Las Vegas office market can’t shake stagnancy

Warren Klein and his 300 agents at Golden Real Estate and Investments are doing their part to sell Las Vegas to foreign investors who want to transfer their wealth to a more tax-friendly country.

He represented a group of Asian investors in purchasing a two-story, 12,000-square-foot office building on Flamingo Road in a cash deal for $1.42 million, or about $120 a square foot.

"America looks cheap to them over there, especially in Shanghai and Beijing," Klein said. "Their prices are higher than New York and London. Three thousand (dollars) a month for a condo is nothing."

The average asking price for office properties available for sale in Las Vegas on an investment basis was $106 a square foot in the first quarter, a $4 increase from the previous quarter and $73 decrease from a year ago, brokerage Colliers International reported.

Investors of office properties are chasing a "moving target" in Las Vegas, broker Nicholas Barber of broker Gatski Commercial Real Estate Services said.

"They're seeing what the notes on the property are and then they're looking at lease rates and saying, 'Oh my god, what's going on?' There's a disconnect," Barber said.

He represented Las Vegas entrepreneur Alberto De La Paz in purchasing a bank-owned office building at 528 S. Casino Center Blvd., the Schofield Center, for $1.05 million, or slightly less than $100 a square foot.

It's about 50 percent occupied by several attorneys who lease executive suites and share services such as the Internet, a receptionist and conference room.

"They all love their space and who wouldn't? They're right next to the new City Hall and the courthouse and their rents are conducive to what permanent space is going for downtown," Barber said.

The Las Vegas office market remains stagnant to start the year with no new space completed and very little construction or planned projects, CB Richard Ellis reported in its first-quarter market overview.

Lease rates dropped 2 cents from the previous quarter to $1.73 a square foot, and vacancy rates stayed relatively stable at 24.3 percent.

Net absorption, or the difference between the amount of space occupied and amount of space vacated, totaled 45,754 square feet, but it marked the third straight quarter of positive absorption, suggesting that the worst of the down cycle has passed.

"We are extremely busy, a lot busier than the last two to three years," CB Richard Ellis office broker Brad Peterson said Thursday. "Activity has definitely picked up, anybody you talk to will tell you."

Peterson said he was encouraged that most of the office market indicators have stabilized. However, economic growth fueled by new jobs is needed for the market to make significant gains, he said.

Roughly 1,800 jobs were created in sectors traditionally associated with office in 2010, according to the Nevada Department of Employment, Training and Rehabilitation.

Gross leasing activity has risen steadily in recent quarters, totaling 385,500 square feet in the first quarter.

Colliers International is showing negative net absorption of 77,378 square feet in the first quarter.

The brokerage altered its methodology of reporting by excluding medical office from the numbers and including all privately owned build-to-suit projects. Medical office projects are characterized as 90 percent or higher occupancy by medical tenants.

Although absorption was negative for the office market overall, net absorption of Class A, or the highest quality office space, and Class C space was positive, which suggests that there are "some cracks in the nonstop bad news we have been getting for the past four years," Colliers research director Matt Stater said.

The amount of distressed office space rose to 5.4 million square feet during the quarter, just 20,000 square feet more than the previous quarter. The number of properties falling into the distressed category has slowed considerably, Stater said.

Office vacancy stands at 24.8 percent, up 2.9 percentage points from the fourth quarter and up 9.2 points from a year ago. Average asking rent is $2.05 a square foot on a full-service gross basis, a 3 cent increase from the prior quarter and 16 cent increase from a year ago.

New completions should continue to surge next quarter with the Metropolitan Police Department's new headquarters in the downtown submarket.

Several top-tier office tenants have signed leases at Tivoli Village, an $800 million mixed-used office and retail development at Rampart Boulevard and Alta Drive scheduled to open in late April. The project was originally scheduled for completion in 2009, but the opening has been delayed several times during the economic recession.

The "spirit of competition" is getting fierce between distressed, bank-owned properties and nondistressed property owners, said Dave Dworkin, research manager for Grubb & Ellis in Las Vegas.

Dworkin said he wouldn't be surprised to see office vacancy rates rise noticeably above their current 23.5 percent when banks release more distressed properties onto the market this year. But, he said, the spike will likely be just temporary.

"These newly marketed properties will introduce an ever-lower bottom line for sales prices and lease rates that will become the focus of competition throughout the year," he said.

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