market they should put in a few extra dollars and go the extra mile,” Jones Walker said. “It does make a difference in getting the space leased. If you start getting rents today instead of eight months from now, it all adds up.”

More tenants are even checking on the financial stability of landlords to make sure they don’t move into a building that’s about to be repossessed, she said. There have been cases where people have moved into buildings, only to have them repossessed and forced to move out a few months later, she said.