While a 10% vacancy rate is thought to be a reasonably healthy market, the vacancy rate has been rising in each of the past five quarters. Moreover, the trend is expected to continue through 2007 because an additional 4.2 million sf is under construction and an additional 7.4 million sf is in the pipeline.
"While the office market's performance during the majority of 2006 reflected a relatively healthy environment, it is now showing clear signs that a materially softer condition is likely to prevail in 2007," says Applied Analysis principal Brian Gordon. "Forward-looking supply remains substantial with under construction projects representing more than 10% of existing inventory, a condition that will certainly cause vacancies to rise."
AA principal Jeremy Aguero adds that while the rate of growth in professional and business services employment continues to outpace all other major categories at 10.6%, which bodes well the for the office real estate market, the number of new employees within the sector falls short of the level of supply expected to enter the market during the next 12 to 24 months. "Should current conditions continue, we are looking for vacancies in the 12% range by the close of 2007," he says.
The situation has developers and building owners sweetening the pot despite continued increases in construction costs and land pricing that have put significant upward pressure on pricing. "We are witnessing some shifts in the frequency and value of builder/seller concessions, including, without limitation, significantly higher tenant-improvement allowances," Aguero says.
Meanwhile, the face rate continues to rise. Average asking lease rate growth continued during the quarter, reaching $2.29 per sf compared to $2.23 in the preceding quarter (third quarter 2006) and $2.14 one year ago.
The new construction in 2006 pushed the Valley wide office inventory total to 41 million sf. The vast majority of new construction is occurring in unincorporated Clark County, which now is home to 18.3 million sf. The vacancy rate there is up to 12.1% from 8.3% at the beginning of the year despite 465,000 sf of net absorption in the fourth quarter. In Las Vegas proper, which has an inventory of 16.3 million sf, vacancy stands at 7.7%, up from 7% at the start of the year despite 243,900 sf of net absorption in the fourth quarter.
In the 5.5-million-sf City of Henderson market, vacancy ticked up to 12.2% in December from 11.9% at the beginning of the year. In the City of North Las Vegas, which is home to just 900,000 sf of office space, the vacancy rate rose is up to 20.5% from 16.3% at the start of the year.
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