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There is roughly 61 million square feet of office space in the Las Vegas Valley. About 22 percent of that is vacant. That being said, leasing activity is picking up. Tenants nearing the end of their leases are looking for better deals elsewhere – and they’re finding them. Then there are the new players in the market, who are are kicking the tires, too.
The tenant’s market has been a mainstay for the past few years in Las Vegas. But over the past 12 to 18 months, banks have shifted their philosophies in regards to how they handle their office portfolios and it’s definitely making an impact on the market. Lenders today are no longer dumping foreclosed properties back on the market at fire sale prices. Instead, they are choosing to add value to their assets by leasing space in the hopes of a better future return for investors.
In general, banks are very aggressive with their terms and generous with tenant improvement allowances. Private owners have needed to follow suit in order to stay competitive.
Some tenants that have considered buying are frequently steered back into leases. This is because rates and terms are far too attractive. Leasing offers an opportunity for a smaller capital outlay to get into a different, oftentimes bigger space with better amenities. It is not uncommon to see a tenant improvement package that offers a turn-key build-out for a tenant with the landlord’s base allowance being $30 to $40-plus per square foot. An additional $15 to $20-plus per square foot is also being made available to the tenant and amortized back into the lease. In many cases, a tenant’s rent will be cheaper than the cost of a mortgage plus improvement costs– and the cash outlay is significantly less.
Current lease rate averages in the Las Vegas Valley are around $2.25 per square foot for Class A; $1.50 for Class B; and $1.20 for Class C, according to CoStar’s last quarterly market report. Ever since the recession and initial big drop in rates, it feels like Class A and B prices have increased slightly, while Class C prices have remained stagnant.
The Downtown submarket is also seeing increased occupancy through negative absorption. This is largely due to Tony Hsieh and his team at Zappos.com. Known as The Downtown Project, Hsieh and his company have invested some $200 million in real estate holdings alone, along with another $150 million in other ventures like tech start-ups, small businesses and education within the area.
Westar Architects is one Downtown tenant that was asked to relocate from an office building that had been acquired by Hsieh’s team. The firm ended up leasing an office in a well-known Class A Downtown property, which helped increase the building’s and submarket’s occupancies.
Even with some new faces and heightened leasing activity in the market overall, slow absorption will still likely be the case for the next few years. My hope is that we’ll see vacancy rates in the mid-teens within the next three to five years. It would be great if that was accompanied by some new and interesting businesses looking to expand their ventures and add jobs here in Las Vegas.
— Rob Lujan, senior associate, investment sales and leasing, Gatski Commercial Real Estate Services