WESTERN SNAPSHOT, DECEMBER 2008

Las Vegas Industrial Market

Doherty

The Las Vegas industrial market recently surpassed 100 million square feet of inventory with slightly more than 4 million square feet completed year to date. Based on 1.2 million square feet currently under construction, expect to see 2008 end with 5 million square feet of new product completed and a total market base of 109 million square feet. With only 2.9 million square feet planned for development, and a small amount under construction, 2009 will see much less new supply as national and regional downward trends reach Las Vegas.

With an already limited industrial land supply, further restrictions on speculative lending, and most national players on the sidelines, next year will be a year of “catch up” on Las Vegas’ available inventory of approximately 10 million square feet. Almost 800,000 square feet of this is sublease space, which is more than double the amount seen historically. Having doubled in the past 16 months, the current rate of 9.7 percent represents 7 consecutive quarters of increasing vacancy.

Net absorption through the third quarter is 95,000 square feet. With an average year’s absorption at 4.5 to 5 million square feet, Las Vegas is clearly seeing the full impact of the downturn on the demand side. There is strong opinion that 2009 should see an increase in demand as many companies in Las Vegas have needs, but are waiting for prices to near bottom before acting. The lack of activity has caused most landlords to increase concessions, lower asking rents and take credit that would normally be turned away. The most successful landlords will be the ones who take a very active role in their projects. There seems to be much more of a partnership between brokers and their clients, and creative deal-making strategies should prove to be beneficial during the next 5 quarters.

The North Las Vegas submarket continues to be the preferred area for bulk warehousing with 55 percent of new completions occurring in this area and nearly 85 percent of planned projects going through 2009. Most of this planned product is in the distribution/warehouse category from companies such as ProLogis, DP Partners, Operating Engineers Pension Fund and Panattoni Development Company. North Las Vegas also had the lowest third quarter vacancy rate in town at 6.3 percent.

Notable leases include 282,000 square feet to Amazon at Prologis’ Park North Building 16. This is the final space of the largest spec building ever built in Las Vegas, totaling 513,240 square feet. Recent project completions include Thomas & Mack Company’s Northern Beltway Industrial Center consisting of 558,000 square feet across several buildings. Average lease rates for North Las Vegas for all product types are about $0.66 per square foot NNN, and sale prices, typically the lowest in the valley, range from $110 to $140 per square foot.

Located in the southeastern part of the valley, the Henderson submarket has seen the greatest impact of the down economy. With a base of just more than 12 million square feet and a vacancy of 13.8 percent, this area has been negatively affected by three large projects completing construction at roughly the same time. Harsch Investment Properties is just completing the second phase of its Henderson Commerce Center IV project totaling 240,000 square feet of flex and light distribution product. Conde Del Mar also recently completed the third phase of Valley Freeway Center, encompassing 155,000 square feet of flex and light distribution buildings, as did Northwestern Mutual on its fourth phase of Pacific Business Center totaling 216,000 square feet. All three projects are competing for limited deals in trying to get their projects stabilized.

Highly leveraged landowners are in the toughest spot of anyone in the valley. Developers who own land at 2006 or 2007 values are finding that underwriting based on current rents does not pencil. There is also no clear exit strategy for this scenario, as most land buyers are on the sidelines until they see the bottom. Industrial land prices 1 to 2 years ago, averaging upwards of $12 to $24 per square foot, have seen decreases by as much as 25 percent. Well-located sites with infrastructure in place will continue to command a premium, but at a lower level.

The near standstill in the lending environment has many owners of for-sale projects offering lease/purchase options at very aggressive lease rates and lease payments going towards a portion of the tenant/buyers down payments. The lack of confidence from buyers has pushed many business owners, who would like to purchase, into leasing. This in turn has placed further downward pressure on asking lease rates throughout the valley.

In 2009, expect a continued increase in vacancy to about 11.5 percent and hopefully a slight increase in demand. Once market confidence is reestablished by users and investment buyers, the tables will turn. The fundamentals of Las Vegas are still stable with job creation coming from several large resort projects such as MGM Mirage’s City Center, which will exceed $9 billion in construction costs. The most positive market components are a relatively low vacancy, limited development opportunities, the ability to reach 13 western markets on an overnight basis and a limited amount in the development pipeline. The ability to finance expansions and replace debt for Las Vegas companies is key for our continued growth.

Dan J. Doherty is a senior vice president at Colliers International in Las Vegas.

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