The housing spillover

Southern Nevada's sluggish housing market is spilling over into its commercial market, as ailing companies in the housing sector retrench amid rising foreclosures and a real estate credit crunch.

Local office brokers say home builders, real estate brokerages, title companies and mortgage businesses are scrapping expansion plans, chucking office space and subleasing empty suites.

"All of a sudden, we're noticing softening in the housing-related office market," said Brad Peterson, a senior vice president with commercial real estate brokerage CB Richard Ellis in Las Vegas. "In the last month or two, we're seeing a moderate amount of companies (releasing space). I have a feeling we'll see more in the next two to three months."

If the trend continues, it could significantly affect overall office vacancies and rents, Peterson said.

David Scherer, a senior vice president with commercial real estate brokerage Grubb & Ellis in Las Vegas, said the residential-sector downturn could push up vacancies in local office space by as much as 1 percent beyond their current levels at just below 10 percent.

One local developer has lost real estate-related tenants in about 80,000 square feet of space, added Chuck Witters, a senior vice president with Las Vegas commercial brokerage Lee & Associates. The dip in the housing market hasn't hit bottom yet, Witters said, and before it does, he believes 150,000 square feet or more of residential-market space could empty out.

Southern Nevada's overall office market remains healthy for now, so the sector could absorb some additional fallout among housing-oriented businesses. With more than 44 million square feet of office space in the Las Vegas Valley, said Witters, a 150,000- or 200,000-square-foot jump in vacancies is a blip that won't have a dramatic effect on the commercial market's health.

The office market had a vacancy rate in the second quarter of 9.8 percent, slightly lower than the 10-year average of 10 percent to 12 percent, Peterson said.

Also, economic growth remains healthy in sectors outside housing. Companies in fields such as medicine, law and insurance are expanding and offsetting some tenant losses resulting from the housing slowdown, Peterson said. For example, Witters is working with out-of-state brokers on two call-center deals totaling more than 100,000 square feet of space.

Once they open in 2008, several new resorts on the Strip should also generate a need for support and service businesses, Scherer said, and that will help absorb office space.

"We're going to have other economic drivers besides the housing market," he said.

Based on his conversations with home builders and developers, Scherer doesn't expect tenant rosters in the residential sector to bounce back before 2009 or 2010. And that lag in the housing market could produce just enough weakness in commercial real estate to rein in rent increases. The market could also see a small uptick in landlord concessions, such as more money for tenant improvements or free rent, Peterson said.

The rent breaks won't be hefty enough to translate into lower prices for local goods and services, experts say, but businesses could find some good deals on offices. That will free up money spent on rents and interior build-outs, allowing companies to spend more with local vendors, retailers and other service businesses.

Some struggling housing businesses are cutting monthly lease rates 10 percent to 20 percent in the hunt for sublessors so they can "at least recoup some of the money they're obligated to pay the landlord every month," Witters said.

Also, subleased offices often need only a little fresh paint and some carpet cleaning, versus the construction of tenant improvements that new office space often requires. The savings on upgrades can be substantial: Landlords typically shell out $40 to $50 a square foot for tenant improvements, but the modifications can cost $75 or more a square foot, Witters said. Tenants have to make up the difference.

Taking over subleased spaces can also mean more flexibility.

Landlords with new space normally demand a five-year lease so they can gain back their up-front investment in tenant improvements. Companies taking on subleased space, however, can often step into a contract with just one year to three years left -- a shorter term suited to fast-growing businesses with unpredictable long-term space needs, Witters said. Subleased space is also ready more quickly, usually within a month or two, compared with the four months or more for suites receiving upgrades.

But these office bargains aren't likely to pop up outside the residential sector, agents say.

"Tenants could get some advantages, but they'll have to go after these specific spaces," Scherer said. "It won't be across the board."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or (702) 380-4512.