Commercial real estate’s slide likely at an end

By Buck Wargo

Friday, Oct. 29, 2010 | 3 a.m.

The commercial real estate market led by the office sector appears to have halted its slide and is showing signs of stability that has been lacking over the past couple of years, analysts said.

In the office market, research firm Applied Analysis reported the third-quarter vacancy rate dropped to 24 percent from 24.1 percent in the second quarter. Colliers International Las Vegas reported a vacancy rate of 24.3 percent, including sublease space, down from 24.8 percent in the April through June period. CB Richard Ellis pegged the vacancy rate at 24.1 percent in the third quarter, down from 25.4 percent in the second quarter.

“After five years of rising vacancy in the office market, the latest period may signal that the sector will begin to have increased stability in the coming quarters,” said Jake Joyce, a project manager with Applied Analysis.

With little construction and the demand for space outpacing those who are giving it up, it appears the office market isn’t going to worsen, Joyce said.

“While it’s easy to latch on to even the smallest bright spot, the return to more normal market conditions is years away, but must start somewhere,” Joyce said.

John Stater, research director at Colliers International, said a tough second quarter was followed by a “fairly good” third quarter. It ended 15 straight quarters of rising office vacancy, and it appears the market is getting closer to bottoming out.

What helped was a gain of 2,700 jobs related to office employment from August 2009 to August 2010, he said. The professional and service sector added 3,600 jobs in the last year while health care added 900 jobs, he said. That was offset by the loss of jobs in the financial industry, he said.

“But it’s only a drop in the bucket of what is needed to return to pre-recession vacancy rates,” Stater said of the absorbed space.

Of those taking office space in this year, almost half were in health, financial or legal services, Colliers reported. Health and insurance companies made up a quarter of the businesses taking space this year. National tenants made up 51 percent of the space taken compared with 30 percent of the space taking by local companies.

“Looking at the employment and commercial real estate data, it appears likely that the office market has hit bottom,” Stater said. “A variety of factors could keep us dragging along the bottom for the next 12 to 18 months.”

The highest office vacancy rates were in the southwest valley at 29.6 percent and the area surrounding McCarran International Airport at 26.5 percent, Colliers reported. The lowest vacancy rates were in downtown Las Vegas at 14.9 percent.

High-end Class A office space had the highest vacancy rate and it was getting higher at 32.1 percent, while the midlevel Class B office space saw a decline to 21.8 percent, Colliers reported.

Stater said the fourth quarter traditionally has more space vacated and coming on the market than is filled, but he said 2011 looks more promising than 2010 did.

“Sustained job growth, even weak growth in the office sector, could bring a few more positive quarters and get the process of recovery off to a start,” Stater said.

The most pessimistic outlook was from brokerage Grubb & Ellis, which said the next wave of commercial foreclosures is coming, and banks are expediting the process to market those properties as soon as possible.

“Since an undisclosed amount of bank-held properties are not currently being marketed, it’s likely that vacancy will jump dramatically as possible as possible,” the firm reported.

Applied Analysis said the average lease rates declined in the third quarter to $2.09, down 2 percent from the second quarter. Class A space was $2.61, Class B space $1.97 and Class C space $1.66.

With distressed sales and lender workouts prevalent, further rental reductions are likely, said Applied Analysis Principal Brian Gordon.

Industrial market

Applied Analysis reported the vacancy rate for industrial properties rose to 16.6 percent in the third quarter, up from 16.2 percent.

Colliers pinpointed the vacancy rate at 16.7 percent, but said that’s fractionally higher than the 16.6 percent in the second quarter.

Grubb & Ellis put the vacancy rate at slightly lower at 15.6 percent and said that’s down from the second quarter because Amonix, a new solar power systems manufacturing plant, leased 2145,030 square feet in North Las Vegas. Czarnowski Display Service’s move from the southwest valley to North Las Vegas took up an additional 214,200 square feet. Czarnowski will occupy both locations until its lease expires.

Stater said the third quarter had 177,029 square feet of more space occupied than vacated, which stopped a trend of six consecutive quarters of decline. That’s anemic by the standard absorption of 1.4 million square feet from 2005 to 2007, but it’s a step in the right direction, he said.

The northwest valley continued to have the highest vacancy rate at 21.1 percent, but that is a 7.9-point drop from the second quarter, Colliers reported.

The most active businesses taking industrial space in 2010 were involved in manufacturing, wholesale trade and exhibition services with retail services and construction close behind, Stater said.

Companies headquartered outside of Nevada took 70 percent of the space occupied during the first three quarters.

Gordon said any improvement in the

industrial sector in Southern Nevada will lag a broader market recover because demand for space from the construction industry will be weak.

Deep discounting, particularly in the warehouse and distribution buildings may shorten any timetable for recovery because retailers and distributors are looking to capitalize on favorable rates, Gordon said.

“Lower prices will help but a national recovery will be a condition to a local recovery within the industrial sector,” Gordon said.

The average asking rent in the third quarter was 57 cents per square foot, 1 cent lower than the second quarter. It was 68 cents per square foot in the third quarter of 2009, he said.

Stater said he thinks 2011 will mirror 2010 in the industrial market, but said more space should be occupied than vacated. Lease rates will decline, but that could change as 2011 progresses, he said.

Retail market

Two of three analysts said the retail vacancy rate declined in the third quarter, but no one is suggesting that sector is in a recovery.

Applied Analysis reported a 10.7 percent vacancy rate; CB Richard Ellis put it at 11.1 percent and Colliers reported an 11.1 percent vacancy rate, up from 10.9 percent in the second quarter.

Stater said that although national and regional retailers loomed large in the early part of the year, the interest in Southern Nevada has cooled, making local retailers once again an important segment of the market.

The most active retail categories were amusement and recreation, furniture and eating and drinking establishments.

“One problem facing Southern Nevada is vacant big box space and the question of who will fill them,” Stater said. “While Asian and Hispanic grocers have expanded in the market, few national chains appear willing to expand into Southern Nevada.”

Gordon said the vacancy rate of anchored-retail centers is showing signs of stabilizing, but pricing remains a concern. With more than two years of excess inventory on the market, the average asking rents may reach a level not seen in a decade, he said.

“The significant declines in pricing may have long-term effects on recovery as property owners and lenders adjust their return and timing expectations,” Gordon said.

The average asking rents was $1.60 per square foot in the third quarter, down from $1.68 in the second quarter, Applied Analysis reported.