WESTERN SNAPSHOT, MAY 2007

Las Vegas Office Market

Restrepo

Driven by a strong resort industry, healthy in-migration and a rapidly growing demand for office-using employment (jobs related to professional and business services, financial activities, and health care and social assistance), the Las Vegas Valley’s office market has evolved dramatically during the last 10 years. According to the Nevada Department of Employment, speculative multi-tenant projects grew by 16,400 jobs in 2006 to just more than 195,000.

By year-end 2006, the spec office inventory stood at 34.1 million square feet in 1,637 buildings and eight submarkets. In 2006 alone, approximately 3 million square feet of new space was added. Most of this new office space was located in the southwest (1.3 million square feet) and northwest (615,000) submarkets. More than half of the new space in 2006 was Class C, while Class B represented 30 percent of these additions, medical additions were 17 percent and Class A space had no additions. The forward supply floodgates also opened in 2006, with upwards of 6.7 million square feet either under construction (2.8 million square feet) or planned (3.9 million square feet). If all 6.7 million square feet of this forward supply were completed (an unlikely event), it would increase the valley’s spec office inventory by 20 percent. To put this amount in perspective, it would take nearly 3 years to absorb all of this space at 2006’s net absorption of 2.5 million square feet. Additionally, if all available space in existing buildings is thrown into the mix, it would take more than 4 years to absorb. Most of this under construction and planned space was for Class A and Class B product.

New Class A product is expected to largely hit the market during first half 2007. So far in 2007, notable Class A completions include Marnell Corporate Center (112,048 square feet) in the airport submarket and Molasky Corporate Center (265,000 square feet) in the downtown submarket.

Class B and medical space are largely expected to be introduced in the latter half of 2007. Pre-leasing has been weak in Class B and medical space, so a surge of this product on the market at the tail end of the year could send vacancy rates up.

At 2.5 million square feet of net absorption, demand did not keep pace with the boom of new supply in 2006. This resulted in an absorption-to-completion ratio of 0.85 to 1 or 0.85 square feet of demand for every foot of completed office space. However, demand was sufficiently strong so that, despite large supply additions, the vacancy rate only increased from 8.7 percent at the end of 2005 to 9.3 percent at year-end 2006. While this is still at a reasonable level, the 2.8 million square feet of space under construction is likely to put upward pressure on vacancy levels throughout 2007.

By the end of 2006, the valley’s average monthly asking rent increased to $2.39 per square foot (full service gross) from $2.17 per square foot recorded the year prior. However, rents in real terms, on average, have not kept pace with inflation and only in fourth quarter 2006 did they rebound to surpass the $1.93 per square foot recorded in first quarter 2001 (the base-year). Since 2001, the consumer price index for the western urban areas has risen by 15 percent. After adjusting the fourth quarter’s office average rent for inflation, the $2.39 per square foot declined to $2.08 per square foot. Office rents, on average, have not kept pace with inflation during the last 22 quarters (5.5 years). In fact, real rents have been flat for the past three quarters.

Expectations for the Valley’s office sector in 2007 are less optimistic than they have been during the last 2 years as future projects face increasing challenges to provide a reasonable return, and there is a growing supply-demand imbalance in the for-sale office-condo market, which directly competes with much of the valley’s spec Class B and C segments. Other factors impacting the Valley’s office market in 2007 include limited land availability combined with relatively high development costs. However, Las Vegas’ healthy economy will continue to correct the area’s current supply-demand imbalance.

— John Restrepo and Maria Guideng are principal and economic researcher, respectively, at Las Vegas-based Restrepo Consulting Group LLC.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.