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LAS VEGAS-The Downtown and Westside office markets here continue to hold up well against the recession, according to fourth quarter market reports and comment from local brokers. Each market posted a vacancy rate in the 11% range, which compares to a market-wide average of 17.24%, up 124 basis points during the quarter, according to the latest data from CB Richard Ellis. The highest vacancy rates are in the Northwest and Southwest submarkets, where vacancy has crested 25%.

Looking into 2009, Brian Gordon, a principal with Applied Analysis, a local research and business advisory firm says he sees continued deterioration in occupancy because office market indicators tend to lag real-time fundamentals due to lease periods that can extend beyond troughs in the economy.

“As a significant amount of space competes for a relatively few number of tenants, we expect effective pricing to erode, higher concessions to become prevalent and lender foreclosure activity to increase,” he says. “Consequently, forward-looking supply is expected to dwindle as projects under construction face leasing challenges and financing for planned projects becomes a near impossibility. Well-capitalized developers and investors will weather the storm, while those with leveraged balance sheets will be forced to renegotiate debt or walk from projects altogether. From a user perspective, attractive opportunities will emerge in 2009.”

Brad Peterson, an office leasing specialist with CBRE in Las Vegas who has been busy negotiating some office lease as of late, also expects to see more downsizing by office tenants as their leases roll. He also expects to see tenants try to take advantage of the market by approaching building owners mid-term looking to trade longer terms for lower rates.

“There’s activity out there,” he tells GlobeSt.com. “Net absorption will be pretty small throughout the first couple of quarters but we will see an increase of activity in the third and fourth quarters and will finish better than [2008].”

New space delivered in 2008 was 36% of its 2007 level, according to CBRE, and total gross space leased in 2008 is half of what it was last year. Given the softness in the market several projects under construction have stalled and developers have pulled many large projects from the pipeline, shrinking total planned space to less than a third of its level of one year ago, according to CBRE. Sales also have been few and far between due to a large bid-ask gap—the delta between what sellers think their properties are worth and what buyers are willing to pay for them.

Average asking lease rates are at least $2.40 per square foot on a full-service gross basis except in the Central East, Central West, and North Las Vegas, where rates are in the range of $2.10 FSG. But asking rates don’t mean a whole lot these days as owners’ ramp up concessions to keep their existing tenants and attract new ones.

Peterson says there is “quite a bit of sublease space” on the market at rates well below market. Consequently, he expects that space to lease up sooner than shell space. That having been said, he adds that building owners’ tenant improvement costs—due to lower demand for workers and materials–have fallen substanitally, which should allow them to negotiate better deals and possibly speculatively refinishing some space with hope that it will result in a strategic advantage over shell space.

“Tenants have in the past had been willing to pay some money for extra tenant improvements, but no longer,” Peterson says. “They are now demanding turn-key spaces and fortunately landlords are getting close to being able to provide it because instead of it costing $70 per square foot for TIs it’s now more like $50 per square foot.”

Planned office space as of the end of the fourth quarter was just 800,000 square feet, down from 6 million square feet one year ago. “This is a reflection of the rapid deterioration of the economy this fall, as developers who were (perhaps warily) still planning projects a few months ago have now lost access to capital and/or are now unwilling to commit to projects in this economic climate,” states CBRE in its report.

Space under construction also dropped this quarter, with just over two million square feet construction. More than half of the activity is in the Southwest submarket. Only 170,626 square feet of new space was completed in the final three months of the year, a fraction of the 750,000 square feet delivered in the fourth quarter of 2007.

In the past week, CBRE has closed several office lease deals totaling close to 70,000 square feet, most of them either renewals or relocations within the market.

CBRE broker Randy Broadhead represented PRA Holding I, LLC in the $5.5-million, 87-month lease of 30,498 square feet at 5070 Badura Ave. in the Beltway Business Park in Las Vegas. Broadhead also represented 7-Eleven Inc. in the $2.2-million, 66-month lease of 19,868 square feet at 2470 Paseo Verde Pkwy., which sits within Green Valley Corporate Center South in Henderson.

Peterson represented Morgan Stanley & Co. in the $1.3-million, 63-month lease of 8,388 square feet at 1645 Village Center Circle, which is part of the Plazas at Summerlin. Peterson also represented Lincoln Technical Institute in the $482,197, 41-month lease of 6,582 square feet at 150 N. Stephanie St., which is in the Stephanie Beltway development in Henderson.

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