Nevada Industrial Market Improving

LAS VEGAS—For the first time since 2008, industrial vacancy is below 10% in southern Nevada. Currently at 9.2%, the decrease in vacancy is a result of improvements in Southern Nevada's industrial real estate market, according to the third quarterly market report of 2014 from Colliers International – Las Vegas. Compiled by John Stater, research director for Colliers International – Las Vegas, the report highlights more than 650,000 square feet of new industrial completions on almost 94 acres of land in the first three quarters of 2014.

From January through September, more than 135 acres of industrial land were sold, with a total industrial land sales volume of $50.1 million. With an additional 184 acres of land on track to account for more than 1.65 million square feet of new industrial space, and with strong gains in industrial employment in Southern Nevada, both the land and industrial markets are expected to absorb several new speculative products in 2015. Despite these gains, demand overall has decreased for this product type.

“Demand for industrial space was generally a bit higher in 2013 than in 2014, which calls into question whether we are seeing a trend of ever-mounting demand for industrial space, such as was seen during the boom years of 2005 and 2006,” Stater said.

Despite some trends in demand, land sales in all submarkets have demonstrated increased interest in Southern Nevada by both developers and investors. Nearly 1,900 acres have traded in the first three quarters of this year, an increase of more than 400 acres compared to the same time period in 2013. Demand for land can also be seen in increasing prices, with the average price for land standing at $7.61 per square foot. More than 2.9 million square feet of new commercial product is either planned or under construction on 565.1 acres of land.

“Land sales are a good indicator of confidence in a real estate market, as they presage future development,” Stater said. “The increase in land sales over the past three years indicates that confidence in the market is returning, albeit at a measured pace.”

Like the industrial sector, retail vacancy is also below 10 percent by a full percentage point. Net absorption in this sector increased significantly compared to both one quarter ago and one year ago, with more than 240,000 square feet being absorbed. Shopping center investment sales year-to-date have totaled more than 1.5 million square feet in 33 centers, with total sales volume of more than $392 million. The remainder of 2014 is expecting nearly 2 million square feet completed retail space, with 875,000 of that total coming from the completion of the Downtown Summerlin retail project.

“After a brief respite at the beginning of 2014, the retail market returned to form, posting almost 500,000 square feet of net absorption over the past two quarters,” Stater said. “At the current rate of net absorption, it could take the market around three years to get to the long-term average of 6.6%.”

Despite these gains, the office market, while recovering, is not experiencing the same significant growth. Office vacancy has been decreasing for four quarters, reaching 19.3% in the third quarter of 2014, and the amount of distressed office space decreased to 3.7 million square feet. Forward supply of office space now stands at 860,834 square feet, with approximately 15% of that space being build-to-suit projects. Only a single office project was completed in the third quarter of 2014, a 12,000 square foot building in the airport submarket.

“Whether you want to call it fits and starts or two steps forward and one step back, the office market recovery is not pretty, but it is a recovery of sorts,” Stater said. “Users have been reducing their office footprint per employee over the past six years, and this trend has probably not played itself out.”

The medical office market has seen significant challenges, with negative net absorption of more than 100,000 square feet in the most recent quarter, the second quarter in a row of negative net absorption. Despite this negative absorption, the average asking rent in this market stayed steady at $2.15 per square foot. The higher asking rents, paired with higher vacancy rates, are most likely the result of less expensive space being leased and occupied, leaving more expensive spaces on the market.

“Southern Nevada's medical office has gone from bad to worse,” Stater said. “At a time when medical properties need to be agile and responsive to attract tenants, a greater percentage of the market is in a state that makes it difficult to provide tenant improvements.”

Countering the negative effects seen in the medical office market, Southern Nevada's hospitality market continued to improve, with average annual room occupancy increasing by 2.5%. As a result of increases in room occupancy, revenue per available room (RevPAR) increased to $104.61, despite a slight decrease in the average daily room rate (ADR). Visitor volume in the first seven months of 2014 was 24.2 million people, up slightly from the 23.6 million visitors recorded in the first seven months of 2013. All of these figures present a promising market for Southern Nevada's hospitality investors.

“In all, we expect that approximately $4.7 billion will be spent on Southern Nevada's hospitality market between 2014 and 2016, before another $4 billion is spent developing the first phase of ResortsWorld Las Vegas in 2017,” Stater said.