2. Office Market Indicators
Current Change Since
1Q10 1Q09
Vacancy 23.05%
Lease Rates (FSG) $2.06
Net Absorption* (818,385)
Construction N/A
*The arrows are trend indicators over the specified time period and do not represent a
positive or negative value. (e.g., absorption could be negative, but still represent a positive
trend over a specified period.)
At A Glance
• Overall vacancy rates showed an increase from 20.8% in the fourth quarter
to the current rate of 23.1%. This rate is up 3.2% from a year ago when rates
averaged 19.8%.
• Developers have halted any new development based on the current
fundamentals of limited to no financing, high vacancy and greatly
reduced tenant demand at much lower effective rates.
• Average rental rates in the Las Vegas office marketed were at $2.06
per square foot per month (psf/mo) (FSG). This is a slight drop from last
quarter rental rates of $2.10 psf/mo (FSG).
• The economic outlook continues to be a growing concern for both
landlords and tenants as tighter credit terms; rising inflation and rising
unemployment continue to affect the Las Vegas area.
• On the bright side, leasing activity has picked up in comparison to
2009.
National and State Employment and Unemployment Overview
National unemployment still remains high at 9.7 %, roughly 11 million unemployed workers that are now drawing
unemployment insurance benefits. In February alone, 27 states recorded unemployment rate increases. The
highest regional jobless rates were in the Western part of the country, while the Northeast recorded the lowest
rates. Michigan again recorded the highest unemployment rate among the states, 14.1 percent in February.
The states with the next highest rates were Nevada, 13.2 percent; Rhode Island, 12.7 percent; California
and South Carolina, 12.5 percent each; and Florida, 12.2 percent. The Las Vegas economy continues to be
impacted by downturns and high employment rate, currently 13.9%, in all major sectors, including gaming,
construction, financial and real estate. The recession will most likely be a “jobless recovery.” Since World War
II there have been a total of 11 recessions and in the most recent recessions before the 2007 recession, job
growth lagged long after the recession. In fact it took several years for the unemployment rate to return back
to prerecession levels. Employment growth is critical to future economic growth and the return to a healthy
commercial market which may take several years to accomplish. (See chart top of 2nd page)
1
3. 15%
13%
11%
9%
7% Las Vegas -13.9%
5% Nevada - 13.2%
3% US - 9.7%
1% Unemployment Rates 1Q10
-1%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
Las Vegas Market Overview
As we start the New Year, the big question on everyone’s occupied commercial real estate is beginning to look
minds is what is going to happen next and will the attractive again.” Real Capital Analytics also agrees
signs of recovery start to show and what will it look like stating that “owner-occupied purchase now represent
for the Las Vegas Market. Experts around the nation almost 10% of global transactions and will be involved
believe that recovery will start to show by early 2011 in a greater share of property deals.” In a recent study,
and in some areas may have already hit rock bottom. most commercial brokerage firm’s executives believe
UNLV Economics Department Chairman, Dr. Stephen that “real estate prices now make it more financially
Miller says “improvements in taxable sales, gaming advantageous to buy rather than lease.” In the Las
revenue and McCarran Airport passenger counts are Vegas market, commercial property values and asking
good indicators of an improving economy (for the rates continued to fall this quarter which may help with
Las Vegas market).” Miller goes on to state that “a lot the decision to either buy or lease.
of things are happening locally that are suggestions The Federal Government is also monitoring the weakness
that the economy is trying to reach bottom and turn of the commercial real estate market. The Feds believe
around.” While Southern Nevada’s local economy that the weakness of commercial loans is a very serous
may be starting to see the bottom of the commercial problem because the whole economy could be hit,
recession period, some experts are still worried about much like the housing bust has caused. Troubled
the commercial real estate market and are analyzing commercial real estate loans could be the primary
declining property values, maturing commercial loans, force behind bank failures this year. Elizabeth Warren,
ownership vs. leasing, the benefit of receiverships and chair of the TARP Congressional Oversight panel stated
the local business activity. that “around half of all commercial mortgages will be
underwater by the end of 2010, posing a very serious
According to Kenneth P. Riggs, President and CEO of problem for the economy over the next three years.”
RERC, “The past decade has served up some tough
lessons about acting on our gut instincts and about With the growing number of troubled properties and
what makes sense and what simply does not fit with commercial foreclosures, the art of the Receivership
sustainable practices. But for investors seeking to business is growing. Hiring a Receivership specialist to
seize market opportunities, 2010 is time to gear up for manage a bank-foreclosed building is a great benefit
a possible once in-a-lifetime opportunity to snag key to all parties. To help landlords preserve the value of
long term investments in commercial real estate.” an asset after default, the receivership will quickly
In 2010, with leasing activity lagging, we are seeing identify all of the problems, restructure their finances,
more landlords willing to hang “For Lease” and “For acquire tenants and liquidate assets so that they can
Sale” signs on their buildings. John Kulper, president of help produce a quick sale of the property. In today’s
Commercial Alliance of Realtors, wrote “While lenders marketplace, these services are valuable and essential
generally are avoiding investment real estate, owner- parts of the new age of real estate operations.
2
4. Office Market - Vacancies
The office vacancy rate once again rose this quarter, this time by 226 basis points, to 23.05%, in comparison to
20.79% in the fourth quarter. The Downtown submarket continues to show the lowest vacancy rate at 15.15%
along with Central East at 21.39% and North submarket at 19.74%. The high vacancy rates in the next submarkets
are a result of newer buildings that have come on line with little or no pre-leasing activity, combined with lease
concessions, defaults and downsizing which is causing vacancy to rise. The highest vacancy submarkets are
the Northwest at 44.38%, Southwest at 25.81% and Airport submarket at 25.79%. Vacancy rates for all class types
in the office market have increased during the quarter with Class A increasing to 31.61% from 30.16%, Class B
increasing to 22.89% from 20.94%, and Class C increasing to 21.52% from 18.88%. Available sublease space
dropped slightly in 1st quarter with current availability at 383,585 sf (0.89% of the total market) of available
sublease space. Net absorption for the 1st quarter showed in the negatives again at (818,385). We have not
seen absorption rates like the current rates since 1st quarter 2009, which was (814,631). The Southwest submarket
showed the greatest amount of positive absorption with over 59,998 sf for the quarter while the Central West
submarket posted the least amount with (259,542) sf of negative absorption.
Professional Office: Quarterly Vacancy
%
25%
. 05
23
9%
0%
1%
%
.7
.5
83
.1
20
20
20
.
19
20%
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.3
.9
.8
17
16
16
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.8
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14
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3%
.1
13
13
.4
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9%
12
2%
12
.8
%
.3
10
10
57
%
69
9.
10%
8.
5%
0%
6
6
6
6
7
7
7
7
8
8
8
8
9
9
9
9
0
30
40
10
30
40
11
20
20
10
20
30
40
10
20
30
40
10
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
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Q
Q
Q
Professional Office: Quarterly Absorption (SF)
1,000,000
800,000
600,000
400,000
200,000
-
(200,000)
(400,000)
(600,000)
(800,000)
(1,000,000)
8
8
6
6
7
7
6
6
7
7
0
8
8
9
9
9
9
40
11
30
40
10
20
30
10
20
10
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20
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10
20
Q
Q
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Q
Q
3 Professional Office: Inventory (SF) and Vacancy Rate (%)
50,000,000 25%
6. Central Central Las Vegas
Northwest Downtown West Southwest Airport Southeast North
East West Area Total
Vacacny % 44.38% 15.15% 21.39% 18.88% 20.32% 25.81% 25.79% 22.69% 19.74% 23.05%
Sublease % 0.05% 1.22% 1.32% 0.10% 1.49% 1.27% 0.72% 0.78% 0.56% 0.89%
Professional Office: Building Class
Class C
Class B
Class A
Class A Class B Class C
Sublease SF 6 2 ,6 3 8 2 3 2 ,6 3 4 8 8 ,3 1 3
Vacancy 1,309,654 3,981,911 4,612,677
Existing SF 4,142,378 17,391,835 21,431,514
Pricing (Average Asking Rents)
The latest performance contributed to price erosion as landlords and building owners compete for a limited
number of users. By 1st quarter 2010, the market reported average asking rents of $2.06 sf/FSG, a drop from
the $2.10 sf/FSG from 4th quarter 2009. Elevated tenant improvement allowances and free rent concessions
are impacting returns for landlords and ultimately lenders. We expect this trend to continue throughout the
majority of 2010 as inventory levels remain elevated.
Most of the submarkets showed asking rental rates decline with the highest declines in the Southwest submarket
at $2.32 sf/FSG from $2.57 sf/FSG and North at $1.97 sf/FSG from $2.19 sf/FSG. Even with market rates declining
over all some submarkets did see a slight rise in asking rates. Downtown submarket rose to $2.59 sf/FSG from
$2.33 sf/FSG and Northwest rose to $1.97 sf/FSG from $1.81 sf/FSG
Average asking rents by class ranged from the Top Tier Class A segment showing $2.83 sf/FSG. Lower Tier Class
A building rates were slightly lower at $2.73 sf / FSG. Also, above the valley average asking rates were Top Tier
Class B buildings that reported average asking rents of $2.41 sf/FSG. However the Lower Tier Class B buildings
were right at the market average at $2.06 sf/FSG. Pricing for Class C properties has average rates around
$1.65 sf/FSG (Top Tier C) and $1.69 sf/FSG (Lower Tier C). Please Note: the average asking rates do not take in
consideration free rent & rental concession.
Full Service Gross (FSG): A lease requiring the owner to pay all operating expenses, such as cleaning, maintenance and
repairs, utilities, insurance and ad valorem taxes.
5
7. Professional Office Submarket - Rates
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Central Central Las Vegas
Northwest Downtown West Southwest Airport Southeast North
East West Area Total
FSG Rate $1.97 $2.59 $1.69 $1.64 $1.93 $2.32 $2.31 $2.13 $1.97 $2.06
MG Rate $1.77 $1.63 $1.17 $1.32 $1.60 $1.90 $1.47 $1.47 $2.16 $1.61
NNN Rate $1.50 $1.69 $1.05 $1.20 $1.41 $1.36 $1.22 $1.26 $0.96 $1.29
Medical Office Market
Now that the Health Care reform bill became law, Nevada will need to prepare for not only a requirement for
more health care employees, but also more facilities. So far the latter part of this statement has been fulfilled,
as the amount of available medical office space in the valley has already outgrown the number of doctors
to fill it. As a result, the medical office space market has experienced an increase in vacancy from 4th quarter
2009 at 14.87% climbing to 15.18% during 1st quarter 2010. However with the Health Care reform bill, we expect
vacancy to see a significant drop in the next year or two. It’s been estimated that more than 32 million additional
Americans will now be covered with health insurance which will create a need for a substantial amount of new
medical office space (roughly 60 million sf National). Also to come on line soon, are the nearly 80 million aging
baby boomers who will also need more medical care over the next decade.
There is some concern, however, as to the cost of the reform from employer cost to construction cost. As in the
general office complexes around Las Vegas, for medical offices, the past years have been filled with challenges
from rising construction costs and over building of the medical condos in certain submarkets. According to Mike
Young, chief executive of Venture, “The cost of building a medical office is roughly 20% higher than standard
commercial space, thus the cost of purchasing or leasing is (typically) higher.” With the slowdown of homebuilding,
the demand for medical offices in the suburban areas has also become soft with significant vacancies beginning
to occur in the Southwest and Southeast submarkets. In the past, the Southwest submarket has been the hot
location to build medical offices, with two major hospitals opening up fairly close to each other. Most of this
added vacancy has been due to over-built medical offices in the area. Other submarkets have held steady
during the year, with relatively low vacancy rates.
Commerce / Cushman & Wakefield
Las Vegas Office Market Report Q1 2010
Medical Buildings
Inventory Vacancy Demand & Supply Pricing
No. of Existing Under Const. Planned Vacancy Net Space Gross Space New Sub Asking Rent (FSG)
Bldgs. SF SF SF SF Rate Occupied Leased Supply Lease Low High W Avg.
Northwest 75 2,070,473 - 166,046 203,376 9.82% 28,234 45,788 - 1,506 $1.30 $2.13 $1.89
Downtown 2 29,985 - 1,679,040 - 0.00% - - - -
Central East 52 1,876,846 - - 301,600 16.07% (1,324) 14,154 - - $1.60 $1.75 $1.69
Central West 68 1,742,095 - - 126,922 7.29% (45,064) 1,892 - 20,962 $1.40 $2.00 $1.76
West 44 1,436,170 270,744 18.85% (17,563) 12,917 - 720 $0.99 $2.25 $1.77
Southwest 53 1,576,427 193,829 730,557 328,701 20.85% 13,293 22,841 - 21,167 $2.40 $2.40 $2.40
Airport 8 82,043 - 16,034 19.54% 230 2,750 - - $1.25 $1.85 $1.99
Southeast 87 1,893,365 27,025 324,638 428,590 22.64% 6,481 38,454 - 8,937 $1.75 $3.00 $2.33
North 14 487,626 - - 23,099 4.74% (5,689) - - - $1.12 $1.95 $1.67
Total 403 11,195,030 220,854 2,900,281 1,699,066 15.18% (21,402) 138,796 - 53,292 $0.99 $3.00 $1.94
6
8. Medical Office Submarket - Rates
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Central Las Vegas
No rthwest Do wnto wn Central East West So uthwest A irpo rt So utheast No rth
West A rea To tal
FSG Rate $1.89 $ 0.00 $1.69 $1.76 $1.77 $ 2.40 $1.99 $ 2.33 $1.67 $1.94
M G Rate $1.78 $ 0.00 $1.33 $1.69 $1.79 $1.80 $1.55 $1.34 $1.37 $1.58
NNN Rate $1.48 $ 0.00 $1.33 $1.78 $1.76 $1.75 $1.25 $1.38 $1.22 $1.49
Outlook
In the coming months we expect commercial real estate prices to decline further and not seeing any true
recovery until the end of the year to early next year. The market will continue to be impacted by cautious
consumer/companies activity, causing vacancies to remain elevated and most likely continue to increase.
Rents will also continue to be impacted by the current economy and will continue to fall. In a report produced
by UNLV’s CBER “Southern Nevada business will continue to struggle with the after effects of the deepest
recession in the US since the Great Depression. To date, Southern Nevada has not enjoyed the same level
of increase in business activity as the rest of the US.” The local economy will not pick up until we see robust
growth in hiring and according to the survey with only 10 % of businesses anticipated to hire more workers, the
recovery will be very slow for the Las Vegas area. We are optimistic going into 2010 that the bottom is near
and compared to last year, vacancy is not rising and lease rates are not falling as fast or as far as we were
witnessing. Some early signs of stabilization may come from the growth from the federal government, health
care sector, energy and clean technology companies needing office space.
Performance by Product Type & Classification
While broader market trends are clear, by providing basic break out of the office product types, it is also
important to understand the performance of detailed key sectors within the commercial office market. At
Commerce, we know the importance of updating the classification of buildings as the market grows older.
We have taken the steps this quarter to start with a new classification process. As a team, we have separated
and reclassified all office buildings in a “Tier” format. The Tier format will separate out classes in a Top Tier Class
and Lower Tier Class. This will help our clients to better understand, for example, the number of “real” Class A
buildings that the Las Vegas area has that would qualify as Class A in other markets such as Los Angeles and
New York.
The following is the Commerce Real Estate Solutions’ 1st Quarter Market report which highlights market conditions
by building type and classification.
7
11. Commerce Classification definitions:
GLOSSARY/MAJOR MARKET DEFINITIONS
Top Tier Class A: Describes the highest quality office space locally available. The architecture of Class A office
structures always prioritizes design and visual appeal over cost, and sometimes over practicality - a Class A
building can be considered a monument and a testament to the success and power of its tenants. Class A:
Generally 100,000 sq. ft. or larger (five or more floors), concrete and steel construction, built since 1980, business
/support amenities, strong identifiable location/access. Most prestigious buildings competing for premier office
users with above average rents for the area. Buildings have high quality standard finishes, state-of-the-art systems,
exceptional accessibility and suggest a definitive market presence.
Lower Tier Class A: Investment – grade property, well located and offering high-quality space. Good design,
above-average workmanship and materials. Well maintained and managed, exceptionally so if an older building.
Quality tenants. Building(s) location considered premier with high market perception standards. Typically higher
rent with excellent building finishes, multiple building amenities and high efficiencies. Lower Tier Class A will have
3 or more floors, concrete and steel construction.
Top Tier Class B: Building(s) location considered excellent with medium market perception standards. Renovated
and in good locations. Typically lower rent than Class “A” with good building finishes, some building amenities and
medium efficiencies. Built after 2000. Concrete and steel construction.
Lower Tier Class B: Buildings competing for a wide range of office users with average rents for the area. Building
finishes are fair to good for the area and systems are adequate, but the buildings do not compete with class A
at the same price. They are less appealing to tenants than Class A properties, and may be deficient in a number
of respects including floor plans, condition and facilities. They lack prestige and must depend chiefly on a lower
price to attract tenants and investors. Such buildings offer utilitarian space without special attractions and have
ordinary design. Built before 2000. Wood frame and tilt wall construction.
Top Tier Class C: A classification used to describe buildings that generally qualify as no-frills, older buildings that
offer basic space and command lower rents or sale prices compared to other buildings in the same market. Such
buildings typically have below-average maintenance and management, and could have mixed or low tenant
prestige, inferior elevators, and/or mechanical/electrical systems. These buildings lack prestige and must depend
chiefly on a lower price to attract tenants and investors. 15 to 25 years old. Wood frame and tilt wall construction.
Smaller buildings, Garden Style design.
Lower Tier Class C: Older, un-renovated and of any size in average to fair condition. Basic Space in a no-frills
older building. Below –Average maintenance and management. Mixed or low tenant prestige. Inferior elevators
and mechanical/ electrical systems. Class C Buildings are typically 15 to 25 years old but are maintaining steady
occupancy.
Medical: A building is considered medical if greater than 55% of its rentable area is occupied by medical
tenants.
Full Service Gross (FSG): A lease requiring the owner to pay all operating expenses, such as cleaning, maintenance
and repairs, utilities, insurance and ad valorem taxes.
10