Las Vegas
Since 2004, an influx of mortgage, title and residential real estate companies had spread across the valley to take advantage of the exploding housing market. In recent months, the fallout in the housing sector resulting from the national credit crunch has pushed many of these offices to either downsize or go out of business.
This backlash has directly affected the office market and pushed vacancy upward. The pulse of the Las Vegas office market began to weaken in the second half of 2007, although not as severely as the national market. Developers remained cautious as several planned office projects were either scaled down or canceled due in part to lenders increasing their underwriting requirements for speculative office buildings. For those projects under construction, landlords continue to offer attractive concessions to increase occupancy and find prospective tenants. Activity this year will be focused on absorbing existing vacant space before any more projects hit the drawing board.
Notwithstanding, the outlook for the office market remains positive. Las Vegas continues to have one of the most robust economic foundations in the nation, with top rankings in both population and job growth. As a result, Las Vegas is well situated for a fast recovery. The demand for medical office space grows stronger each year and the amount of vacancy surrounding hospitals continues to drop. Construction on the Strip is booming, with thousands of jobs being created to service the hotel and gaming industries, which will also result in further job growth in other sectors of the economy and increase the demand for office space.
Phoenix
Phoenix office space increased more than 1 million square feet in the first quarter. Of the new space, only 66,000 square feet has been occupied. The additional office space coupled with negative net absorption has spiked the overall vacancy rate to 18.1%. Last year the vacancy rate stood at 15.6%, which would be considered a balanced figure by historical standards.
The current situation closely mirrors the vacancy movement at the tail end of 2000. At that time overall vacancy jumped from 15.8% in the fourth quarter of 2000 to 18.8% in the first quarter of 2001. The upward trend continued for the next 12 months topping out at 21.8%. With more than 6 million square feet equally delivered in 2000 and 2001, the vacancy rates did not return to a balanced level for four years. Today there is more than 4 million square feet under construction with 2.8 million square feet to be completed by year’s end.
Aside from the direct vacant space, sublease space has been increasing since 2006. The total space available for sublease stands at 1.6 million square feet, of which roughly 600,000 square feet is currently occupied. With the softening of tenant demand and increasing sublease and direct vacant space we should see some future developments postponed.
Overall asking rental rates have held steady and remain at record levels despite the rising space availability. However, increased concessions and agent commission incentives are becoming much more frequent in the market. The rapid increase in asking rental rates in the past few years has resulted in a disparity when considering available sublease rates. In some cases significant discounts can be found for tenants willing to accept the occupancy parameters. This year it is clear that landlords will be very proactive in attracting prospective tenants.
Breaking a long trend of net absorption, the Phoenix office market showed negative net absorption of 197,728 square feet during the first quarter. Of the 22 submarkets, 10 submarkets showed positive net absorption.
The Scottsdale North and Scottsdale Airpark submarkets accounted for the highest gains with 82,671 and 97,872 square feet respectively. The downtown north submarket reported the largest loss of space with 141,875 square feet of negative absorption. Class A space accounted for the largest net absorption totals with negative 21,646 square feet. Meanwhile, class B space experienced the lowest net absorption at a loss of 115,584 square feet.
Class B space had the lowest vacancy rate of 16.6%, a change from the fourth quarter when class A space claimed the lowest rate at 15.1%. The greatest increase in vacancy in all three classes occurred in class C buildings, which posted a 20.3% vacancy rate; up 150 basis points from the fourth quarter. The highest direct vacancy rate is in the Glendale submarket with 57.6% vacant, and the highest sublease vacant rate occurred in the Deer Valley/airport submarket with 3.5% vacant.
By far the lowest vacancy rate in any submarket was in Mesa downtown at 3.5%, followed by downtown south at 10.2%.
The overall asking rate in the Phoenix market is $2.19 per square foot down slightly from the previous quarter. The current direct asking rates are at record high levels. The upcoming year may be challenging for landlords who need to both compete for ten-
ants and offset construction costs with high
rents.
Albuquerque
The office market has yet to experience any major downturns but some turbulence could be looming. Vacancy increased slightly during the quarter as a result of 77,000 square feet of new space coming on line that still had about one-third vacant. Total vacant sublease space is holding around 208,000 square feet, which was consistent with 2007 levels. A bigger concern is the 185,000 square foot increase in available space. Disproportionate increases in available space could be a harbinger of growing vacant sublease space over the next few quarters, driving up vacancy.
The construction pipeline is expected to deliver around 200,000 square feet of new space in the second quarter. With only 25% of this preleased, 150,000 square feet of space will be delivered empty and vacancy is likely increase by almost 1%. These first generation spaces can meet the shortage of large, contiguous spaces larger than 20,000 square feet but may remain on the market longer since demand for larger spaces has declined.
Adding even more pressure to the office lease market is the growing number of new office condominiums that have remained on the market unsold. Some developers are changing their strategies by putting their projects on the market for lease. Given the higher asking rates required, these condominium projects will primarily be competing with the newer office buildings. Look for tenants to become much more rate sensitive as a result of the current economic downturn. Landlords of newer office buildings with higher asking rates will likely be forced to consider concessions such as rent abatements and higher tenant improvement allowances.
Data and analysis by Grubb & Ellis Co.
