Industrial vacancy in Las Vegas at seven-year high

Every sector of commercial real estate in Las Vegas is suffering -- including the industrial market, once thought to be somewhat invincible as national companies looked to establish big-box distribution and warehouse centers in the valley.

Industrial vacancy rose to 10.5 percent in the first quarter, the highest level since 2002, business advisory firm Applied Analysis reported Tuesday. That's up from 9 percent in the fourth quarter and from 7.6 percent in the first quarter of 2008.

Vacancy bottomed out at 3.3 percent in the fourth quarter of 2005 and has steadily increased as 18 million square feet of industrial space was developed in the past three years. Only 11.5 million square feet was leased, Applied Analysis principal Brian Gordon said.

The market showed about 1.4 million square feet of negative net absorption, or the amount of space taken during the quarter, which contributed to nearly 10.8 million square feet of empty space.

A modest 104,000 square feet of new industrial space was added to the market in the first quarter, bringing total inventory to 102.5 million square feet in more than 3,400 buildings, Applied Analysis reported.

Construction in the industrial sector is approaching a near standstill as little preleasing activity is taking place and financing for new developments is challenging to obtain, Gordon said.

"Expect continued softness in existing product as distributors see reduced inventory levels and businesses tied to the leisure, hospitality and construction sectors attempt to cut costs at every level," he said.

Grubb & Ellis brokerage in Las Vegas reported 11.3 percent industrial vacancy, compared with 9.9 percent in the previous quarter and 7.4 percent in the same quarter a year ago.

Although vacancies have not climbed above 10 percent in many years, only a small portion of vacant space in the first quarter came from new product delivered to the market, Grubb & Ellis research analyst Dave Dworkin said.

Most of the increase in industrial vacancy can be attributed to projects completed early last year and remaining empty in recent quarters, he said.

Although vacancies are up overall, the southwest submarket is in short supply of distribution space over 100,000 square feet, CB Richard Ellis broker Jeremy Green said. Vacancy for distribution only in the southwest, a critical location for servicing casinos on the Strip, is 5.76 percent, he said.

He's marketing a 121,8750-square-foot warehouse being developed by Equity Building Services at Procyon Street and Ponderosa Way that's scheduled for completion in July.

"So it's a short list of good, quality product," Green said. "This one is insulated inside of Valley View (Boulevard) and close to the Strip. In that corridor, those distribution buildings have historically had low vacancy and are highly sought after."

Quinn Johnson, president of Equity Building Services, said the project was funded in June by California National Bank, before the bottom fell out of the financial markets. The land had been in the family for 30 years.

"We have very little (land) basis and construction prices that I haven't seen since the mid- to late-1990s," he said. "Our construction budget came in 40 percent under what we projected."

CB Richard Ellis reported asking lease rates of 68 cents a square foot in the first quarter, down 7 cents from the previous quarter. Applied Analysis put the rent at 74 cents a foot, compared with 77 cents in the fourth quarter.

Real estate consultant John Restrepo said 10 percent is viewed as the benchmark for longterm stabilized vacancy, whether it's New York City or Las Vegas, to operate profitably and still accommodate growth.

"If you go north of 10 percent for some period of time, then you've got problems," he said. "I think we'll see another 12 months of rising vacancy across the board in anchored retail, office and industrial, based on the continuation of job losses."

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