Commercial vacancies climbing higher

By Buck Wargo

Friday, July 10, 2009 | 3 a.m.

Unemployment and the recession are taking a toll on Las Vegas’ commercial real estate, driving up vacancies and prompting landlords to trim lease rates.

Three brokerages agree that the office vacancy rate passed 20 percent at the end of the second quarter.

CB Richard Ellis reported an office vacancy rate of 21.1 percent on June 30, up from 18.8 percent at the end of the first quarter. Grubb & Ellis reported a 20.6 percent vacancy rate, and Colliers International said it is 22 percent — up 39 percent from the second quarter of 2008.

Retail and industrial vacancies, although much lower than office, are rising sharply as well, according to the firms.

“Jobs are the story,” said John Stater, Colliers International’s research manager. “If you want to know when the commercial market is going to bounce back, look at the jobs ... We are expecting the recovery to be rather slow. Jobs are connected to real estate, and the demand over the next two to three years is going to be lower than we would like.”

A six- to nine-month gap exists between changes in employment and changes in the number of occupied square feet, Stater said. Economic growth and development have been spurred by the gaming industry and residential construction, and their recovery is crucial for the commercial market, he said.

The industrial sector has lost 35,000 jobs since 2007’s second quarter. The office sector has lost 17,000 jobs since that year’s first quarter, and retail employment has fallen by 4,700 jobs from May 2008 to last May, Stater said.

The vacancy rate for retail space reached 8.9 percent in the second quarter, according to Colliers. That is more than double the 4.1 percent vacancy rate during 2008’s second quarter.

CB Richard Ellis reported a retail vacancy rate as high as 12.6 percent in the second quarter.

“Given that we are losing jobs right now, we are probably going to continue to see occupancy decrease through the rest of this year,” said Stater, who added, “we are dealing with more than just the problem of the recession ... We have a lot of issues to work through in Las Vegas. It will probably be two to three years before we have any major new development.”

The problem with commercial real estate is too much supply, Stater said. There is a supply of 3.3 years of industrial, 7.9 years of office and 2.7 years of retail space. A normal level would be eight to 10 months, he said.

There is an excess of 6 million square feet of industrial, 4.7 million square feet of office and 2 million square feet of retail space, Stater said.

Absorption of that space could begin by the end of 2010 at the earliest and pick up in 2011, Stater said.

“These are big numbers, and this will take awhile for us to work through,” Stater said. “That is the story we need to look at. If we see a turnaround by the third or fourth quarter, which seems unlikely for Las Vegas, we can start seeing positive numbers by early next year.”

The problem is distressed commercial real estate that faces or is in foreclosure, Stater said. Residential has gone through its problem with foreclosures that commercial has yet to confront, he said.

There are 87,000 square feet of distressed industrial space. Complexes have been hurt because major tenants related to the construction industry have vacated their space, Stater said.

There are 850,000 square feet of distressed anchored retail space that increases to 2.2 million square feet when malls and other specialty space are added, Stater said. There are 900,000 square feet of distressed office space of which 450,000 square feet are owned by banks or the Federal Deposit Insurance Corp.

This distressed space will be sold at low prices and when it comes on line, that will push down rents, Stater said.

Office rents fell to $2.36 per square foot in the second quarter, a 13 cent or 5.2 percent drop from the second quarter of 2008, Colliers reported. Rents for industrial space were 71 cents in the second quarter, a 9 cent or 11 percent drop over the past year. Retail rents were $1.88 per square foot in the second quarter, down 27 cents or 12.6 percent over the past year, Colliers reported.

Further breakdown of the market

Despite a 21 percent valleywide office vacancy rate, CB Richard Ellis reports the western valley had the lowest rate at 12.6 percent, followed by downtown Las Vegas at 14 percent.

The southwest valley had a vacancy rate of 32.4 percent and the northwest valley had a 38 percent vacancy rate.

Downtown Las Vegas had the biggest decline in rents, falling 17 cents in the second quarter, said Brad Peterson of CB Richard Ellis. Landlords are offering more tenant improvement allowances, rent reductions, free rent and other incentives to attract tenants. These tenants, however, are negotiating shorter lease terms, he said.

As for the industrial market, CB Richard Ellis reported that tenants continued to move out of space in Henderson and the southwest valley.

“In the last half of 2009, we will see more tenants consolidating or leaving the market,” said Karolina Janik, CB’s industrial expert.

CB Richard Ellis puts the industrial vacancy rate at 8.3 percent during the second quarter, and Janik said it will approach double digits.

Colliers has the vacancy rate higher at 12.4 percent, up from 8.4 percent in the second quarter of 2008.

In the retail sector, CB Richard Ellis reports North Las Vegas has the highest vacancy rate at 20.7 percent, followed by the southwest valley at 17.1 percent.