Valley Office Demand Softens in 2006

Southern Nevada’s office market finished 2006 with a thud, recording a 10.5% vacancy rate, up 2.1% from the previous year, reports Applied Analysis, a local business advisory firm. It marks five consecutive quarters of vacancy increases. Class A space, as always, remains in high demand with a low 5.2% vacancy rate in the fourth quarter, while speculative space softened to 11.9%. Net absorption, meanwhile, dropped to 2.5 million square feet in 2006, which is 28.1% less than the previous year.

The market grew to 41 million square feet in the fourth quarter, adding 3.7 million square feet since 2005. Major additions included a new three-story, 72,000-square-foot Class A building in Thomas & Mack Development’s Corporate Gateway as well as buildings at GSG Development’s The Park at NorthPointe, among other projects. Much the activity was concentrated in the southwest and northwest submarkets along the 215 Beltway and US 95.

“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,” said Brian Gordon, principal of Applied Analysis. “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.”

There was also 4.2 million square feet of new space under construction in the fourth quarter, with another 4.7 million square feet worth of inventory planned for future development. Yet valley wide average asking rents increased to $2.29-per-square-foot triple net in 2006, a 15-cent gain over the previous year. Henderson had the highest rents at $2.42-per-square-foot, while the North Las Vegas was lowest at $2.24-per-square-foot. But the basic market dynamics remain strong with office using employment seeing a 10.6% growth over the last year outpacing all other major categories.

“Overall, 2006 experienced inflated prices, rising interest rates, construction costs, land prices and much uncertainty,” said Dave Dworkin, a market analyst with Grubb & Ellis. “In the year ahead, new construction will gradually slow while existing vacant product is absorbed into the overall inventory and the market goes through a much-needed, though mild, recovery cycle”