Forecast Foresees Increasing Instability

Joyce explains that the market is poised for instability as fundamentals have reached a tipping point. "With vacancies approaching 30% in key areas, many landlords will be required to rework terms with their lenders or face foreclosure as the supply-demand balance within the sector is not expected to improve in the next few months," he comments in the latest Applied Analysis report on the Las Vegas office market.

Applied Analysis principal Brian Gordon notes that a number of office buildings "remain stalled in the construction process, suggesting investors or lenders have reserved against or written off these assets." Gordon says that, with market expectations "running thin for landlords and tenants" the corrections that lie ahead for the market "will include a resetting of price points in both rental and for-sale product."

Applied Analysis, which tracks an inventory of 49.3 million square feet in the Las Vegas office market, says in its second-quarter report that vacancies "have escalated to record-setting levels with a continuing stream of new product entering the market," and with the amount of occupied space declining to levels reported two years ago."

Among the new major project completions during the latest quarter were two buildings totaling 364,800 square feet, including the 226,140-square-foot office building within the Rainbow Sunset Pavilion and three buildings in the Arroyo South project located at Warm Springs Road and Tenaya Way. Both projects are located in the southwest submarket where vacancies reached 27.8 percent by mid-2009.

Applied Analysis calculates that overall availability in the market reached 22.1% of inventory, a jump from the 19.6% reported three months ago and 16.9% one year ago. Grubb & Ellis, which tracks a considerably smaller inventory of approximately 35 million square feet, pegs the vacancy at 20.6%.

Grubb & Ellis, in its forecast, says that new development is not expected until next year and that lease rates are expected to stay low throughout the end of the year. "Short lease terms will remain common until a significant improvement in the economy becomes evident," the Santa Ana-based firm says.