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Shifting to a Landlord Market?
As the 2nd Quarter of 2016 has come to a close, we read all of the market reports, “with the slow pace of improvement and absorption” on the office front, “development isn’t needed due to the vacancy rates”, etc. the numbers minor improvements in the way of movement; however, the picture from ground level is much more interesting and one all tenant’s need to stay in front of. We know that your lease is typically not on your mind until the year of expiration, and you hate having to deal with the renewal/relocation questions and process. This will prove to be a very volatile 12-36 month swing in rental rates in the Las Vegas market shifting from what is still a tenant market, quickly to a landlord market, depending on location, of course. Are you aware of the changing dynamics and whether now is the time to start understanding the market so you can best determine how to align your real estate with your businesses strategy?
With vacancy rates ranging from 16.7% to 19.2% (depending on who’s report you read) or about 7.3 million square feet of vacant space, how can this be shifting to a landlord market? It’s the market dynamics. Since the recession, we have seen a steady increase in rental rates market-wide. This has come to a trickle over the last 6 months, with some Class A properties actually lowering prices. It’s when you get down to the details of the deals and the inventory to see what is truly going on.
During the recession we saw a huge “flight to quality” as C users moved into B, and B into A buildings, for cheaper than what they were previously paying. This took up a good portion of the space in the desired business parks, but it’s only over the last 24 months, as the Las Vegas economy recovers, that we have seen the majority of the remaining good space be absorbed. New businesses are opening, companies are relocating from other states, existing companies are expanding and hiring, and all of this is happening quickly. Now as clients are exploring the alternative options, we are not only seeing fewer potential spaces that fit the requirement of: geography, building class, cultural fit, size of space, desired layout, security, amenities, parking, etc… but the rental rates are higher, landlords are giving less in the way of free rent, tenant improvements and other concessions.
The supply of “quality” buildings is quickly dwindling in the suburban markets. This will not only raise the rental rates of the suburban inventory, but as the buildings fill up, this will force tenants back into the core of town, which will enable those landlords to also take advantage of the tight market.
The biggest concern from a tenant’s perspective should be the lack of any new office developments currently under construction. This stems from the developers also reading the market reports with high vacancy numbers. We now have seen other sectors (residential, industrial, retail) purchase premium land over the last 36 months, bringing prices for the good land locations to numbers that don’t make sense to develop office buildings based off the rental rates needed to achieve an appropriate return for the developer or landlord.
The best way to protect yourself from being a victim of the shift to a market is to stay well ahead of your expiration and align yourself with a market expert. We always recommend starting to analyze your space needs 24 months ahead of expiring.
CLIENTS REPRESENTED THIS QUARTER
Bank of Internet – 24,000sf (New Lease)
Bergman Walls Architects – 11,400sf (New Lease)
Rod Perdew – 6,000sf – (New Lease)
Dignity Health – 2,400sf – (New Lease)
Rob Jensen Co. – 2,100sf (Sublease)
Crawford & Company – 1,600sf (Relocation)
DaVita Medical Group – 3,700sf (Renewal)
Wright, Finlay & Zak – 9,800sf (Expansion)
Glumac – 1,600sf (Renewal)
Trident Construction – 18,600sf (Sale)