Office vacancy climbs higher

Everybody's gazing into the crystal ball to see what the future holds for commercial real estate in Las Vegas and all they can see is uncertainty, research analyst Dave Dworkin of Grubb & Ellis brokerage said.

Office vacancy hit a record 19.3 percent in the first quarter, up from 18.5 percent the previous quarter, and a lot of planned projects have been put on hold, he said.

Leasing activity in newly developed office space has been bleak, which puts tenants in good position to negotiate with desperate landlords.

"Existing tenants who can keep their heads above water in the current economic downturn are likely to renegotiate their current leases to lower their rent or look elsewhere for more favorable terms," Dworkin said.

In addition to cheaper rent, concessions are being given for higher tenant improvement allowances, or the cost to build out office space to the tenant's specific needs, he said.

Completion of new office space increased to 631,609 square feet in the first quarter from 452,500 in fourth quarter 2008, Colliers International brokerage reported. Net absorption, or the amount of space taken by tenants, fell dramatically, down by 413,213 square feet.

Transaction volume increased slightly during the quarter, mostly from office tenants looking to downsize or find lower rents rather than expansion and new businesses that are needed to fuel the recovery, said Michael Campbell, managing director of Colliers in Las Vegas.

Colliers showed 20.9 percent office vacancy, compared with 18.6 percent in the fourth quarter. Asking rent increased one cent to $2.41 a square foot per month.

CB Richard Ellis reported 18.9 percent vacancy and asking lease rates at $2.40 a square foot. Effective lease rates, which take concessions into account, are substantially lower than asking rates.

Healthy job growth combined with cheap and easy credit from 2005 to early 2007 drove an office building boom in Southern Nevada, John Restrepo of Restrepo Consulting Group said.

"Many developers ignored the warning signs about the deteriorating job market and continued building office product," he said. "So be prepared for the next phase -- a wave of commercial loan defaults well into 2010."

Office employment decreased for the third straight quarter, shedding 7,900 jobs since February 2008, Colliers reported. Most of those job losses (7,300) came from professional and business services.

The bright spot for office jobs has been the health care and social assistance fields, which gained 1,900 positions in the last year and has posted gains every quarter since second quarter 2004.

Foreclosure problems that hit the residential market in 2008 are set to hit the commercial market even harder this year, Campbell said.

Commercial real estate loans are typically made on a shorter term and are rolled over at the end of the term into a new loan.

"With financial institutions either unwilling or unable to roll these over and hesitant to rewrite loans at lower rates, we will probably see a wave of commercial foreclosures in 2009," Campbell said.

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