Building Nevada - December 2007

Nevada’s Office Market

Strong State Economy Weathers Downturn

by Tony Illia

Nevada’s strong job growth and population boom have helped it weather a national housing market downturn and tightening credit crunch. Although state unemployment climbed to 5.1 percent in September – its highest figure in nearly four years – more than 11,000 private sector jobs have also been created since 2006.

“While the pace of job creation is well below recent norms, the private sector – excluding the gaming and construction industries – has produced jobs at a respectable 2.5 percent annual rate in the past 12 months,” said Larry Mosley, director of Nevada’s Department of Employment, Training and Rehabilitation. “That rate compares favorably to the state’s overall 1.3 percent job growth during the same period.”

Southern Nevada, like other regions, isn’t immune to the residential market fallout. The Las Vegas Valley’s office vacancies climbed to 12.24 percent in the third quarter or 2.2 percent more than last year, reports Applied Analysis, a Las Vegas-based economic research firm. The area’s rapid residential expansion fueled office use with homebuilders, contractors, title companies and mortgage lenders. Its decline has since caused a market-wide softening with industry-related firms now downsizing, subletting or consolidating space.

Market conditions aren’t likely to ease anytime soon. A record 24,218 homes were listed for sale in Southern Nevada at the end of third quarter, a 16.3 percent increase over the previous year, according to the Multiple Listing Service (MLS). Yet, only 10,521 new homes sales were recorded through August, a 48.3 percent drop from 2006, despite lowering prices by 10.2 percent during the same time frame, reports Home Builders Research Inc., a Las Vegas-based residential market research firm. Foreclosures have skyrocketed with one filing per every 185 Nevada households in the third quarter, or nearly triple the number of filings in 2006, reports RealtyTrac.

Despite this, the Las Vegas Valley welcomed 3 million square feet of new office space during the first nine months of 2007, although only 2 million square feet worth of net absorption for a 0.68-to-1 absorption-to-completion ratio. The Las Vegas Valley’s inventory grew to 44.1 million square feet in the third quarter for a 9.3 percent year-to-year increase. But many of those projects were commenced 12 to 24 months ago, when economic market conditions were dramatically different.

“The modest market imbalance is a function of a developer-friendly environment in existence two years ago – interest rates were low, land values were rising, and relatively low office vacancy rates prevailed,” said Brian Gordon, principal of Applied Analysis. “Additional increases in vacancies are likely through next year, followed by a stabilized supply-demand balance post-2008.”

Robust development activity saw 3 million square feet worth of office space under construction in the third quarter, with another 8.5 million square feet planned for future development. Asking rents still remain steady, however, averaging $2.51 per-square-foot in the third quarter for a 9.6 percent year-to-year increase, reports Colliers International/Restrepo Consulting Group. Location, product type and amenities still dictate rental rates, which vary dramatically among submarkets and properties.

Class A space, for example, remains a hot-seller, boasting the region’s lowest vacancy rates among all office products, as well as its highest asking rents. Crescent Real Estate Equities this year completed an 11-story, 280,000-square-foot Class A tower inside Hughes Center at 3883 Hughes Center Parkway. The property’s aking rents are $3.85 per square foot, full-service gross, which is 34.8 percent above the Valley-wide median. Crescent, a unit of Morgan Stanley, is now planning a sequel with an adjacent 11-story, 250,000-square-foot building to break ground in 2008.

“Demand for Class A product is still strong,” said Dean Kaufman, an office associate with Colliers International. “Office users still want a high-level of finishes in a master-planned setting with plenty of amenities like covered parking and availability to restaurants.”

Other newly minted Class A facilities include Charleston Pavilion LLC’s $35 million, 154,000-square-foot Pavilion, which opened inside Summerlin Centre, at 10801 W. Charleston Boulevard in the third quarter. Situated on 6.56 acres, the six-story office building serves as City National Bank’s corporate headquarters. It occupies 32,000 square feet, including a 5,000-square-foot bank branch and two lending centers on the first floor. Other building tenants include Fertitta Enterprises, UBS, TD Ameritrade, Harris & Associates and Hill International.

Marnell Properties completed the five-story, 117,000-square-foot MCC-5, at 6720 Via Austi Parkway, in May. The Class A office building is situated within the 36-acre, 350,000-square-foot Marnell Corporate Center master-planned development at Sunset Road and Gillespie Street. The new addition features a glass curtain-wall façade with travertine marble floors and custom lighting in common areas. Asking rents are $3.00 to $3.25-per-square-foot full-service-gross.

PLISE recently broke ground on a $60 million, eight-story Class A office building inside its 25-acre Rainbow Sunset Pavilion at 6315 South Rainbow Boulevard, just north of the Beltway. The 225,921-square-foot project is scheduled for completion in the fourth quarter 2008.

Unitrin is building the $35 million Eastgate Plaza II at the northeast corner of Warm Springs Road and Stephanie Street in Henderson. The six-story, 140,000-square-foot Class-A building is expected to open in the second quarter of 2008. It will be Henderson’s tallest office building upon completion.

“The Class A market remains popular with limited availability,” said David Scherer, senior vice president of Grubb & Ellis | Las Vegas Office Division. “The Valley’s growth has fueled demand for brokerage, banking and professional services who are seeking high-quality suburban space.”

Town Square, meanwhile, boasts 352,000 square feet of Class A office space at the I-15/215 interchange. Co-developed by Centra Properties and Turnberry Associates, the 1.57 million-square-foot complex consists of nine office buildings, along with 150 stores, 12 restaurants and a 20-screen multiplex. The $750 million, 117-acre mixed-use development opened in November 2007. A strong mix of amenities prompted the Las Vegas Chamber of Commerce to leave its longtime location inside Hughes Center, and sign a 10-year, 25,000-square-foot office lease at Town Square.

“This really puts the commerce in the Chamber of Commerce,” said Cara Roberts, a Chamber spokesperson. “We are going to be front and center where business takes place.”

Another Class A office complex is taking shape nearby at Sunset and Pilot Roads. The $50 million, 180,000-square-foot Sunset Pilot Plaza will consist of two, three-story buildings with divisibility from 5,000 square feet. The 9-acre project is being developed by Stoltz Management Co. with New York-based investor GoldenTree InSite Partners. The first building will open in the first quarter of 2008, with asking rents from $3.10 to $3.25 per square foot, full-service.

“Sunset Pilot Plaza provides excellent access to the Beltway and Strip, McCarran International Airport and I-15,” said Wes Jenson, senior vice president of Stoltz’s Las Vegas office. “Its central location will allow tenants to draw from a broad labor pool throughout the Valley, since it’s equidistant between Green Valley and Summerlin.”

But downtown still remains a popular address for many legal and professional firms, making this year’s debut of Molasky Corporate Center II an exciting one. The $107 million, 852,000-square-foot Class A office tower at 100 City Parkway was developed by the Molasky Group of Companies. The 17-story high-rise is anchored by Southern Nevada Water Authority. In 2005, the agency signed a 20-year, $63.3 million lease to occupy 129,000 square feet inside the building with an option to buy.

“Downtown Las Vegas redevelopment is starting to gain momentum with the proposed REI project that is to be anchored by a sports stadium to the north of West Charleston Boulevard,” said Bruce Follmer, a senior office associate with CB Richard Ellis. “Other projects in the downtown submarket include: the IRS building on Ogden Avenue; the Molasky Corporate Center; the Las Vegas Premium Outlet Center; Phase III of World Market, the Jewelry Mart; and Union Park.”

Downtown Las Vegas had the lowest vacancy rate of all submarkets in the third quarter at 7.36 percent, reports CB Richard Ellis. It additionally boasts the nation’s fifth lowest downtown office vacancy rate, trailing only Charlotte, Boston, and Midtown Manhattan and Downtown Manhattan. Las Vegas’ strong national rating is partly due to a lack of recent new product. Downtown had only 1.76 million square feet of inventory in the third quarter – the second lowest of all Valley submarkets behind North Las Vegas – with just 30,000 square feet of new space under construction.

“The majority of vacancy in the downtown submarket consists of approximately 91,000 square feet in the Carson Building located at 302 Carson Avenue,” said Dave Dworkin, a research analyst with Grubb & Ellis Las Vegas. “This submarket, mostly populated with attorneys, government offices and court-related services, will likely experience a larger diversification of tenants to serve the wide array of development projects planned in the near future.”

Yet tenant standards for office space continue to evolve, with users requiring greater efficiency, flexibility and technology integration. Items such as enhanced lighting, air quality and redundant fiber are important to industries like healthcare, computer science, finance and management. Many office users, as a result, are looking at dressed-up, more affordable Class B properties that incorporate key building components.

“People are increasingly looking at the bottom line,” said Soozi Jones Walker, a corporate broker with Commercial Executives. “It’s about getting the most value for your buck, which includes commute time. Employees don’t want to drive more than 10 or 15 minutes to get to work. It can make recruitment very hard.”

Location and major freeway access, as always, remains a critical concern with many modern employers and staff looking to work closer to home. New development consequently is occurring along places like the Las Vegas Beltway, which serves as the Valley’s transportation conduit between master-planned communities like Summerlin and Green Valley. Projects with visibility and quick access to the Beltway have generated the most demand with an average vacancy rate of 3 percent, says Colliers International Las Vegas.

EJM Development Co., for instance, is building The Arroyo Corporate Center at Tenaya and Badura Avenues in the southwest Valley. The new office complex is part of The Arroyo – a 450-acre, 5 million-square-foot mixed-use development located along both sides of the Beltway between Rainbow Boulevard and Buffalo Drive. Situated on 10 acres, The Arroyo Corporate Center will consist of 12 buildings from two to six stories, totaling 1.25 million square feet. The initial two buildings, which combine for 125,000 square feet, will open in the first quarter of 2008. The center offers floor-to-ceiling glass façades with mahogany and polished-granite common areas, plus fiber-optic wiring and covered parking. Asking rents are $2.25 per square foot, modified-gross.

“The project attracts a lot of interest due to its freeway access and equidistant location between Summerlin and Green Valley,” said Randy Broadhead, a senior vice president with CB Richard Ellis who is representing the project. “It’s also situated within a true master-planned development, within walking distance of several restaurants.”

Thomas & Mack Development Group is building the Corporate Gateway across the street. The upscale three-story office complex is located along the southern Beltway between Decatur and Jones Boulevards. It’s a component of the 400-acre, 5.86-million-square-foot Beltway Business Park – a joint development with Majestic Realty Co. The 55-building office, retail, industrial mixed-use, master-planned complex is expected to reach build-out by 2012.

“The southwest submarket continues to lead office development in the Las Vegas Valley, accounting for more than 64 percent of new construction,” said Taber Thill, vice president of Colliers International Las Vegas Office Division. “Ideally located between two of the largest residential master-plans in Southern Nevada (Summerlin and Green Valley), the southwest submarket will evolve into one of the Valley’s core submarkets.”

GSG Development is seeing demand at its southwest office complex located at Hacienda Avenue and the Beltway. The firm broke ground on The Park at Spanish Ridge, Phase II, in the third quarter. Situated on 40 acres, the 16-building project will combine for 367,000 square feet worth of office space. The $50 million project will finish in the third quarter of 2009.

Its neighbor, LaPour, is building a $19 million, 70,000-square-foot office building nearby at the southwest corner of Diablo Drive and the Beltway. The three-story LaPour Corporate Center will offer divisibility from 3,000 square feet to 60,000 square feet, with 660 feet of Beltway frontage and covered parking. Asking rents are $2.60 per square foot modified-gross. The 40-foot-tall building is scheduled to finish in the first quarter of 2008.

Nigro Development, meanwhile, is building the $35 million, 15-acre Desert Canyon Business Park Phase I at the southwest corner of Russell Road and the Beltway. The project consists of eight office buildings totaling 170,000 square feet, and anchored by Cannery Casino Resorts. Sales prices are $235 to 245 per square foot, gray shell, while leases run $2.25 per square foot, modified-gross. Work is already underway for a second 33-acre phase.

“The market is going through an adjustment period,” said John Restrepo, 2008 president of the National Association of Industrial and Office Properties(NAIOP), Southern Nevada Chapter and owner of Restrepo Consulting Group. “The Valley’s economic fundamentals are strong, but the office market is not where we would like it to be. Because of this weakness, we expect that a lot of the planned space will go away. Ultimately, this will result in a better balance between absorption and completions.”

Northern Nevada may see a similar adjustment period, as office leasing activity slowed in the first half of 2007 causing vacancy rates to creep up to 14.5 percent, reports Grubb & Ellis | NCG’s office. Development is also showing signs of a pullback with some suburban Class A product on hold, pending lease-up of already completed buildings. Developers and lenders alike are expressing concern with the lack of tenant demand and limited pricing power.

The South Reno Corridor has been hit hard by the housing construction slowdown, prompting builders to put space up for sublease, including: Centex, 14,000 square feet; Lennar, 14,470 square feet; and Pulte, 12,000 square feet. The sub-prime meltdown that led to the closure of MLSG, put 25,000 square feet back on the market. And there’s also the downsizing and potential closing of the 17,000-square-foot Covance Office and the 28,000-square-foot Hartford Reno Office. Meanwhile, the new 80,000-square-foot Employers Insurance build-to-suit office will result in the vacating of 76,000 square feet inside the Thomas Creek office park. The South Reno Corridor will see a total of 208,000 square feet of office space become available, driving vacancies up 25 percent by the first quarter in 2008.

Circumstances are expected to dampen any South Reno speculative construction for a couple of years. But other areas have fared better with the Meadowood submarket vacancy at 9.5 percent and the overall market at 14.3 percent, Colliers International’s Reno Office reports. One bright spot is the old Southwest submarket where the vacancy rate fell from 18.7 percent to only 10.3 percent.

“We suspect that as the economy has tightened, more firms have opted for the more economical space in this submarket,” said Tim Ruffin, managing partner and senior vice president of Colliers International Office Properties. “No matter how you cut it, this is a market that definitely favors tenants.”

Tony Illia
Tony Illia is a freelance writer based in Southern Nevada.