LAS VEGAS OFFICE MARKET OVERVIEW

STATISTICS, NEWS AND ANALYSIS OF CURRENT LAS VEGAS OFFICE VALUES

Official Appraisers of Las Vegas  News Site and Analaysis

According to a Grubb & Ellis, Property Solutions Worldwide, internet publication entitled “Office Market Trends Las Vegas: 1st Quarter 2007”:

“With approximately 406,000 square feet of newly completed office product, 2.7 million square feet under construction and 341,000 square feet of absorption in the first quarter, the Las Vegas office market is off to a healthy start.  However, sluggish residential sales in 2006 caused a slight decline in both employment and population growth. This trend may push vacancy upward over the course of the year as the market adjusts. 

The southwest submarket is booming with approximately 1.1 million square feet under construction. Lease rates for Class A product in this submarket jumped dramatically in the first quarter, while Class B rates rose only slightly. Despite these increases, activity was high with almost 300,000 square feet of absorption and a steady vacancy rate of 11.8 percent. Access to Summerlin, Henderson, McCarran International Airport, the Las Vegas Strip, three new hospitals and large amounts of new residential growth have made the southwest submarket one of the most popular places to do business.

The outlook for the Las Vegas office market is bright. Large Class A projects such as the 150,000-square-foot Charleston Pavilion Centre on West Charleston, the 285,000-square-foot Molasky Corporate Center on City Parkway, and the 239,000-square-foot addition to the Hughes Center, located at 3883 Howard Hughes Parkway, are expected to finish construction this year. While these popular projects are already mostly pre-leased, the remaining space will fill up quickly. Class A product in Las Vegas continues to grow to meet the demands of tenants and buyers, with many more projects coming through the pipeline this year.”

While Grubb & Ellis report the outlook for the Las Vegas market is bright, others offer a differing view as presented in the following article from the Western Real Estate Business website and authored by John Restrepo and Maria Guideng:

“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 16,200 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.

A summary of the Las Vegas Valley office market in 2006 providing strong support for the previous findings of Western Real Estate Business was provided on the Applied Analysis website section “Newsroom-2007” as follows; 

Valley office demand soft in 2006

Rents still increase, despite glut

January 15, 2007 - Southern Nevada's office market finished 2006 with a thud, recording a 10.5 percent vacancy rate, up 2.1 percent from the previous year, reports Applied Analysis, a local business advisory firm.

This marks five consecutive quarters of vacancy increases. Class A space, as always, remains in high demand, with a low, 5.2 percent vacancy rate in the fourth quarter, while speculative space softened to 11.9 percent. Net absorption, meanwhile, dropped to 2.5 million square feet in 2006 -- 28.1 percent less than the previous year.

The office market grew to 41 million square feet in the fourth quarter, adding 3.7 million square feet since 2005. Major additions included a new, three-story, 72,000-square-foot Class A building in Thomas & Mack Development's Corporate Gateway as well as buildings at GSG Development's The Park at NorthPointe, among other projects. Much of the activity was concentrated in the southwest and northwest submarkets, along the Beltway and I-95.

"While the office market's performance during the majority of 2006 reflected a relatively healthy environment, it is now showing clear signs that a materially softer condition is likely to prevail in 2007," said Brian Gordon, principal of Applied Analysis. "Forward-looking, supply remains substantial, with under-construction projects representing more than 10 percent of existing inventory, a condition that will certainly cause vacancies to rise."

There were also 4.2 million square feet of new space under construction in the fourth quarter, with another 4.7 million square feet worth of inventory planned for future development. Yet valley-wide, average asking rents increased to $2.29 per square foot triple-net in 2006, a 15-cent gain over the previous year.

Henderson had the highest rents, at $2.42 per square foot, while North Las Vegas was lowest, at $2.24 per square foot. But the basic market dynamics remain strong, with office-using employment seeing a 10.6 percent growth over the last year, outpacing all other major categories.

"Overall, 2006 experienced inflated prices, rising interest rates, construction costs, land prices and much uncertainty," said Dave Dworkin, a market analyst with Grubb & Ellis. "In the year ahead, new construction will gradually slow while existing, vacant product is absorbed into the overall inventory and the market goes through a much-needed, though mild, recovery cycle."

Current Office Market data  has been analyzed by a number of third party analysts in the following Las Vegas Review Journal article entitled “Local Office Market Continues to Add Space, Data Show”, January 13, 2007. 

“Las Vegas continues to build more office space even as the market is stabilizing, research analyst Dave Dworkin said in his fourth-quarter report for Grubb & Ellis, a commercial real estate firm.  Rising construction costs and land prices have done little to slow the persistent expansion of the Las Vegas office market, he said.  Grubb & Ellis reported 1.27 million square feet of office space under construction in the fourth quarter, including 574,740 square feet in the southwest submarket. Vacancy rate is running at 11 percent on 26 million square feet of total inventory.

There were signs that the amount of new office space was beginning to level off by the end of the year, Dworkin said.  "As everything started to skyrocket, a lot of developers got a little more hesitant to push product through the pipeline if no one can afford it," he said. "They finished the product that was coming through and let it get absorbed into the market before delivering new product."

A report in The Wall Street Journal earlier this month suggested that Las Vegas "may be taking a gamble" with new office construction. The city's suburban office market tied for the weakest rating among 52 U.S. markets surveyed by Moody's Investors Service.

Brian Gordon, principal of Applied Analysis, a Las Vegas-based research firm, said office projects under construction represent more than 10 percent of existing inventory, a condition that will certainly cause vacancy rates to rise.  "While the office market's performance during the majority of 2006 reflected a healthy environment, it is now showing clear signs that a materially softer condition is likely to prevail in 2007," he said.

Las Vegas added 3.7 million square feet of office space last year, including 1.1 million in the fourth quarter, bringing inventory to 41 million square feet with 10.5 percent vacancy, up from 8.4 percent vacancy a year ago, Applied Analysis reported.  It's the fifth straight quarter of rising vacancy and, with 4.2 million square feet under construction, vacancies are likely to push higher throughout this year, Gordon noted.

Most of the growth in office space is in the northwest and southwest submarkets where tenants such as attorneys, title companies, insurance companies and professional services are opening second offices, CB Richard Ellis broker Jayne Cayton said.  Among the more significant Class A office developments are the 16-story, 300,000-square-foot Molasky Corporate Center in downtown Las Vegas; a five-story, 117,000-square-foot building at Marnell Corporate Center south of McCarran International Airport; and the six-story, 150,000-square-foot Business Bank of Nevada headquarters in Summerlin. Together, they represent about $200 million in office construction.

Recent lease transactions reported by CB Richard Ellis include MGM Mirage taking 40,000 square feet at Hughes Airport Center; Cashcall taking 27,260 square feet at McCarran Center; Deloitte & Touche taking 22,531 square feet at Hughes Center; and Gemstone Development taking 11,870 square feet at Desert Canyon Business Park.

CB statistics showed 9.3 percent office vacancy for 25.2 million square feet of inventory and 4.2 million square feet under construction. Average monthly lease rates are $1.91 a square foot.  Dworkin of Grubb & Ellis reported asking rents of $30.24 a square foot for Class A, or premium office space, and $24.52 a square foot for Class B, on an annualized basis.  As the market continues to stabilize, asking rents for existing offices will remain lower than the price of new product. This trend may leave landlords of new buildings at a competitive disadvantage and their properties will sit vacant on the market, Dworkin said.

Class B properties represent the lion's share of new construction and absorption during 2006, partially driven by for-sale office condominiums, Commerce CRG managing partner Mike Hillis said in his year-end market review.”

Findings of the Moody’s Investors Service report as presented on RealEstateJournal.com also demonstrate a less than bright outlook for the Las Vegas office market per analysis of 3^rd quarter 2006 data.  The Moody report as presented on the journal website indicated that Las Vegas may be taking a gamble with a surge in new office buildings.  The report goes on to say:

“The Las Vegas region's suburban office market tied with Cincinnati and Ventura County, Calif., for the weakest ratings out of 52 suburban markets nationwide, while Las Vegas's central business district tied with Wilmington, Del., for the lowest ranking out of 46 core office markets surveyed in a Moody's Investors Service report. The new quarterly report based on third-quarter data is expected to be released this week.

The low ratings in both the suburbs and the central business district stemmed largely from Moody's views that new construction is outstripping demand in Las Vegas. Although industry estimates vary widely, Moody's expects about 3.2 million square feet of new suburban office space to be under construction or completed from the end of the third quarter of 2006 through the third quarter of 2007, while the increase in demand for offices from tenants is expected to be only about 1.3 million square feet of space

Area developers are putting up new buildings on the assumption that the economy will continue at its current pace, says Sally Gordon, senior vice president of Moody's Investors Service. Yet even high-growth markets have lulls, and Ms. Gordon says the Las Vegas pace isn't sustainable over the long haul.”

Despite the potential glut in available office space in the Las Vegas market, the projected higher vacancy rates are not expected to negatively affect pricing as discussed in the following In Business Las Vegas article, “Office Space Outpacing Businesses to Fill Them, October 2006:

“Slightly tougher times are ahead for Las Vegas Valley office market after enjoying below average vacancy rates for the last three years.  The office vacancy rate has inched up to 9.9 percent during the third quarter and is likely to surpass 12 percent in the next year as more offices under construction come on line, according to Applied Analysis, a business advisory firm that tracks real estate trends.   A year ago, the third quarter vacancy rate stood at 8.2 percent but even a strong demand for office space hasn't been able to keep up with the nearly 3.8 million square feet of new inventory coming on line in the past year, said Applied Analysis Principal Brian Gordon.

In the third quarter, for example, the office inventory grew by 422,000 square feet but there was only a demand for an additional 272,000 square feet, Gordon said.  The glut is going to worsen with the market reporting another 4.4 million square feet under construction, and another 6.8 million square feet is planned, Gordon said. Most of that construction is occurring where homes are being built on the periphery in the southwest, northwest and south Las Vegas Valley, he said.

"Office developers are sharpening their pencils as market conditions soften in the next 12 to 18 months," Gordon said. "That poses some challenges for office owners in the interim, but it's not a desperate situation and not a detriment to the overall performance of the market."   The reason there's so much construction in the pipeline dates to market conditions 18 months ago when the projects were financed and designed, Gordon said. At the time, land values were rising, employment was strong, interest rates were low and construction costs were stable.   All of that has since changed. A modest slowdown in job growth lessens the demand for professional, business and medical offices, Gordon said. Sizable job gains are tied to major casino openings and nothing major on Las Vegas Boulevard has opened since the Wynn in April 2005. The next project to open is Palazzo, Sheldon Adelson's megaresort, in late 2007.

The highest vacancy rate is in North Las Vegas with 13.8 percent, followed by Henderson's 12.1 percent. Clark County has an 11 percent vacancy rate, while Las Vegas stands at 7.6 percent.  Class A space has the lowest vacancy at 5 percent while Class C space has an 11 percent rate.

SOUTHERN NEVADA OFFICE MARKET INDICATORS

Source: Applied Analysis Website

Don't expect the higher vacancy rate to have much of an impact on pricing, Gordon said. The average lease rates, which stood at $2.23 per square foot, are up 9.3 percent from $2.04 per square foot one year ago.  Gordon said development costs, which includes land, construction and financing, don't allow the market to cut prices for new office space. The average rental rates should remain in the high single-digits for the next several quarters.

Brian Gordon, principal of Applied Analysis, a Las Vegas-based research firm, reported in the company’s “Newsroom” section of its website that

“…office projects under construction represent more than 10 percent of existing inventory, a condition that will certainly cause vacancy rates to rise.  “While the office market's performance during the majority of 2006 reflected a healthy environment, it is now showing clear signs that a materially softer condition is likely to prevail in 2007," he said.

Las Vegas added 3.7 million square feet of office space last year, including 1.1 million in the fourth quarter, bringing inventory to 41 million square feet with 10.5 percent vacancy, up from 8.4 percent vacancy a year ago, Applied Analysis reported.  It's the fifth straight quarter of rising vacancy and, with 4.2 million square feet under construction, vacancies are likely to push higher throughout this year, Gordon noted.

1^st Quarter 2007 findings as reported on the Colliers International website Office “Market Research” provide strong support for both the increasing lease rates and increasing vacancy rates defined in the previously cited publications.   Colliers International reports that “The past two quarters has seen the gap between new office completions and net absorption widen. In Q1, 2007, new completions beat net absorption by 681,405 sf. Naturally, this pushed office vacancy to 10.8%, the highest recorded office vacancy since Q2, 2005. This quarter’s vacancy is 1.5-percentage points higher than one quarter ago, and 2.4-percentage points higher than four quarters ago. Asking rents also continued to rise, to $2.51 psf FSG from $2.38 psf last quarter and $2.17 psf four quarters ago. On the positive side, employment in sectors traditionally associated with office space increased for the thirteenth consecutive quarter. Net absorption of office space also increased by 24% to 602,487. While the Las Vegas office market seems generally healthy, sup­ply is clearly expanding faster than demand can keep up.”

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