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LAS VEGAS-The Las Vegas retail market posted its second consecutive quarter of negative net absorption we well as a record-high vacancy rate, according to a first quarter report by Applied Analysis, a locally based business research and advisory firm that tracks 51 million square feet of retail space in the region. The firm attributes the performance to retailers that closed stories in the market and new developments that came to market with significant vacancy.

Approximately 800,000 square feet of retail space was added to the market and absorption was negative to the tune of 221,000 square feet, according to the report. Average vacancy reached 9.3% by quarter-end. That figure is 200 basis points higher last quarter (9.1%), 370 basis points higher than this time last year (5.6%) and 600 basis points higher than the market’s 10-year average (3.3%). Moreover, Applied Analysis principal Brian Gordon says the average will remain elevated for the next several years as the commercial retail sector rebalances.

Restrepo Consulting, another local business advisory that tracks 42 million square feet of anchored retail centers in the market is generating similarly glum data. While average vacancy for anchored centers is lower than the overall retail market at 7.6%, it’s on a rapid rise, up from 5.8% at the start of the year. One year ago vacancy at anchored centers was 3.7%, less than half the current rate.

Just like the overall market, the declining fundamentals are attributable to a combination of new product coming to market with high vacancy and existing product losing tenants. Restrepo Consulting says new anchored-center space coming online during the first quarter of 2009 totaled 427,300 square feet while net absorption was a negative 367,300 square feet.

“Consumer and business confidence and spending continue to plummet and, until we see the job market improve for at least 6 months, and the credit markets stabilize, demand for retail space will soften and the vacancy rate will continue to rise,” concludes company principal John Restrepo. Applied analysis principal Brian Gordon concurs, saying the market may retreat further in 2009 because the pace of growth in vacancy rates is accelerating and no signs of stabilization have emerged.

“Consecutive, year-over-year double-digit declines have many retailers trying to forecast the bottom as financial obligations are outpacing operating cash flow, forcing them to seek mid-contract lease rate adjustments,” Gordon says. “With increased vacancies, many landlords are also being impacted, which may result in an increased incidence of foreclosures. A downward cycle not unlike the residential sector could be in full bloom by year-end.”

If vacancies continue to increase, new development will be less a factor than it has been. While an additional 2.5 million square feet is said to be under construction at the end of March, Gordon says that total includes nearly 1.7 million square feet of product that has actually stopped development.

The overall situation pushed the average asking rent down 6% to $2.07 per square foot per month in the first quarter from $2.20 one year earlier, according to Applied Analysis. Power Centers posted the highest average rent ($2.24) and the lowest average vacancy (6.8%) while neighborhood centers posted the lowest average rent ($1.92) and the highest vacancy (11.3%). The current average rate of $2.07 is on par with levels reported two years ago.

While just looking at anchored retail centers Restrepo Consulting came up with similar spreads. The average asking rate for anchored centers fell 5.8% in the first quarter to $1.92 from $2.04. In the first quarter of 2007, Restrepo reported an average asking rent of $1.97.

“Pricing adjustments are inevitable as second generation space will likely be discounted to spur demand for space. Substantially all leasing transactions will be in existing units as limited new product will enter the market this year,” says Applied Analysis project manager Jake Joyce. “Bank liquidations may also play a role in retail price points over the next two years. While these are expected to create challenges across the board, well-capitalized tenants looking to enter the market may find opportunities not seen during the past five years.”

The two retail reports come on the heels of another by CB Richard Ellis that also found negative absorption, rising vacancies, sliding rents and a development slowdown. Like Joyce, CBRE says the upside for retailers is that increased vacancies mean bargains abound for those few in a position to take advantage. Landlords are serving up more rent concessions (lower lease rates) and incentives (free rent, larger tenant improvement allowances) in order to maintain occupancy through the downturn.

Brian Sorrentino of ROI Commercial says activity has indeed increased after falling off the radar at the end of last year, though there is a disconnect on rent and concessions between building owners and tenants, both of whom must answer to both investors and lenders. “Landlords know they are no longer calling the shots but in a lot of cases they simply can’t do some of these deals” either because they can’t afford it, it’s simply a bad deal and/or the lender won’t let them, he told GlobeSt.com. “You can only write down so much of a loss.”

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