The Las Vegas Office Market is experiencing heartburn as it attempts to digest too many recently constructed Class A and B office buildings. The overall office vacancy rate has increased substantially over the past year due to negative absorption and a supply increase of 2.1 million square feet. According to the Restrepo Consulting Group, the first quarter 2009 overall office vacancy rate was 22.3%, which is 1.5% higher than the 4th quarter of 08*. The report indicated that the majority of the vacancies are in newer (within 3 years old) properties located in projected high growth areas. Office buildings built in 2008 are experiencing an average vacancy rate in excess of 50%. Buildings built in 2007 and 2006 are doing better, but are still averaging vacancies in excess of 25%. Many of these newer buildings are still trying to fill first generation space. Unfortunately for office investors, new product continues to roll of the shelf with another 755,750 under construction with a 2009 deliver date. Several things happened to cause the current over supply. First of all, easy cheap credit makes for bad development decisions. Favorable financing should never be the reason to build a project. Secondly, the design and construction of the I-215 Beltway opened new areas for development. The residential boom enticed office developers to bet on up- and-coming areas. When residential development stopped, office and retail projects were already under construction leaving buildings with no residential base for support. Thirdly, land owners became developers overnight, not by talent or experience, but by land appreciation. Small time investors became office park developers, resulting in poorly designed and built projects. Some of these projects cannot be fixed in any market and will need to be substantially overhauled to offer a viable return. The office investors that concentrated on the fundamentals of real estate are doing fine. In fact, they are attracting and retaining tenants that want a well located, designed and constructed building.
* Restrepo Consulting Group LLC First Quarter 2009 Office Report
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