Vacancies climb as rents fall

Commercial real estate is going through the kind of downturn experienced by the residential market four years ago, with supply outstripping demand and foreclosures on the rise, the research manager of Colliers International brokerage in Las Vegas said Wednesday.

Vacancy rates for office, industrial and retail properties are at historical highs and rents are falling, John Stater said at a second-quarter briefing at the Four Seasons.

Industrial vacancy rose to 12.4 percent during the quarter, compared with 11.2 percent in the first quarter and 8.4 percent a year ago, while supply dropped to 920,732 square feet, the first time it's ever been under 1 million square feet, Colliers reported.

The highest vacancy is found in the office market at 22 percent, up from 15.8 percent a year ago, while retail vacancies increased to 8.5 percent from 4.1 percent in second quarter 2008.

If there's anything good about the second-quarter report, it's the decline in new construction, Stater said.

"Developers did start reacting to the difference between supply and demand, they did stop building, but not soon enough," he said. "The attitude in Vegas has always been if they build it, they will come."

New completions decreased 59 percent for industrial and 69 percent for office, but increased by more than 400 percent for retail from the same period a year ago.

The big story is the number of jobs that have been lost in the commercial sectors, Stater said. Industrial has lost 37,000 jobs since the peak in 2007, office employment is down 17,000 jobs and more than 11,000 retail jobs have been shed.

"If you want to know when commercial real estate will bounce back, look at the jobs," he said.

Stater said he's also monitoring the amount of "distressed" commercial property, either in default or foreclosure, in Las Vegas. He shows 87,000 square feet of industrial, 900,000 square feet of office and 850,000 square feet of retail space in distress, some of it owned by banks and the FDIC.

Sean Sheward, chief investment officer of newly formed Turner Opportunity Fund, said his firm is raising capital through investors and institutional sources to buy distressed properties in Las Vegas, mostly industrial, low-rise office and medical office. He's also interested in commercial loan portfolios.

"We believe long-term in the growth of Las Vegas, the gaming and quality of life," Sheward said. "Right now, you're overbuilt. There's too much of everything. They're going to stop building, and if you keep that down and the economy starts to turn ... it's going to take time, obviously. One to two years is a fair estimate."

In a separate report, Grubb & Ellis brokerage showed second-quarter industrial vacancy at 12.9 percent for total inventory of 98.6 million square feet. Net absorption, or the amount of space taken during the quarter, is negative 1.16 million square feet. Asking rent is 52 cents a square foot for wholesale and distribution, and 97 cents for research and development.

On the office side, vacancy rose to 20.6 percent for 35.5 million square feet of inventory. Net absorption is negative 266,231 square feet. Asking rent is $2.71 a square foot for the top class of office space and $2.09 for Class B space.

Opportunities for office tenants continue to be plentiful, Grubb & Ellis research analyst Dave Dworkin said. Below-market introductory lease rates are common on vacant space and many landlords are agreeing to extremely short-term leases just to keep a steady income flow, he said.

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