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LAS VEGAS-The Las Vegas Valley office market continued to expand in the third quarter as absorption continued to decline. The situation pushed overall vacancy up to 12.4%, its highest point since the turn of the century, according to a just released third quarter report by Applied Analysis, a local business advisory firm.

Approximately 766,000 sf was delivered in the third quarter–including the 285,000-sf Molasky Corporate Center in Downtown Las Vegas–while net absorption totaled 459,000 sf. Through the first nine months of the year, some three million sf has been delivered while only slightly more than two-thirds of the total was soaked up. Looking forward, an additional three million sf is under construction and set to be delivered over the next four quarters, according Applied Analysis principal Brian Gordon, who forecast the increasing vacancy in his mid-year report.

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

Meantime, Gordon says owners will be adjusting their pro forma income statements to account for slower rent growth and increasing concessions. “While rent growth has declined for six consecutive quarters, pricing remains somewhat elevated,” he says. “Longer lease-up periods, incentives and above-average tenant improvement allowances must also be considered for new supply entering the market.”

In the longer run, growth in the office-using employment sector will once again lower vacancy. “Future expansions within the resort corridor will certainly ripple throughout the economy in the coming years, providing increasing demand for space with above-average vacancies,” he said at mid-year.

The current high office vacancy is not evenly spread across product type. While class B spaces posted a vacancy rate of nearly 14%k in the third quarter, class A vacancy remained safely in single digits at 8%. Average asking rents, while about 5% ahead of last year, held steady during the third quarter at approximately $2.36 per sf, while class A rates averaged $2.86 and class C rates averaged $1.90. The average B class asking rate was $2.33, according to the report.

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