Las Vegas Review-Journal - Business

New construction has slowed to a pace not seen since the 1990s, Applied Analysis principal Brian Gordon said. In the past 12 months, a modest 843,000 square feet of new office space was added to the market, including 84,800 square feet in the first quarter.

No new office buildings have broken ground this year and the pipeline of planned projects has dried up as developers cancel or postpone projects, CB Richard Ellis office broker Jayne Cayton said.

Given the overbuilt nature of the office market in Las Vegas, Cayton said she expects little to no new construction in the near future.

"There's still some space under construction, but it's mostly zeros across the board," she said. "You can buy for less than you can build for, so if you bought land, you probably paid more than it's worth today and you can't build on it. It's going to probably sit for a while."

CB is reporting 24.6 percent vacancy for 33.6 million square feet of inventory. Monthly asking lease rates are $1.84 a square foot, down 12 cents from the previous quarter and down 56 cents from a year ago.

Gordon said he's concerned that the purchase price of office buildings will continue to diminish as more distressed and lender-owned sales emerge. He expects to see downward price pressure far into the economy recovery.

"The silver lining in this is the opportunity created for companies looking to expand operations or relocate from higher-cost environments such as California," he said.

Dave Dworkin of Grubb & Ellis said he's seeing an increase in bank-owned properties and short sales, which provide investment opportunity. Investors who purchase land or distressed properties now are in good position to turn a profit in the future, he said.

While some office tenants have vacated their building, those who've stayed have been able to negotiate better lease rates with their landlords, Dworkin said. He reported slightly less than 50 lease transactions in the first quarter at rates ranging from 85 cents to $2.85 a square foot. That's down from $1 to $3.75 a foot a year ago.

Demand for office space continues to shrink in today's economy. Net absorption, or the amount of space taken, was negative 65,000 square feet during the quarter, John Stater of Colliers International reported. That's an improvement from negative 312,000 square feet in the fourth quarter and negative 320,000 square feet in the year-ago period.

CB Richard Ellis and Grubb & Ellis had it much worse at negative 541,639 square feet and negative 535,000 square feet, respectively, for the quarter. Calculations within each brokerage vary according to methodology.

Colliers reported 22.6 percent office vacancy in the first quarter, up from 22.3 percent in the previous quarter, the 14th straight quarter of rising vacancy. However, it's the fifth straight quarter in which year-over-year percentage increase has declined.

"Things are generally getting better," Stater said. "There's a lot more activity, a lot of people looking for cheaper space."

Mike Hillis, managing broker for Commerce Real Estate Solutions, said tighter credit terms, rising inflation and rising unemployment are hurting the outlook for the office market in Las Vegas.

The market will be subject to cautious activity from both consumers and companies, causing vacancies to remain elevated and most likely to increase, he said. Rents will continue to fall.

"In the coming months, we expect commercial real estate prices to decline further and we're not seeing any true recovery until the end of the year to early next year," Hillis said.

Southern Nevada continues to struggle with a deep recession and has not enjoyed the same level of increase in business activity as the rest of the country, he said.

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