With approximately 406,000 square feet of newly completed office buildings, 2.7 million square feet under construction and 341,000 square feet of absorption in the first quarter, the Las Vegas office market is off to a healthy start.
Sluggish housing sales in 2006 caused a slight decline in both employment and population growth. This trend may push vacancy upward during the course of the year as the market adjusts.
The southwest submarket is booming with approximately 1.1 million square feet under construction. Lease rates for class A space in this submarket jumped dramatically in the first quarter, while class B rates rose only slightly.
Despite these increases, activity was high with almost 300,000 square feet of absorption and a steady vacancy rate of 11.8%. Access to Summerlin, Henderson, McCarran International Airport, the Las Vegas Strip, three new hospitals and large amounts of new homes have made the southwest submarket one of the most popular places to do business.
The outlook for the Las Vegas office market is bright. Large class A projects such as the 150,000-square-foot Charleston Pavilion Centre on West Charleston, the 285,000-square-foot Molasky Corporate Center on City Parkway, and the 239,000-square-foot addition to the Hughes Center, at 3883 Howard Hughes Parkway, are expected to finish construction this year. These projects are already mostly preleased, and any remaining space will fill up quickly.
The Portland office market got off to a slow start in 2007, an indication of seasonal fluctuations in deal activity rather than a reversal of the market’s improving trend. The market sustained a loss in net absorption of 152,000 square feet, pushing vacancy rates up to 12.5%.
Despite this loss, rental rates continued to climb in response to the tightening office market and increased competition for space. Just 148,000 square feet of new construction was added to the market but there has been an increase in the construction pipeline with more than 1.1 million square feet currently under construction.
The Central Business District office market will become tighter as the year progresses, more due to a lack of new space than robust demand. Nonetheless, expect rental rates in the Central Business District to spike this year, ending the year over $26, while the best class A-plus space is already being marketed at rates of $28 to $30 full service.
The Washington Square/Kruse Way submarket has felt the repercussions of the sub-prime mortgage fallout with vacancy up again this quarter. Deals in the market and current leasing velocity suggest that this trend will not last long and the market is expected to stay strong this year.
Rental rates have risen again this quarter, driven primarily by the Central Business District and Washington Square/Kruse Way submarkets. Overall class A asking rates rose 2% in the first quarter, from $23.60 to $24.15.
Construction activity also increased with total office under construction jumping from 877,000 square feet in the fourth quarter to more than 1.1 million square feet currently under way.
The first quarter marked the start of another great year for the Denver office market. Absorption sustained its nearly 1 million square feet per quarter trend, despite slower than normal quarters in both the Central Business District and Southeast Suburban submarkets.
Vacancy dropped again, with multiple markets at or near a 10% vacancy rate. The Central Business District and Southeast Suburban markets have received significant coverage for their stellar performances, even with a slow first quarter. Additionally, the Midtown, Northeast and Boulder markets have improved and are experiencing 10% vacancies across the board.
These markets are attracting interest for renovations, buys and new construction on a smaller scale than their neighboring larger submarkets.
Boulder’s overall vacancy has dropped 690 basis points in the past year, and the Central Business District market declined by 530 basis points. The Southeast market continues to lag with a 21% vacancy rate, as large blocks of space linger on the market. Class B & C properties are seeing the most activity in recent quarters, as the majority of the quality class A space has already been taken.
This trend is consistent in smaller submarkets that previously offered opportunities for tenants looking to relocate.
Significant absorption in the quarter included the completion of the fully-leased EPA building in Lower Downtown, bringing 300,000 square feet of positive absorption to that submarket. The West, Boulder and Midtown markets, all experienced large amounts of absorption as well.
Alps signed a 40,000-square-foot lease at 1290 Broadway in the Midtown submarket, and Ellora Energy took 41,000 square feet at 5665 Flatiron Parkway in the Boulder submarket.
Asking rental rates have almost completely rebounded to 2000 levels, surpassing historical highs in some submarkets. The Central Business District market saw lease rates increase by 23% in the past 12 months. The Southeast Suburban submarket saw a 14% increase in lease rates during the past 12 months, after only single digit increases for the preceding year.
A significant milestone is the increase of Central Business District class A asking rates to above $30, a benchmark that many feel will be the norm moving forward. New properties coming online will need to achieve rents at or above this level to meet costs.
