Las Vegas Business Press :: News : Office market deflated by downturn

Office market deflated by downturn

BY TONY ILLIA

Financial market turmoil and money worries are causing Las Vegas Valley businesses to scale back capital expenditures and cut personnel resulting in an anemic third-quarter local office market. Diminished demand for office space and a glut of new capacity resulted in a 17.5 percent vacancy rate at the end of September, Colliers International and Restrepo Consulting Group report. It marks the ninth consecutive quarter of worsening office numbers.

"Office vacancies are at the highest they have been in over six years," said John Restrepo, a local analyst who serves on the Nevada Economic Forum, which forecasts state budget-related revenues. "Bad home loans have triggered an epic financial meltdown. It has soured the economic outlook for the next two years."

Professional and business services -- sectors using office space -- had a loss of 4,200 jobs during the last year, the Nevada Department of Employment Training and Rehabilitation reports. The job losses resulted in scant demand with a negative 162,846 square feet of absorption in the third quarter, reports Colliers and Restrepo. Vacancies are nearly double what they were 12 months ago.

TONY ILLIA | BUSINESS PRESS
Stoltz Management Co.'s $50 million Sunset Pilot Plaza, at Sunset and Pilot roads, helped the Las Vegas Valley's office inventory grow to 48 million square feet in the third quarter.

Yet, there was still 579,592 square feet of new office space that came online in the third quarter. It resulted in a negative 0.28-to-1 absorption-to-completion ratio. Most of that new space was funded and started well before the current financial mess. Depending on the size and complexity, it can take two years or more to begin and finish an office project in Southern Nevada, industry sources say.

New third-quarter additions include Stoltz Management Company's $50 million, 180,000-square-foot Sunset Pilot Plaza at Sunset and Pilot roads; FFPW Development's seven-building, 60,160-square-foot Cheyenne West Professional Centre at Campbell Drive and Cheyenne Avenue; and, Rancho Torre Development's $18 million, 77,904-square-foot The Park at Palisades at 4600 N. Rancho Drive. The projects helped nudge the valley's office inventory to 48 million square feet, reports Applied Analysis, a Las Vegas-based business advisory firm. It marks a 3.2 million square foot year-to-year increase. And more office buildings are on the way.

There was 2.6 million square feet of space under construction in the third quarter. Again, the funding and groundwork for those developments occurred well before the current credit crunch. New projects seeking backing in today's market face significant challenges getting underwritten, sources say. Lenders are asking for more hard cash and preleasing than ever before from developers.

"Development continues at a brisk pace even as the market fundamentals counsel otherwise," Applied Analysis principal Jeremy Aguero said. "This trend will only exacerbate the current supply-demand imbalance in the coming months, putting increased pressure on existing operators to cut costs and prices and placing some projects into severe financial hardship."

Rents remained flat at $2.36 per square foot during the third quarter, which is the same as last year, Applied Analysis reports. Developers, owners and brokers are working harder than ever to close deals and keep rent values in place, sources say. Invisible costs that are not always reflected in the final price, including a free month of rent or larger tenant improvement allowances, can sometimes make the difference between deal and no deal.

"Currently, it's a tenant's market," Grubb & Ellis

Las Vegas research analyst Dave Dworkin said. "Landlords continue to aggressively negotiate with new tenants by offering higher tenant improvement allowances and increased amounts of free rent, practices that have been exceedingly more common than our market has experienced in the past."

Contact reporter Tony Illia at 702-303-5699 or tonyillia@aol.com.

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