Odds are that Las Vegas developers, landlords and brokers did not mind putting 2008 in the rear-view mirror. Unfortunately, odds are also good that 2009 will be even more challenging. Commercial real estate certainly finds itself in unprecedented times.
At the end of 2008, the Las Vegas office market had about 5.5 million square feet of vacant space, with the vacancy rate rising to 17.24 percent. This number doesn’t include the increasing amount of sublease space on the market or what is even harder to track, shadow space — unused space not being marketed. Even with the amount of vacant space on the market, there is roughly 2.2 million square feet under construction, most of which will hit the market in 2009. Based on historical absorption averages, the estimated supply of existing vacant space now would take about 5 years to absorb.
The average asking lease rate ended 2008 at $2.40 per square foot, but is expected to decrease during first quarter 2009. Landlords have tried to maintain their face rates, but will generally bend significantly to make a deal.
Available shell space on the market has more leasing challenges than second-generation space. With the cost of construction exceeding the allowance, landlords are faced with offering allowances higher than previously offered or even providing a turn-key build-out. For companies looking at every possible way to cut costs and run lean, second-generation space becomes very appealing because companies are able to find space that will work with little to no out-of-pocket improvement expenses.
Tenants are also attracted to sublease space, but all too often they’re seeking a steal, not just a deal. Given current market conditions, they can get into a space quickly, utilize the improvements in place and negotiate a below-market rental rate. The only drawback to sublease space is determining in advance what the market rent will be at the end of the sublease term.
Landlords aren’t the only ones feeling the pinch. Tenants are having a hard time determining their exact space needs. Forecasting has become more difficult. They have to make decisions on retracting, expanding or relocating. Some tenants would rather do a shorter-term lease to ride out the down economy. Others want to take advantage of the rents today and lock in long term.
In today’s market, landlords are chasing the same deals. Brokers are grinding out deals, which seem to get harder to make with each passing day. Tenants are holding all the cards these days. And they know it.
— Jayne Cayton, vice president, and Bret Davis, senior associate, are based in CB Richard Ellis’ Las Vegas office.