Analysts write off Las Vegas commercial market for 2010

Vacancies rise again, improvement in the forecast for next year

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Gary Chappel

Work continues on Tivoli Village at Queensridge, one of the few retail and office developments under construction in Las Vegas.

Fri, Jul 9, 2010 (3 a.m.)

You know the news can’t be good when analysts are saying it could be worse.

That sums up the commercial real estate market in Las Vegas these days.

The vacancy rates for office, industrial and retail space rose in the second quarter and lease rates declined again to the dismay of landlords. Market observers said it’s going to be until late 2011 at the earliest before there is real improvement.

The best observation analysts can make about the commercial real estate market in Las Vegas is that it’s worsening at a lesser rate than it has in the past.

CB Richard Ellis reported the average retail vacancy rate increased slightly during the second quarter to 11.3 percent, up from 11.1 percent in the first quarter.

The office vacancy rate rose from 24.6 percent in the first quarter to 25.4 percent by the end of June, the firm reported.

The industrial vacancy rate rose from 10.5 percent in the first quarter to 11 percent in the second quarter, CB Richard Ellis reported.

“The rate of decline has started to slow, but by no means are conditions improving,” said Brian Gordon, a principal with Applied Analysis. “The second half of 2010 will remain a challenge. There is no question that visitors and business are expected to remain cautious with their spending, and I don’t anticipate any significant job growth in the second half of 2010.”

The score card for the commercial market hasn’t been good for the past two years.

Commercial vacancies in Las Vegas have grown dramatically since the first quarter of 2008, according to John Restrepo, principal of Restrepo Consulting Group. He said industrial vacancy is up 167 percent from 6 percent to 16 percent.

Anchored retail centers have seen a 150 percent jump in vacancy from 4 percent to 10 percent and speculative office projects have seen a 57 percent increase from 13 percent to 22 percent for spec office. The lower increase for the office market is because that was the weakest market at the start of the recession, Restrepo said.

What’s helping the commercial industry is there is virtually no new construction, Restrepo said. But as long as the private job market remains weak, there will be a weak commercial real estate markets in Southern Nevada, Restrepo said. Losing fewer jobs each month in 2010 compared with 2009 isn’t the same as creating jobs, he said.

“I don’t think we are going to see a recovery in the job market until late 2011 at the earliest,” Restrepo said. “And by recovery we mean at least six months of consistent private sector job growth.”

The retail sector had some of the best news to report in the second quarter, but even that won’t play out until 2011. Tivoli Village at Queensridge, an $850 million project of Israeli-based IDB Development Corp. and EHB Cos. at the corner of Rampart Boulevard and Alta Drive, is working on 225,000 square feet of retail and 145,000 square feet of office as part of its first phase. The opening, however, was pushed from the fall to March to ensure the center opens with higher occupancy.

The industrial market took a hit in the second quarter when Solo Cup Co. moved out of its 200,000-square-foot space at ProLogis’s Nellis Industrial Park in North Las Vegas, according to analysts. The company has been consolidating across the country, officials said.

“This has been the industrial trend over the past two years,” Gordon said. “A number of businesses that were tied to the construction industry have either closed their doors or contracted in size and require less space. Retailers have been hit hard over the past two years and that means they are holding less inventory and requiring less industrial space.”

The retail sector has the lowest vacancy rate, but it’s been helped by some discount retailers taking some of the space vacated by larger retailers that have gone out of business, analysts say. The large vacancies hurt mom-and-pop retailers who are losing customers walking by their stores, analysts said.

“Retail is starting to show some signs of stabilizing at new levels, and the consumer is showing they are spending more,” Gordon said. “That is tied to consumer confidence much like the housing market is. People have been extremely cautious with their discretionary money, but they are feeling some recession fatigue and want to go out to dinner because they are tired of staying home and doing nothing.”

As for office, Gordon said that sector depends on companies’ bottom lines and more jobs being created. There’s no significant expansion in the real estate and legal industries that warrants filling up the empty space, he said.

During the second quarter, space at a two-story 166,000-square-foot office building opened up on South Valley View Boulevard after CenturyLink, formerly Embarq, moved its local headquarters to the Marnell Corporate Center on May 31, downsizing to 50,000 square feet.

The owners of the South Valley View Boulevard building, Tiberti Co. and Fong and Associates, hosted a group of brokers last week to market the building for lease or sale.

Despite the 25 percent vacancy rate for the office market, Paul Maffey, a manager with Tiberti, said there are few available buildings of that size in the market and that positions it better than most complexes as he expressed optimism it will be leased.

But Maffey acknowledges the climate is a difficult one for the office market as a whole because businesses aren’t growing. He said he doesn’t see any improvement until late 2011.

Tenants are moving because they are finding better deals to reduce their monthly operating expenses.

“The broker and tenant representatives seem to be pretty busy moving people around town,” Restrepo said. “We are not seeing demand from outside Las Vegas, but more musical chairs.”

Musical chairs is an apt description of what’s happening in the office market, said Randy Broadhead, senior vice president of office leasing with CB Richard Ellis.

“We haven’t hit bottom yet,” Broadhead said. “I think we are getting close, but it keeps getting worse. At least we are seeing more activity.”

That activity is tenants taking advantage of the reduced rental rates that fell 9 cents in the second quarter to an average of $1.70 per square foot per month. Rates have dropped 21 cents in the past year, CB Richard Ellis reported.

Tenants want reduced rents, space improved at no cost to them and even free rent and moving expenses, Broadhead said. There is no loyalty and businesses are taking advantage of the market to move into higher quality space, he said.

“It is hard on landlords because they feel they have to be aggressive to get attention and tenants are getting more aggressive,” Broadhead said. “They are not leaving any meat on the bone and landlords are trying to hold on. It is a balancing act because you don’t want to be so aggressive to put the landlord out of business.”

One landlord that has been successful in keeping most of its tenants this year and is even adding a few is Hughes Center, which had a vacancy rate as low as 4 percent in 2007. The vacancy rate rose to 18 percent in 2009.

Since it was reacquired in November by Crescent Real Estate Equities, the vacancy rate has fallen 1 percentage point to 17 percent and the firm has been aggressive in retaining tenants and attracting new ones. It has lowered rents as much as 20 percent and heavily marketed the building to the brokerage and legal community.

Hughes Center has leased 147,000 square feet in the first two quarters of which 23,300 were either new customers or existing customers that expanded.

The biggest news was the center’s retention of Wells Fargo’s 60,000 square feet for the next 10 years. That’s 4.5 percent of the 1.35 million square-foot project in one of the largest leases signed in Las Vegas in years.

“They were considering their competitive alternatives,” said Robert Boykin, managing director of leasing with Crescent. “They are highly visible, and it was important to retain them because they have had a presence since 1987.”

The overall vacancy rate for high-end Class A space, which includes Hughes Center, is 30 percent, according to Grubb & Ellis.

Boykin said more space might be filled by law firms, including one from downtown Las Vegas and others from out of state.

“We have stabilized and I think for the rest of the year we will have healthy velocity,” Boykin said. “It is a great time to make a deal.”

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