CRUNCH GOES COMMERCIAL

Housing isn't the only real estate market being crushed by the tidal wave on Wall Street.

The credit crisis is now having a greater effect on commercial real estate than the savings and loan crisis of the 1980s, a September report from the DLA Piper global law firm shows.

Andy Armenian, owner and broker of Vegas Valley Commercial, sees this unfolding daily in Las Vegas. His firm represents the seller of a 29,900-square-foot industrial building at 4080 N. Pecos Road that's been reduced to $3.5 million, or about $117 a square foot.

Two years ago, investors would have grabbed that property for $145 to $150 a square foot with a down payment of 5 percent to 10 percent, Armenian said; now they've got to come up with 20 percent to 25 percent down to get a loan.

It's a sign of the times as commercial markets search for stabilization, local observers said.

"You're going to see sales prices dropping and properties pulled off the market because they can't get their price," Jeff Barton of Grubb & Ellis said. "Also, who's going to lend right now? We've got to get a true valuation on the sales side and we've got to see what happens with the banks, if they get comfortable with lending again."

The industrial market in Las Vegas, once driven by demand for big-box distribution and warehouse space, has changed drastically in the last two years.

Industrial vacancy reached 9.2 percent during the third quarter, up from 8.6 percent in the previous quarter and 5.9 percent a year ago, Grubb & Ellis reported. Average annual asking rent ranged from $6.71 a square foot for warehouse and distribution space to $12.45 a square foot for research and development space.

Landlords no longer have the upper hand in setting rental rates, Barton said. They're offering rent concessions and increasing tenant improvement allowances to upward of $50 a square foot.

For the first time in eight years, industrial construction fell below 1 million square feet in Las Vegas.

Most developers are waiting for evidenced demand for space, stabilization of rental rates and a reduction in land prices before venturing back into the market, Barton said.

Lack of available financing remains the chief concern of respondents to DLA's September survey on the state of the market.

"Frustrated with the ongoing credit crisis that continues to reshape the financial markets, real estate executives are expressing a new record level of bearish sentiment as they continue to be reminded of the cyclical nature of the industry after nearly a decade of prosperity," the report said.

Before the collapse of Lehman Bros. Holdings Inc., American International Group Inc. and Merrill Lynch & Co., the majority of survey respondents said that the savings and loan crisis was the event that had the greatest impact on the real estate industry in the past 20 years.

That sentiment changed after Lehman Bros. filed for bankruptcy. Eighty percent of respondents do not believe that these events signal the bottom of the cycle, nor do they see it as the "first sign of light at the end of the credit crisis tunnel."

Las Vegas' industrial market has not been immune to the economic downturn, Donna Alderson of CB Richard Ellis said.

Net absorption, or the total amount of space leased, fell to 18,400 square feet during the quarter. The airport, Henderson and northwest submarkets show negative year-to-date absorption.

Average monthly lease rates dropped to 73 cents a square foot, down 3 cents from the previous quarter and down 6 cents from a year ago, CB Richard Ellis reported.

Major companies continue to move into Southern Nevada with its attractive tax structure, Alderson said. Amazon.com took 142,000 square feet for a plant in North Las Vegas that will create more than 300 jobs and RC Willey Home Furnishings leased another 45,000 square feet.

The local commercial real estate market's condition is not all doom and gloom. Forbes.com ranked Las Vegas among the top 10 U.S. cities for commercial investment.

"In the commercial real estate market, we are seeing moderate demand for rental apartment complexes while office buildings continue hurting for the next year," Armenian said. "In the industrial sector, new construction has considerably slowed and generally we expect the market to stabilize during third and fourth quarter of 2009."

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.