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LAS VEGAS-Office vacancy jumped 100 basis points to 9.4% in the second three months of the year as record new construction completions pushed the total inventory to 39.3 million sf, according to a second quarter report from Applied Analysis, a locally based business advisory and market research firm.

Absorption came close to keeping up with new supply in the first quarter, when 900,000 sf was delivered, but absorption backed off in the second quarter to 669,000 sf while construction completions rose to 1.2 million sf. The total amount of product delivered in the first half of the year is higher than any six-month total in the past decade, according to the report.

Joseph Kupiec, managing director of Grubb & Ellis Las Vegas, expects demand will catch back up in future quarters. “You’re going to see these small spikes in the market as deliveries come but it won’t tell you much,” he tells GlobeSt.com. “This is a vibrant market and we are continuing to see strong demand.”

While vacancy is now 20 basis points higher than it was this time last year thanks to three consecutive quarters of vacancy rate increases, Applied Analysis principal Brian Gordon says vacancy remains below the double-digit rates reported three years ago, suggesting a more normalized balance between supply and demand.

The office expansions in recent quarters were driven by projects designed, marketed and financed up to 18 months ago, a time when market conditions were more favorable. An additional 4.3 million sf is under construction and an additional 5.6 million sf is planned, according to the report.

“A significant amount of office condominium space has come on-line in the past several quarters primarily due to land price and construction cost escalations combined with favorable interest rates,” Gordon says. “We have no expectation that this condition will repeat itself into the foreseeable future; and, in fact, there is increasing evidence that the tide may be turning toward a softer overall condition.”

Class A space has the lowest vacancy at 4.9%, according to the report, while class C space has the highest at 10.9%. Slicing it by geography, the 16-million-sf City of Las Vegas market had the lowest vacancy rate at 7%, while Unincorporated Clark County, the largest market with 17 million sf, posted a vacancy rate of 10.6%. Vacancy in the City of Henderson, home to 5.3 million sf of office space, stands at 12.2%.

“Demand for space in the southwest portion of the Valley remains relatively healthy as employers have identified this area as a convenient location for both employees and customers,” says Applied Analysis principal Jeremy Aguero. “On the other hand, softness has been reported in the north and southeast submarkets as accessibility and proximity to major labor pools may be impacting their performance.”

Average asking lease rate growth continued during the quarter, reaching $2.21 per sf compared to $2.17 in the first quarter and $1.99 this time last year. The biggest jump in asking rates over the past year occurred in Unincorporated Clark County, where the average rate rose $0.25 to $2.15 per sf per month, a 13% jump. The most expensive market is the City of Henderson, where the average asking rate is $2.39, up 8% in the past 12 months. The average rate within the City of Las Vegas is $2.20, up 6.8% in the past year.

“We continue to see above-average rental rate growth in the speculative sector, while rising land and construction costs will continue to drive rates north on future projects,” Aguero says. “New pricing levels have expanding and relocating firms paying premiums never before witnessed for quality speculative space.”

Significant completions during the quarter included:

  • The 100,000-plus-sf building at Rainbow Sunset Pavilion developed by Plise Cos. in the southwest submarket.
  • Several buildings at Desert Canyon Business Park at the southwest corner of Interstate 215 at Russell Road.
  • Space at Flamingo Pointe Corporate Centre on West Flamingo at Fort Apache.
  • Office condominiums at the Park at Spanish Ridge developed by Glen, Smith & Glen Development along Interstate 215 north of Russell Road.
  • Several buildings at the Sunset Post Medical Center in the southwest submarket.
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