Office vacancy edges upward
Kenneth Smith likes to see office vacancy around 6 percent to 8 percent, but he get developing projects in Las Vegas even when rates were at 12 percent or 14 vacancy levels and he did just fine.
That’s why Glen, Smith & Glen is proceeding with building permits next week to develop the second 20 acres at The Park at Spanish Ridge, bringing another 350,000 square feet of office space to southwest Las Vegas Valley.
Office vacancy climbed to 11 percent in the second quarter, up from 10.8 percent in the previous quarter and 8.7 percent a year ago, Restrepo Consulting Group reported.
Demand did not keep pace with the boom of new supply, real estate analyst John Restrepo said.
Net absorption, or the amount of space taken by tenants, was 916,200 square feet in the quarter, while developers completed 1.2 million square feet, bringing total office inventory in Las Vegas to 36.6 million square feet.
"The thing about Vegas is you have to be careful about separating it in submarkets," office developer Smith said. "You’ve got downtown and it’s got the highest vacancy, always has. It’s mostly older B and C office."
Irwin Molasky built the Molasky Corporate Center, but he probably wouldn’t have done it without having the Southern Nevada Water Authority commit to taking 80 percent of the building, Smith said.
The same goes for lease rates. Restrepo is showing average monthly asking rates of $2.51 a square foot, trending upward since third quarter 2003 when rates were $1.83 a foot.
Office rents are "drastically different" as you move around town, Smith said. They’re 25 cents a foot higher on average in the southwest, he said.
The central east submarket, the original office corridor of Las Vegas, continues to attract tenants with low lease rates on existing space and convenient access to business amenities, Grubb & Ellis research analyst Dave Dworkin said.
"What makes this submarket unique is that it boasts the most competitive lease rates for second-generation Class B product in the valley," Dworkin said.
Gina Perry of Heritage Realty is leasing the Nema Business Center at 1500 E. Tropicana Ave. for $1.55 a square foot with no common area maintenance fees, which are almost universally a minimum 35 cents a square foot, she said.
It’s close to the airport, the university and the Strip.
"That’s the people you’re going to hit," Perry said. "It’s good for people from lower income areas with a bus line there."
Many tenants prefer to lease offices in east Las Vegas because of minimal tenant improvement work needed to build out the space, compared with much higher costs for new office space in other parts of town, Dworkin said.
Nicole Johnson, owner of Koplin Construction, said there could be a difference of $20 to $30 a square foot in tenant improvement costs, depending on how much work is involved.
"There’s a lot of factors that go into it," she said. "For example, retrofitting for a restroom or break room, you may have to jackhammer. It depends."
CB Richard Ellis reported second-quarter vacancy of 9.9 percent with average lease rates of $1.97 a square foot, moving to $2.67 a square for Class A office.
Tenant demand is anticipated to remain strong to steadily absorb the record amount of inventory coming to the market.
"With record development on the Las Vegas Strip, the office market continues to outperform expectations," CB managing director Craig Shulte said.
More than 2.8 million square feet of office is under construction. Two Class A properties that are sure to draw demand are The Arroyo in the southwest submarket and Pavilion in the west, he said.
