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The Las Vegas economy is progressively improving as more than 22,000 jobs were added in a year-over-year basis. The unemployment rate in Las Vegas is still higher than the national average; however, it has decreased 0.9 percentage points since Q2, 2015 and these trends are expected to continue.
“Commercial real estate in the Las Vegas area continues the recovering process during the second quarter,” said Michael Dunn, market leader for the Las Vegas office of Cushman & Wakefield/Commerce. “The market remains active, the tightening of availability will linger as the limited supply of quality space continues to drop. Through this trend, we have seen job growth continue to increase. Nevada was ranked as third for job growth, which is a result of the increase of expansion as established companies grow and new companies moving into the area from around the country.”
Office Snapshot
Q2, 2016 marks the seventh consecutive quarter for the office market to see a positive absorption with an overall absorption of 68,000 square feet, and 235,778 square feet year-to-date. The West market showed the most positive absorption, while Henderson South market experienced the highest level of negative absorption. The total overall vacancy has continued to decline, and currently stands at 7.8 million square feet. Compared to Q1, 2016, vacancy rates decreased from 18.3 percent to 18.1 percent.
As rental rates increase slightly, and vacancy rates continue to decline, new construction will remain limited. The Las Vegas office market saw 7,894 square feet of completed buildings in Q2, 2016, a slight increase from zero square feet in the first quarter. The ongoing trend of tenants renewing at their current buildings and signing longer term leases, rather than moving locations has continued in this market. New construction is expected to remain very low for the next several years as developers want to wait to develop until the vacancy rate declines and rental rates increase enough to support development costs.
Industrial Snapshot
Q2 of 2016 has been reported as the eleventh consecutive quarter of positive absorption, with a total overall absorption of 455,327 square feet. The second quarter saw 12 speculative building projects. New buildings are under construction, Henderson had 163,000 square feet; the Southwest had 547,514 square feet and North Las Vegas had 886,126 square feet, totaling 1,596,640 square feet of speculative construction underway. The total overall vacancy did not change from 2016’s first quarter, and remained at 6.6 million vacant square feet. In addition to the speculative buildings mentioned above, Chinese-backed car company, Faraday Future, which began development on a 3 million square foot factory in North Las Vegas at the Apex Industrial Park.
Increasing land prices and labor costs in the industrial market will force developers to raise rental rates to justify new construction. For new mid-bay multi-tenant buildings to be constructed, rental rates will need to rise from the current average $0.58 monthly per square foot triple net (NNN) to approximately $0.70 monthly per square foot NNN to justify the cost for construction. Tenant demand should continue to remain positive during the rest of the year and vacancy rates are expected to remain consistent in the 6 percent range with supply and demand in relative balance.
Retail Snapshot
For three consecutive quarters, vacancy rates remained the same but have decreased by 0.1 percent during each quarter of the first half of 2016.quarters. The overall vacancy rate in the Las Vegas retail market was at 7.8 percent at the end of the second quarter which was nearly a half percent decrease from the first quarter. The Downtown submarket continued to have the lowest vacancy rate, which stayed below 3 percent for the first half of 2016. Rental rates remained stable at $1.35 monthly per square foot NNN, which decreased slightly from the 2016 first quarter’s $1.36 monthly per square foot NNN.
The total overall positive absorption was near 460,000 square feet at the close of the second quarter. The second quarter of 2016 marked the third consecutive quarter of positive absorption, as well as increased activity for each quarter, which indicates market growth and stabilization. Ikea occupied its 351,000 square foot building which accounted for majority of positive absorption during the second quarter. Outside of Ikea’s absorption, the overall market absorbed 109,000 square feet. Overall absorption is expected to remain positive and vacancy rates should slowly decline and rental rates should slowly increase moving forward.