Cover, Applied Analysis Commercial Market Monitor

September 2013

All Sectors Post Positive Net Absorption

The southern Nevada economy continued its tepid pace of recovery in the second quarter, while some headwinds persist. A number of indicators reported modest gains or slight contraction in the second quarter of 2013. In June, employment in the Las Vegas MSA increased by 17,800 jobs (+2.2 percent) annually, while the unemployment rate fell 1.7 percentage points from a year ago to 10.1 percent. However, average weekly hours worked continued to decline, falling 0.2 hours (-0.6 percent) to 33.9. In addition, Las Vegas visitor volume for the second quarter of 2013 was relatively flat compared to a year ago, while Clark County gross gaming revenues continue to struggle to report any material gains, falling 1.6 percent year-over-year during the period. While some stabilization has been reported in the commercial markets, performances generally remain mixed. The industrial and retail sectors continue to report annual declines in vacancies, while the office vacancy rate remains elevated.

The office sector vacancy rate fell to 26.0 percent during the second quarter of 2013, down 20 basis points (0.2 percentage points) compared to the prior quarter (Q1 2013). However, compared to a year ago (Q2 2012), the rate remains up 40 basis points (0.4 percentage points). With no completions during the period, the sector reported approximately 115,200 square feet of positive net absorption. However, due to nearly 220,000 square feet of net move-outs in the first quarter sourced to the Nevada Cancer Institute (143,000 square feet) and the University of Phoenix (40,300 square feet), net absorption for the first half of the year was negative 104,700 square feet. Three office projects totaling 220,700 square feet are actively under development throughout the valley. Construction on the Federal Justice Tower (129,000 square feet) and Robert T. Eglet Advocacy Center (46,000 square feet) continues to move forward in Downtown Las Vegas. In addition, the second phase of Seven Hills Plaza broke ground during the quarter. The 45,700-square-foot building will be the headquarters for Prudential Americana Group when completed.

The industrial vacancy rate fell 30 basis points (0.3 percentage points) quarter-to-quarter and 130 basis points (1.3 percentage points) year-over-year to 16.2 percent. Three projects totaling 422,100 square feet completed construction during the quarter, including Pama Airport Center (60,000 square feet), Chelten House Products (97,100 square feet) and Switch SuperNAP 8 (265,000 square feet). Demand for industrial space remained elevated, with approximately 741,000 square feet of net moveins during the quarter. However, it is important to note that the 362,100 square feet in user-specific completions contributed to a large portion of the net absorption. Without these completions, there would have been approximately 378,900 square feet of net move-ins. Seven industrial projects totaling 1.5 million square feet remained actively under development at the end of the quarter, all sourced to specific users.

The retail sector continued to report stabilizing conditions in the second quarter of 2013 as the vacancy rate fell 30 basis points (0.3 percentage points) quarter-to-quarter and 90 basis points (0.9 percentage points) year-over-year to 9.8 percent. The second phase of Desert Marketplace was the only project to complete construction during the period, adding approximately 11,600 square feet of partially pre-leased inline space to the market. A number of significant lease transactions took place during the quarter, and net absorption increased to positive 145,800 square feet. Conn’s HomePlus (50,200 square feet) and Epic Stores (22,500 square feet) signed leases for space in Tropicana Centre, while Gameworks will soon be moving into a 37,000-square-foot space in Town Square. In addition, Stein Mart signed a lease for the 30,900-square-foot space formerly occupied by Office Depot in the Best in the West power center, while Office Depot moved to the 18,600-square-foot former Paddock Pools within the same center. Four anchored retail projects totaling 1.8 million square feet were under construction at the end of the quarter, including the previously stalled Shops at Summerlin.

View Report »

July 2013

Divergent Commercial Market Performances in Q1

Key sectors in southern Nevada’s economy appear to be gaining traction. By the end of the first quarter (March 2013), employment increased by 17,200 jobs when compared to March of 2012, and the unemployment rate fell from 11.7 percent to 9.8 percent. The housing market reported 581 new home sales in March, up 67.0 percent from a year ago, while median new home prices increased 8.7 percent to $222,201. Meanwhile, existing home sales fell, but prices increased year-over-year for the twelfth consecutive month, rising 31.6 percent to $138,151. Despite other sector improvements, recovery in the commercial markets remains somewhat tepid. Although the retail and industrial sectors have begun to show some signs of stabilization, the office market is continuing to struggle in the current economic environment.

Vacancies in the office sector reached a record high of 26.2 percent during the first quarter of 2013, up 50 basis points compared to the prior quarter (Q4 2012) and 110 basis points compared to the prior year (Q1 2012). Net absorption was negative 229,500 square feet, primarily due to two significant move-outs. The Nevada Cancer Institute ceased operations and vacated its 143,000-square-foot building, while the University of Phoenix vacated 40,300 square feet at Longford Medical Center. It is important to note that if these two spaces had not been vacated during the quarter, negative net absorption would have been a much less dramatic 46,200 square feet, while the vacancy rate would have increased 10 basis points quarter-to-quarter to 25.8 percent. The new 35,000-square-foot Legal Aid Center of Southern Nevada at the northeast corner of Charleston Boulevard and 7th Street was the only project to complete construction in the first quarter. Approximately 175,000 square feet remain under construction, sourced to two buildings located downtown.

The industrial vacancy rate declined 50 basis points quarter-to-quarter and 70 basis points year-over-year to 17.2 percent. Approximately 690,600 square feet of positive net absorption was reported in the sector during the first quarter. The latest performance is attributable to a number of significant transactions, including a lease signed by Hand Air Express for 303,200 square feet in ProLogis Sunrise Industrial Park and a deal for 133,400 square feet in Las Vegas Corporate Center signed by Derse Inc. In addition, three non-speculative projects totaling 160,000 square feet completed construction during the quarter, with 115,000 square feet sourced to new facilities for Knight Transportation and Old Dominion Freight Lines, and 45,000 square feet sourced to a new facility for Bon Breads Baking Company. Approximately 910,000 square feet remain under construction, including the 600,000-square-foot Switch SuperNAP 8 and 130,000-square-foot headquarters for SHFL Entertainment. Average asking rates have remained flat at $0.51 per square foot per month for five consecutive quarters.

The retail sector reported a slight quarterly increase in vacancy rate of 10 basis points during the first quarter of 2013, but year-over-year, vacancies declined 60 basis points to 9.8 percent. Two projects totaling 9,100 square feet completed construction during the period, including a 4,000-square-foot Wendy’s located in the Winco Foods Center on the southeast corner of Stephanie Street and Wigwam Parkway and the 5,100-square-foot Bonefish Grill in Town Square. The sector reported approximately 41,100 square feet of negative net absorption. Although Opportunity Village signed a lease for 28,100 square feet in Craig Valley Plaza and Harbor Freight Tools absorbed 18,200 square feet in Rainbow Expressway, Paddock Pools vacated two of its locations, each totaling approximately 19,000 square feet, while DSW vacated its 30,600-square-foot store in SunMark Plaza. Approximately 320,600 square feet remains actively under development. The second-phase addition to Tivoli Village at Queensridge accounts for 300,000 square feet, 11,600 square feet is sourced to the second-phase addition to Desert Marketplace, and a new Flemings at Town Square accounts for another 9,000 square feet.

View Report »

July 2013

Divergent Commercial Market Performances in Q1

Key sectors in southern Nevada’s economy appear to be gaining traction. By the end of the first quarter (March 2013), employment increased by 17,200 jobs when compared to March of 2012, and the unemployment rate fell from 11.7 percent to 9.8 percent. The housing market reported 581 new home sales in March, up 67.0 percent from a year ago, while median new home prices increased 8.7 percent to $222,201. Meanwhile, existing home sales fell, but prices increased year-over-year for the twelfth consecutive month, rising 31.6 percent to $138,151. Despite other sector improvements, recovery in the commercial markets remains somewhat tepid. Although the retail and industrial sectors have begun to show some signs of stabilization, the office market is continuing to struggle in the current economic environment.

Vacancies in the office sector reached a record high of 26.2 percent during the first quarter of 2013, up 50 basis points compared to the prior quarter (Q4 2012) and 110 basis points compared to the prior year (Q1 2012). Net absorption was negative 229,500 square feet, primarily due to two significant move-outs. The Nevada Cancer Institute ceased operations and vacated its 143,000-square-foot building, while the University of Phoenix vacated 40,300 square feet at Longford Medical Center. It is important to note that if these two spaces had not been vacated during the quarter, negative net absorption would have been a much less dramatic 46,200 square feet, while the vacancy rate would have increased 10 basis points quarter-to-quarter to 25.8 percent. The new 35,000-square-foot Legal Aid Center of Southern Nevada at the northeast corner of Charleston Boulevard and 7th Street was the only project to complete construction in the first quarter. Approximately 175,000 square feet remain under construction, sourced to two buildings located downtown.

The industrial vacancy rate declined 50 basis points quarter-to-quarter and 70 basis points year-over-year to 17.2 percent. Approximately 690,600 square feet of positive net absorption was reported in the sector during the first quarter. The latest performance is attributable to a number of significant transactions, including a lease signed by Hand Air Express for 303,200 square feet in ProLogis Sunrise Industrial Park and a deal for 133,400 square feet in Las Vegas Corporate Center signed by Derse Inc. In addition, three non-speculative projects totaling 160,000 square feet completed construction during the quarter, with 115,000 square feet sourced to new facilities for Knight Transportation and Old Dominion Freight Lines, and 45,000 square feet sourced to a new facility for Bon Breads Baking Company. Approximately 910,000 square feet remain under construction, including the 600,000-square-foot Switch SuperNAP 8 and 130,000-square-foot headquarters for SHFL Entertainment. Average asking rates have remained flat at $0.51 per square foot per month for five consecutive quarters.

The retail sector reported a slight quarterly increase in vacancy rate of 10 basis points during the first quarter of 2013, but year-over-year, vacancies declined 60 basis points to 9.8 percent. Two projects totaling 9,100 square feet completed construction during the period, including a 4,000-square-foot Wendy’s located in the Winco Foods Center on the southeast corner of Stephanie Street and Wigwam Parkway and the 5,100-square-foot Bonefish Grill in Town Square. The sector reported approximately 41,100 square feet of negative net absorption. Although Opportunity Village signed a lease for 28,100 square feet in Craig Valley Plaza and Harbor Freight Tools absorbed 18,200 square feet in Rainbow Expressway, Paddock Pools vacated two of its locations, each totaling approximately 19,000 square feet, while DSW vacated its 30,600-square-foot store in SunMark Plaza. Approximately 320,600 square feet remains actively under development. The second-phase addition to Tivoli Village at Queensridge accounts for 300,000 square feet, 11,600 square feet is sourced to the second-phase addition to Desert Marketplace, and a new Flemings at Town Square accounts for another 9,000 square feet.

View Report »

February 2013

Commercial Markets Still Struggling to Find Solid Footing

By the end of 2012, a number of key sectors in the southern Nevada economy reported improvements from the prior year. The unemployment rate fell 3.3 percentage points year-over-year to 10.0 percent in December, which is the lowest it has been in four years. In addition, the housing market is continuing to show signs of improvement. New home sales totaled 5,389 in 2012, up 42.1 percent from 2011, while the median new home price reported a year-overyear increase for the third consecutive month in December, rising 4.1 percent. Existing home sales declined 10.2 percent during the year, but prices have reported annual increases for nine consecutive months, ending the year up 23.9 percent. In the commercial markets, the retail sector continues to outperform, reporting a year-over-year decline in vacancy rate and positive absorption, while the office and industrial sectors continue to struggle with elevated vacancy rates.

The office sector reported a vacancy rate of 25.3 percent during the fourth quarter of 2012, up 0.3 percentage points from the prior quarter (Q3 2012) and the prior year (Q4 2011). Net absorption was negative (78,300 square feet), but for the year, it was positive with 280,200 square feet of net move-ins. The Red Rock Business Center at the southeast corner of Interstate 215 and Patrick Lane was the only project to complete construction during the period, adding 74,200 square feet to the market. The center was partially leased to Keller Williams Realty. With no new projects starting construction during the fourth quarter, the amount of space actively under construction fell to 254,000 square feet. The majority (210,000 square feet) is sourced to development in the downtown area, including the new Federal Justice Tower (129,000 square feet), the Robert T. Eglet Advocacy Center (46,000 square feet) and the Legal Aid Center of Southern Nevada (35,000 square feet).

The industrial market vacancy rate remained relatively flat quarter-over-quarter at 18.3 percent. Compared to a year ago, it is up 0.3 percentage points. With no new completions during the quarter, the sector reported some increased demand with approximately 32,000 square feet of positive net absorption. However, for the year, absorption remained negative with 243,700 square feet of net move-outs. Average asking rates remained flat at $0.51 per square foot per month for the fourth consecutive quarter and are down a modest 1.9 percent compared to the prior year. Compared to the peak (Q2 2007), average pricing is down 37.8 percent. The amount of space actively under construction increased to 875,000 square feet, the highest it has been since the third quarter of 2008. The majority is sourced to the 600,000-square-foot Switch SuperNap 8, while SHFL Entertainment’s new headquarters accounts for another 110,000 square feet.

The retail sector reported the strongest performance during the fourth quarter of 2012, with a vacancy rate of 9.9 percent, down 0.3 percentage points from last quarter and 0.7 percentage points from a year ago. Net absorption was positive for the third consecutive quarter, with 188,700 square feet of net move-ins. For the year, net absorption was positive 551,600 square feet. Average pricing is also slowly starting to improve, increasing 4.2 percent from the prior quarter and declining a modest 0.7 percent from a year ago to $1.50 per square foot per month. However, compared to two years ago, it remains down 4.1 percent. Construction activity remains slow with just two retail projects totaling 304,000 square feet actively under development. Approximately 300,000 square feet is sourced to the second phase of Tivoli Village at Queensridge, while 4,000 square feet is comprised of the third-phase addition to the WinCo Foods Center at the southeast corner of Wigwam Parkway and Stephanie Street.

View Report »

December 2012

Commercial Markets Report Mixed Results

The southern Nevada economy continues to post modest gains from the lows experienced during the last economic downturn. During the third quarter of 2012, employment increased 0.6 percent year-over-year. The unemployment rate fell 2.5 percentage points to 11.5 percent; however, a shrinking labor force was a contributor. While median new home prices have fluctuated based on the mix of properties sold, resale home prices increased 17.0 percent from the prior year. With limited foreclosure activity (largely due to the impact of Assembly Bill 284) and fewer homes on the market, prices have responded. The commercial markets reported mixed results during the quarter. The office and retail sectors witnessed declines in vacancy rates when compared to the prior quarter and industrial product continued to report an increase. However, all three sectors continue to report falling average asking prices quarter-to-quarter.

The office market vacancy rate fell to 25.2 percent during the third quarter of 2012, down 0.4 percentage points compared to the prior quarter (Q2 2012). However, compared to a year ago (Q3 2011), the rate remains up 0.3 percentage points. Net absorption was positive 245,600 square feet during the period, partially attributable to the completion of the Martin Luther King Family Health Center at the southwest corner of Martin Luther King Boulevard and Mount Mariah Drive, which added 33,000 square feet to the market. In addition, the University of Phoenix signed a lease for 53,600 square feet of space near Interstate 215 and Town Center Drive. Approximately, 328,200 square feet remains actively under construction throughout the valley, with 210,000 square feet sourced to projects downtown. Pricing continues to decline, falling 1.0 percent since last quarter and 4.5 percent since last year to $1.91 per square foot per month.

The industrial market vacancy rate increased 0.1 percentage points since last quarter and 0.8 percentage points since last year to 18.6 percent. With no new completions during the quarter, the sector witnessed 46,600 square feet of negative net absorption. Average pricing remained flat for the third consecutive quarter at $0.51 per square foot per month. However, compared to a year ago, asking rates remain down 3.8 percent. On a positive note, the amount of space actively under construction has picked up in recent quarters with approximately 1.1 million square feet reported in the third quarter of 2012, a level not reached since the third quarter of 2008. Each of the four buildings currently under development is being built for specific users looking to expand or relocate to the area.

The retail market vacancy rate declined to 10.2 percent during the third quarter of 2012. Compared to the prior quarter, the rate fell 0.3 percentage points, while compared to last year, it fell 0.7 percentage points. Approximately 11,000 square feet completed construction during the period, sourced to second phase additions to the WinCo Foods center on the southeast corner of Stephanie and Wigwam and the Albertson's center on the southeast corner of Rainbow and Warm Springs. In addition, the sector reported 179,300 square feet of positive net absorption during the period, partially attributable to the leasing of a 32,000-square-foot space in Centennial Center to Big Lots and a 25,000-square-foot space in Canyon Pointe to Ross. New construction activity remains slow with only the 300,000-square-foot second-phase addition to Tivoli Village at Queensridge actively under construction at the end of the quarter. In addition, pricing continues to decline, falling 2.0 percent from last quarter and 5.3 percent from last year to $1.44 per square foot per month.

View Report »

August 2012

Challenging Environment Persists in Commercial Markets

Economic recovery generally slowed during the second quarter of 2012. Employment in southern Nevada increased year-over-year, but only by a modest 1.0 percent. Both industrial and retail-using employment reported slight increases, but office-using employment continued to decline. The residential market is starting to show some signs of stabilization, with existing home prices increasing year-over-year as regulatory red tape has impacted foreclosure volumes and inventory. Commercial markets continued to report little change in the second quarter. While the retail market has shown some signs of stabilization, commercial real estate continues to seek the bottom of the cycle.

The office market vacancy rate increased 0.4 percentage points during the second quarter of 2012 to 25.6 percent. Compared to the same period a year ago (Q2 2011), the vacancy rate is up 1.3 percentage points. After reporting positive demand in the first quarter, the market witnessed 126,800 square feet of negative net absorption during the second quarter, bringing net absorption for the first six months of the year down to positive 71,900 square feet. Pricing also continued to struggle during the period, with average asking rates falling 0.5 percent from the previous quarter (Q1 2012) to $1.93 per square foot. Approximately 128,000 square feet of new office space entered the market, with 68,000 square feet attributable to the first phase of Seven Hills Plaza at the southeast corner of St. Rose Parkway and Seven Hills Drive. Another 60,000 square feet was sourced to the Windmill Office Plaza at the southwest corner of Windmill Lane and Spencer Street. Three projects, totaling 85,900 square feet remain actively under construction.

With 103,000 square feet of negative net absorption during the second quarter, the industrial market reported a vacancy rate of 18.5 percent. Compared to the prior period (Q1 2012), the latest vacancy rate represents a 0.1-percentage point increase, while compared to last year (Q2 2011), the rate is up 0.5 percentage points. Average asking rates remained flat quarter-over-quarter at $0.51 per square foot per month, but compared to last year, rates are down 5.4 percent. The Gowan Industrial Center at the northeast corner of Gowan Road and Civic Center Drive was the only project to complete construction during the second quarter of 2012, adding 65,000 square feet to the market. Another 900,000 square feet remains under construction, both of which are sourced to Switch data centers in the northwest and southwest submarkets.

Vacancies in the retail market have remained in a relatively tight range during the past three years, suggesting stability within the sector. For the second quarter of 2012, the retail market reported a vacancy rate of 10.5 percent, up 0.1-percentage points over the prior period (Q1 2012) and a year ago (Q2 2011). With no new inventory entering the market, the sector reported 8,100 square feet of negative net absorption. Average asking rates during the second quarter were $1.47 per square foot per month, up 1.4 percent compared to last quarter. However, asking rates remain down 2.4 percent when compared to a year ago and 33.2 percent when compared to the peak. Approximately 311,000 square feet remain actively under construction, the bulk of which is sourced to a second-phase addition at Tivoli Village at Queensridge, which is not expected to reach completion until mid-2013.

View Report »

May 2012

Road to Recovery is Long and Winding

While some of southern Nevada's economic indicators are starting to show positive signs, the impact on the commercial and industrial markets has been negligible. Employment is up over a year ago, while the unemployment rate has started to trend down. In addition, the tourism industry is continuing to move beyond the latest downturn, with both visitor volume and average daily room rates reporting consistent gains. However, southern Nevada's real estate markets - residential and commercial - are still struggling. Housing prices are facing moderate price deterioration, while commercial vacancy rates remain elevated and lease rates continue to seek the bottom. While it appears the retail market may be the first to reach a turning point, it will be some time before performances akin to pre-boom and bust averages are achieved.

The office market vacancy rate remained at 25.2 percent during the fourth quarter of 2011 and the first quarter of 2012. Compared to the same period last year when the vacancy rate was 23.7 percent, availability has increased 1.5 percentage points. The sector reported 208,000 square feet of positive absorption during the quarter, up over the negative 8,000 square feet reported a year ago. However, the positive absorption is primarily attributable to the completion of the 310,000-square-foot Las Vegas city hall building in the downtown submarket. Four projects totaling 216,900 square feet remain under construction in the Las Vegas valley. In terms of pricing, rents fell to $1.94 per square foot per month, down 5.4 percent compared to the prior year period and 18.5 percent off the pre-recession peak of $2.38 per square foot.

The industrial market reported nearly 419,000 square feet of negative absorption during the quarter, a significant amount of net out-migration but modestly better than the negative 488,000 and negative 962,000 reported in the preceding quarter and prior year quarter, respectively. The valley-wide vacancy rate increased 0.4 percentage points from the fourth quarter of 2011 to 19.0 percent. Compared to the year ago rate of 17.7 percent, the vacancy rate is up 1.3 percentage points. On a positive note, the state's largest active construction project is moving forward. Totaling 600,000 square feet, another co-location datacenter is being constructed by Switch at the northeast corner of Warm Springs Road and Lindell Road. In addition, 65,000 square feet of space is under development at the Gowan Industrial Center.

Vacancies in the retail market declined slightly during the first quarter of 2012, falling 0.1 percentage point quarter-to-quarter to 10.5 percent. Compared to last year, the vacancy rate remained relatively flat. The market reported 203,000 square feet of positive absorption during the quarter, up over the negative 63,000 square feet reported a year ago. However, much of the positive absorption is attributable to the completion of two WinCo Foods in the valley, totaling 190,000 square feet. A second phase addition to Tivoli Village at Queensridge totaling 300,000 square feet remains under construction. Pricing in the sector continues to decline. Average asking rates during the first quarter were $1.45 per square foot per month, down 5.5 percent since last year.

View Report »

February 2012

Commercial Markets Continue to Face Weak Demand

Southern Nevada continues to struggle through difficult economic conditions. While the region's unemployment rate has declined from peak levels, and visitation and average daily room rates have moved steadily upward for nearly two years, many sectors face challenges, particularly in the commercial markets. Weak demand is continuing to drive vacancy rates up and prices down. Until a sustainable recovery of the region's broader economy emerges, relatively sluggish performances in the commercial real estate sectors are expected to prevail.

The office market reported another all-time high vacancy rate of 25.3 percent during the fourth quarter of 2011, up 0.3 percentage points over the prior quarter (Q3 2011) and 1.5 percentage points from the prior year (Q4 2010). The sector reported 66,000 square feet of positive absorption during quarter, largely sourced to the completion of the new North Las Vegas City Hall totaling 210,400 square feet. For the year, net absorption remained negative as 174,900 square feet of net move-outs occurred. Average asking rents continued to decline, falling 1.4 percent from the prior quarter (Q3 2011) to $1.97 per square foot per month (full service gross equivalent). Four projects, totaling 466,900 square feet remain actively under construction throughout the Las Vegas valley, primarily consisting of government user build-to-suits.

Nearly 477,000 square feet of negative net absorption was reported in the industrial market during the fourth quarter of 2011, contributing to an annual negative tally of 1.8 million square feet. The vacancy rate rose 0.5 percentage points to 18.5 percent in the final quarter of the year and is now 1.8-percentage points higher than the fourth quarter of 2010. Average asking rents continued to decline, falling 1.9 percent quarter-over-quarter to $0.52 per square foot per month. Over the past 12 months, rents have declined 7.2 percent. During the fourth quarter, U.S. Micro Corp. completed its $15-million building, which added 120,000 square feet of inventory to the market, bringing total industrial inventory to 104.4 million square feet.

The retail market ended the year on a positive note, with a 0.3-percentage-point decline in the vacancy rate from the prior quarter, to 10.6 percent. The latest movement was sourced to nearly 197,000 square feet of positive absorption, offsetting negative absorption earlier in the year and contributing to an annual total of 122,400 square feet of positive absorption for 2011. Average asking rents continued to decline slightly, falling to $1.51 per square foot per month. From a year ago, average asking rents have declined 3.5 percent. It is important to note, 35,000 square feet was added to the market with the completion of the second phase of Green Valley Crossing, which includes a Petco and Staples. Two WinCo Foods and a second-phase addition to Tivoli Village at Queensridge remain actively under construction. Even with modest improvement in the retail market during the fourth quarter, real estate markets remain fragile and subject to excess capacity across all sectors.

View Report »

October 2011

Commercial Markets Continue to Struggle

The timing of Southern Nevada's economic recovery remains somewhat uncertain. Exclusive of the broader tourism industry and other selected sectors, many economic indicators are reporting little to no signs of improvement. While the region witnessed an increase in visitation for the eighteenth straight month in August, the unemployment rate remains elevated and the housing market continues to struggle. Declining national consumer confidence and equity markets around the world provide additional concern for the local economic climate that continues to seek out solid footing. The Las Vegas commercial markets also remain challenged due to oversupply conditions and a relatively weak demand profile. Until broader improvements are reported in the region's economy, particularly within the labor and housing markets, it is unlikely the commercial markets will return to pre-recession performances any time soon.

The office market continued to face challenges during the third quarter of 2011 as vacancies increased 0.6 percentage points from the prior quarter (Q2 2011) to 25.2 percent. The sector reported 9,100 square feet of negative net absorption during the quarter, compared to negative 223,500 in the second quarter of 2011. However, the change in absorption was largely attributable to the completion of the 390,000-square-foot space for the Las Vegas Metropolitan Police Department. Average rents fell to $2.00 per square foot per month during the third quarter, down 1.5 percent when compared to the prior quarter. Compared to last year (Q3 2010), average rents have declined 4.3 percent. Nearly 750,000 square feet remain under construction at the quarter close, the majority of which being non-speculative government office buildings.

Vacancies in the retail market reached 10.8 percent during the third quarter of 2011, up 0.4 percentage points when compared to the previous quarter (Q2 2011). Meanwhile, there was 223,400 square feet of negative net absorption. The high vacancies can be partially attributed to the closing of the four remaining Borders bookstores, which put approximately 100,000 square feet of space back on the market. Average rents fell 5.0 percent when compared to the same period last year (Q3 2010), from $1.60 to $1.52 per square foot per month. Approximately 225,000 square feet remain under construction, including two WinCo Foods and a second-phase addition to a Target-anchored center.

The industrial market reported 145,800 square feet of positive net absorption in the third quarter of 2011; the first quarterly net gain since the fourth quarter of 2008. Meanwhile, the vacancy rate fell a modest 0.2 percentage points from the prior quarter (Q2 2011) to 18.0 percent. However, it remains 1.6-percentage-points higher than that reported in the same quarter last year (Q3 2010). Average rents fell 7.0 percent, to $0.53 per square foot per month, when compared to last year. With each of the commercial markets continuing to report vacancy rates at record highs, it is likely the market will continue adjusting to a new normal, and long-term historical average rates are not likely to emerge within the decade.

View Report »

August 2011

Commercial Markets Continue to Endure Decline

As volatility persists among national indicators, including unemployment, consumer confidence, and home prices, only uncertainty remains constant. Additionally, a strong focus on debt burdens and budget constraints from local to national governments continues to dominate the landscape with little discussion about material job creation or economic recovery. Locally, travel and tourism demand has been one bright spot in an otherwise gloomy sky as the sector continues to show marked improvement for the better part of the past year in terms of the volume and value of visitors seeking out the region. These relatively recent gains, while critical, have yet to have any significant impact on other local economic sectors, including the commercial real estate markets. As such, the timeline for recovery for the broader southern Nevada economy and its office, retail and industrial markets is going to remain long and painful for many.

The office market continued to weaken as the vacancy rate reached a new high of 24.8 percent during the second quarter of 2011. Although two new projects totaling 153,000 square feet completed construction, the sector reported 199,000 square feet of negative net absorption. With demand limited, average asking rents across the valley fell to $2.03 per square foot per month, compared to $2.05 recorded in the prior quarter. Rents are down from $2.13 per square foot one year ago. The rate of decline in pricing has slowed, but despite very little speculative space actively under construction, pricing has yet to reach the proverbial bottom. Looking forward, more than 1.1 million square feet across the valley remains actively under construction, much of which is owner-user buildings with most programmed for government uses.

Vacancies among anchored retail centers declined nearly 0.4 percentage points to 10.1 percent, as 369,700 square feet of positive net absorption occurred during the second quarter of 2011. Overall demand figures are partially attributable to the first phase opening of Tivoli Village, where a majority of the 225,000 square feet was pre-leased. Although vacancy has held within the low 10-percent range for more than a year, average asking rents continued to decline, falling to $1.51 per square foot per month, or a decrease of 8.9 percent from the $1.65 reported one year ago. Two projects totaling 186,000 square feet in the southeast submarket remain actively under construction.

A 120,000-square-foot build-to-suit project was added to the industrial market during the second quarter, but improvements to the broader sector have yet to materialize. Reporting 135,600 square feet of negative absorption, the vacancy rate increased 13 basis points from the previous quarter to 18.0 percent. At $0.54 per square foot per month, average asking rents remain down 6.8 percent from the prior year with large distribution space transactions closing at price points lower than the market-wide average. As local supply continues to outstrip demand, and jobless numbers remain volatile among the backdrop of a choppy economic climate, the commercial markets will continue to endure hardship.

View Report »

March 2011

Mixed Signals Within Commercial Markets

The unemployment rate continues to fall in southern Nevada, partially attributable to job seekers leaving the market. Tourism, the core economic driver of the local economy, is still pushing forward at a modest pace. Small, yet positive, reports not withstanding, there remains a large gap between current conditions and an economic recovery firing on all cylinders. Encouraging indicators are counterbalanced with continuing declines across the residential and commercial sectors. Additionally, uncertainty remains a concern as macro forces - budget gaps, mounting debt levels, and inflation - continue to prod at a recovery that remains distant and elusive. This puts the local commercial and industrial sectors, which have received the brunt of the pain from more than three years of economic downturn, on a long-term economic rehabilitation timeline.

The office market reported a negligible decline in the vacancy rate, moving to 24.0 percent due to 97,300 square feet of positive net absorption during the first quarter. Nevertheless, average asking rents fell 1.0 percent to $2.05 per square foot per month, compared to the previous quarter (Q4 2010). Vacancies remain ahead of prior year comparisons while pricing is off more dramatically. No new inventory entered the market during the quarter but nearly 1.2 million square feet across eight projects remains actively under construction, much of which will be owner-user buildings with most for government uses.

After three consecutive quarters of decline, vacancies among anchored retail centers rose 0.2 percentage points to 10.4 percent, as 98,300 square feet of negative net absorption was witnessed during the first quarter of 2011. The increased vacancy is partially attributable to the closing of Ultimate Electronics storefronts, after filing for Chapter 11 bankruptcy protection. Continuing its downward trend, average asking rents declined to $1.53 per square foot per month, a decrease of 11.0 percent from the $1.72 reported one year ago. No new inventory was added to the sector during the quarter, and only a single 225,000-square-foot project is under construction in the west submarket. The project (Tivoli Village) is expected to be completed in the second quarter of this year.

Nearly 1.1 million square feet of negative net absorption was recorded in the industrial market during the first quarter, posting its eighteenth consecutive quarter of a rising vacancy rate, which now stands at 17.9 percent. An additional 22,000 square feet of speculative space was added to the market during the quarter and a build-to-suit project totaling 120,000 square feet remains actively under construction. With rising vacancies, pricing continued to suffer, declining to an average asking rate of $0.55 per square foot per month during the first quarter of 2011. The industrial market experienced severe cutting in prices as asking rents are down 32.9 percent from peak levels in 2007. As the national economy continues to maneuver in a positive direction amid favorable consumer spending and labor reports, southern Nevada's commercial markets will continue to lag as demand for commercial space remains weak and elevated unemployment levels persist.

View Report »

December 2010

Pace of Decline in Commercial Markets Slowing

Declining unemployment, rising trends in consumer spending, and business investment increases are pushing the national economy forward. While the pace of recovery is still less than ideal, the thawing is long overdue. While it has been accepted that southern Nevada's economy, particularly housing, tourism, and the commercial markets will lag any national recovery, the depth of their downturn over the last three years is unprecedented. As tourism has shown several signs of recuperating, an oversupply of housing and commercial products creates challenges, with few signs of improvement. Without significant job growth, which most observers expect to take years, the office, retail, and industrial markets will continue to experience elevated vacancy rates and prices well below their peaks reached prior to the Great Recession.

The office market reported an increase in vacancies as 118,800 square feet of negative net absorption occurred during the fourth quarter, bringing the 2010 total to a negative 559,200 square feet. With the vacancy rate reaching a new high of 24.2 percent, pricing continued to suffer as average asking rents across the valley and among all product types fell 0.8 percent to $2.07 per square foot per month compared to the previous quarter, or 7.2 percent below the same period a year ago. No new inventory entered the market during the quarter; nevertheless, 616,800 square feet remain actively under construction with another 2.6 million on the drawing board.

For the third consecutive quarter, anchored retail centers witnessed positive net absorption with 165,400 square feet of second-generation space being occupied, contributing to an annual total of 306,700 square feet. Positive movements pushed the vacancy rate down 32 basis points from the previous quarter (Q3 2010) to 10.2 percent. While no new space was delivered during the quarter, 299,000 square feet remain actively under construction across the valley, the lowest reported total in more than a decade. Average pricing fell to $1.56 per square foot per month, which is 2.2-percent less than the average asking rent during the previous quarter (Q3 2010) and 15.0-percent lower than the same period a year ago (Q4 2009).

The industrial market reported its seventeenth consecutive quarter of rising vacancies as more than 417,700 square feet of negative net absorption was reported during the fourth quarter (-2.2 million in 2010). No new inventory entered the market during the quarter, and the 351,000 square feet of new space added in all of 2010 is the lowest amount reported in more than a decade. Even with only 22,000 square feet remain under construction, the market is struggling with an all-time high vacancy rate of 16.9 percent or nearly three years of excess supply at normalized demand levels. Pricing within the industrial market declined slightly, reporting an average asking rent of $0.56 per square foot per month, 1.7 percent lower than the previous quarter and down a larger 11.1 percent from one year ago. While positive signs can be cherry picked out of the local commercial market reports, it is likely that any improvements occurring during the new year will remain slow as ultimate recovery will lag that of business profits and employment levels, a timeline expected to be measured in years not months.

View Report »

September 2010

Commercial Markets Remain Weak

The national economy continues to grow at a painfully slow pace, while the sting from the Great Recession persists in the southern Nevada commercial markets as it simply struggles to find its balance. Locally, the pace of decline has slowed and in several sectors, recent figures have shown modest demand indicating the worst may be behind us. Nevertheless, full recovery is still below the horizon, as 146,000 jobs remain lost since the recession began and vacancies remain near all-time highs. Moreover, housing, retail sales, and tourism - all of which frame the bulk of our concentrated economy - linger along the bottom. Until these markets reflect something akin to a stable condition, which has yet to emerge, it is difficult to offer any other prognosis than falling prices, increased project failures and elevated rates of vacancy into the foreseeable future.

The office market witnessed a drop in vacancies for the first time in five years as 68,900 square feet of positive net absorption occurred during the third quarter. Although vacancies declined, pricing continues to suffer as average asking rents across the valley fell 2.1 percent, to $2.09 per square foot per month compared to the previous quarter, or 8.1 percent from the same period a year ago. During the third quarter, the office market posted 21,000 square feet of new inventory, with 475,000 square feet currently under construction.

Posting positive net absorption of 47,200 square feet, anchored retail centers witnessed its vacancy rate fall five basis points to 10.7 percent. While this is a modest change from the prior quarter and the second consecutive decline in vacancies, the vacancy rate remains 0.3-percentage-points higher than one year ago. During the quarter, 25,200 square feet of new in-line shop space was delivered, with 524,000 square feet remaining actively under construction. Average pricing fell to $1.60 per square foot per month which is 4.6-percent less than the average asking rent during the previous quarter (Q2 2010) and 17.9-percent lower than the same period a year ago (Q3 2009).

The industrial market reported nearly 351,000 square feet new of space, nearly double what the market witnessed over the prior 12 months. With only 22,000 square feet under construction, the market is struggling with nearly 17.2 million square feet of vacant space. During the quarter, the market posted approximately 37,700 square feet of negative net absorption, pushing the vacancy rate upward to 16.6 percent. The current vacancy rate increased from16.2 percent and 13.1 percent, compared to the prior quarter (Q2 2010) and the same quarter of the previous year (Q3 2009), respectively. Pricing within the industrial market also declined, reporting an average asking rent of $0.57 per square foot per month, which is 1.4-percent lower than the previous quarter and down a significant 16.2 percent from one year ago. In the near term, it is likely that the pace of recovery will remain slow continuing to exert downward pressure on commercial market rents and sale prices. While confidence among businesses and consumers may increase within the next 12 months, it is expected that a return to something that looks like historical norms is, at best, several years into the future.

View Report »

June 2010

Corrections Continue

Many broader economic indicators are pushing ahead at a slower-than-expected post-recession pace. Nevertheless, the southern Nevada commercial markets struggle in their search for simply stabilizing. While the decline in many areas of the commercial sector have slowed, recessionary pressures from an all-time high unemployment rate (14.5%), depressed housing prices, and reduced consumer spending have challenged the commercial markets ability to reverse a long-standing downturn.

No new inventory was added to the office market during the second quarter of 2010, and the handful of projects under construction, totaling 611,000 square feet, will likely be completed by late 2010 or early 2011. Selected positive contributors to office market demand continue to be outpaced by downsizes and closures as the market reported 426,800 square feet of negative net absorption, pushing the amount of occupied space down for the seventh consecutive quarter and to a level not seen since late 2006. The latest movements have pressed the vacancy rate up to 24.1 percent, which continues to exert downward pressure on asking rents. Average asking rents fell to $2.13 per square foot per month, a decline of 1.4 percent from the $2.16 reported during the previous quarter (Q1 2010) and 8.2 percent from the $2.32 posted during the same period a year ago (Q2 2009). Valley-wide average asking rents matched levels reported five years ago while vacancies at speculative buildings rose to 26.5 percent.

On a per-square-foot basis, average asking rents among anchored retail centers fell to $1.68 per month, a 17.0-percent decrease from $2.02 witnessed just one year ago. Reporting a vacancy rate of 10.4 percent at the close of the second quarter of 2010, vacancies remain relatively stable compared to the previous quarter, but linger 0.2 points above the 10.2 percent witnessed during the same period of the prior year (Q2 2009). By quarter-end, the retail market reported 51.9 million square feet of inventory, as 139,400 square feet of new space was added to the market with a Lowe's store being completed in the northwest submarket. Projects that remain actively under construction total approximately 568,800 square feet.

In the industrial market, nearly 351,000 square feet of industrial space in four buildings remain under construction with limited product in the pipeline. The market reported approximately 841,600 square feet of negative net absorption during the quarter, bringing the total amount of vacant space to nearly 16.8 million square feet. The latest figures reflect the sixth consecutive quarter of negative net absorption and the 16.2 percent vacancy rate is a new record high for the Las Vegas region. The vacancy rate climbed 0.8 points during the past three months, but is also the smallest increase since the fourth quarter of 2008. Nevertheless, the vacancy rate has steadily climbed since the recession began in late 2007 and compared to the same quarter of the prior year (Q2 2009), the vacancy rate increased 4.0 points, or from 12.2 percent to 16.2 percent. Reduced levels of confidence and spending among consumers and businesses are expected for the remainder of the year, likely keeping a strangle on the local commercial sectors ability to recover.

View Report »

March 2010

Corrections Continue

From surging equity markets to stronger expansion in manufacturing, broader economic indicators continued to improve during the first quarter of 2010. While these and other leading indicators continue to advance, the question plaguing the Las Vegas valley is, when is it our turn? A train must let out slack before it can begin pulling and moving forward from the station - our economic engine is no different. Just as it has been doing for two years, Las Vegas' commercial markets continue to let out slack, a phenomenon witnessed during the first quarter of 2010 as negative net absorption and price declines were reported throughout all sectors. Slack remains in the local job market (13.8 percent unemployment and 141,100 people actively seeking work), in the core tourism industry (citywide occupancy below 80 percent) and for individual consumers (personal income down 4.8 percent and taxable retail sales down 4.9 percent).

These conditions notwithstanding, the commercial market has shown no notable signs of improvement compared to where it was just 12 months ago. With the completion of an additional 85,000 square feet in a LEED-certified, build-to-suit project downtown, the office market expanded to just above 49.7 million square feet by quarter-end. The majority of the remaining 221,000 square feet actively under construction will likely not complete until the end of 2010. This is a welcome sign as the demand for office space continues to contract, posting 81,000 square feet of negative net absorption during the quarter and pushing the vacancy rate to 23.4 percent, nearly double the 10-year average of 12.1 percent. The all-time high vacancy rate has been relentless in putting pressure on average asking rents, accelerating downward on an annualized basis for the fifth consecutive quarter, or 6.5 percent during the latest period to $2.16 per square foot.

Average asking rents among anchored retail centers continued to slide, falling to $1.72 per square foot, or by 6.5 percent from the previous quarter (Q4 2009) and 16.1 percent from the same period a year ago (Q1 2009). Although significant second-generation space was absorbed, net move-outs pushed the vacancy rate to 10.5 percent, its largest three-month increase in nearly a year. The retail market is withstanding the recession better than other sectors, but with nearly two years of excess supply on the market, further adjustments in average asking rents are expected.

In the industrial market, a build-to-suit project totaling 53,000 square feet did begin construction during the quarter even as the amount of occupied space dipped to levels not seen in three years. The vacancy rate soared to 15.0 percent from 14.2 percent in the preceding quarter (Q4 2009) and 10.7 percent one year ago (Q1 2009), which continues to have unenviable affects on asking rents now averaging $0.60 per square foot, down 26.8 percent from its peak just before the recession began. We anticipate that this trend will lead to continued instability within the sector, including without limitation, higher rates of commercial-loan defaults.

View Report »