While Nevada’s economy is in good shape, the second half of 2023 saw demand for commercial and industrial real estate soften in the Las Vegas Valley despite strong employment growth, but demand could pick up in 2024, especially on the retail front that recorded one of its lowest vacancy rates since before the Great Recession, according to a report from commercial real estate brokerage Colliers International — Las Vegas.
Colliers Research Manager John Stater even sounded a warning about the Las Vegas office market, which is facing some of the same challenges experienced by those in major urban markets with the pandemic lock-downs of 2020.
“While demand did not turn entirely negative in 2023, it softened significantly compared to 2022,” Stater said. “Office users are coping with changes in both how people work, and in their manpower requirements, thanks primarily to computers and the internet. This may merely be a transitional period that impacts demand for a few quarters or years or it might signal a more permanent shift in demand for office products.”
Office vacancy increased to 11.1 percent from 10.9 percent in the third quarter. Vacancy was 0.2-points lower at the end of 2023. Office owners and developers should be looking for ways to get ahead of this trend, Stater said. Small office units outperformed larger office units through most of 2023, and it now appears that landlords are more willing to divide larger spaces, he noted
“Office design that encourages employees to work in the office rather than home, and communications systems that help businesses remain flexible should be pursued both in new developments and when renovating older buildings,” Stater said.
Overall, commercial real estate sales, both owner/user and investment, picked up in the third quarter, but slowed once again in the fourth quarter, Stater said.
In addition, there was a record of deliveries of industrial space in 2023 and retail vacancy stabilized by the end of the year.
Data for Southern Nevada’s economy shows an “overall positive picture,” Stater said. “The hospitality sector did well in 2023, with new resorts and sports venues and events boosting visitation, and employment continued to grow,” Stater said. “So, with economic numbers being generally positive, why aren’t people in a better mood? One explanation, of course, is that individuals do not base their mood on macro economic numbers, but rather on their own personal experiences. These might involve higher retail prices, working multiple jobs to make ends meet, and the seeming chaos we are seeing in the world today.”
OFFICE
After a less-than-stellar third quarter, Southern Nevada’s office market bounced back in the fourth quarter with 39,311 square feet of net absorption. New development was light, and did not completely offset the several buildings in McCarran center that were purchased by the state of Nevada and removed from inventory, Stater said.
Downtown vacancy was 10.3 percent to end 2023, compared to 11.2 percent in the suburbs. On a submarket basis, the valley’s highest vacancy rate was in East Las Vegas at 22.2% percent, while the lowest vacancy rate was 2.1 percent in North Las Vegas. The southwest remains the valley’s most popular submarket for new development, especially along the I-215 Beltway corridor, where 188,300 square feet of office space is under construction, Stater said.
Two new Class A buildings were completed this quarter in the southwest submarket, adding 146,728 square feet of office inventory, Stater said. There was 230,800 square feet of office space under construction and scheduled for delivery in the first quarter of 2024.
Demand for office space increased in the fourth quarter, with net absorption of 39,311 square feet. Class B office posted the strongest net absorption this quarter at 22,215 square feet followed by Class C at 18,493 and Class A, with negative 1,397 square feet.
The industries most active in occupying office space over the past four quarters in Southern Nevada were involved in professional and business services at 25.5 percent, financial activities at 19 percent and health services at 13.1 percent, Stater said.
Local companies took 51.6 percent of the leased square footage tracked over the past four quarters. Companies headquartered in the Mountain West states took 11.1 percent of the space occupied, followed by the Northeast at 10.6 percent and Mid-Atlantic at 9 percent, Stater said.
The average asking rental rate for office space in Southern Nevada was $2.57 per square foot full service gross lease to end 2024, $0.12 higher than one year ago.
This is the highest office asking rental rate yet recorded in Southern Nevada. The Southwest was the Valley’s most expensive submarket, at $3.29 per square feet. The least expensive submarket was downtown, at $2.03 per square foot.
RETAIL
Stater spoke most optimistically about retail even though demand for retail space declined in the second half of 2023 and retail sales were down just under 1 percent over 12 months to end the year — notable because sales have been up since the lock-down.
Southern Nevada added 5,900 retail jobs between November 2022 and November 2023, including 400 jobs in food and beverage stores and 100 jobs in health and personal care stores. Eating and drinking places added 2,600 jobs over the same period, including 4,000 jobs in limited-service restaurants while losing 3,000 jobs in full- service restaurants.
There were bright spots, Stater said. Eating and drinking places had retail sales of $12.7 billion over a 12-month period ending in November, representing 6.7 percent annual growth. Non-store retailers saw 6.1 percent annual growth over the same period, Stater said.
A total of 97,414 square feet of retail space is scheduled for completion in the first quarter of 2024, and these projects are 87.9 percent pre-leased.
“The retail market looks as though it is in for an active 2024, with 746,434 square feet of space scheduled for completion, and approximately half of that space was pre-leased,”
Stater said. “This is a positive sign for the market moving forward in terms of net absorption.”
The Southwest submarket had the valley’s strongest net absorption in 2023 at 115,078 square feet. It was followed by Henderson at 87,675 square feet. Negative net absorption was experienced in the downtown, northwest and University East area.
The sub sectors most active in occupying retail space over the past four quarters were involved in miscellaneous retail (17.4 percent), eating and drinking places (16.5 percent), health services (9.1 percent), amusement and recreation (8.5 percent) and hardware (8.4 percent), Stater said.
Local companies took 61.7 percent of the leased square footage tracked over the past four quarters, followed by companies from the Southwest (20.9 percent) and Great Plains (9 percent), Stater said.
Retail vacancy remained at 4.3 percent in the fourth quarter, 0.3-points lower than one year ago, and near the lowest retail vacancy rate recorded in Southern Nevada since before the Great Recession, Stater said.
Neighborhood centers had the highest vacancy rate at 5.4 percent, while freestanding retail the lowest at 3.1 percent. Among submarkets, North Las Vegas, northeast, southwest and west central had vacancy rates below the valley average, while downtown, Henderson and University East had above average vacancy. The valley’s lowest was Southwest at 1.7 percent and highest in the University East submarket at 7.8 percent, Stater said.
INDUSTRIAL
Southern Nevada’s industrial market added 3.54 million square feet to inventory in the fourth quarter of 2023 to add 9.93 million square feet in 2023, a new record for construction in Southern Nevada for space that was 79 percent pre-leased, Stater said
While releasing on this space was lower than in past quarters, it still increased net absorption to 2.28 million square feet. Industrial vacancy increased to 2.9 percent, Stater said.
The valley had 19.77 million square feet of industrial space in active development, with 13.91 million square feet having gone vertical. The vast majority of this space is warehouse/distribution space, and most of it is located in the North Las Vegas submarket, Stater said.
A total of 7.73 million square feet is scheduled to be completed in the first quarter of 2024. Those projects were 34.8 percent pre-leased, he noted.
Businesses most active in leasing space over the past four quarters were in the wholesale (18.6 percent), retail (17.4 percent), professional and business services (13.6 percent), manufacturing (12.2 percent) and transportation and warehousing (7.8 percent) sectors. This trend is somewhat borne out by employment growth in industrial sectors. Local companies took 27.9 percent of the leased square footage we tracked over the past four quarters. Companies headquartered in the Southeast took 14 percent of the space occupied, followed by Midwest companies at 13.5 percent and Mountain West at 9.4 percent, Stater said. The weighted average asking rental rate increased to $1.28 per square foot on a triple net basis.
EXPERT GIVE THEIR TAKE
“We started off 2023 with an unsettling understanding of the current state of our economic cycle,” said Sabrina Borghoff, vice president of business development at Martin-Harris Construction who recently hosted a NAIOP Southern Nevada roundtable panel on 2024. “For the first time in two years, the industry had major concerns about the availability, access and cost of capital. All of a sudden, the way deals were getting done looked a lot different, and it caused people to pause and ask if now is the right time to be moving forward with our projects. We saw a slight pause in transactions in the first and second quarters as a result. However, we closed out 2023 really strongly.
Industrial demands were at a sustainable high and vacancy at an all-time low. We had a surge of Class A offices delivered to the market and leasing at premium rates. Retail was performing well. There were low vacancy rates and a lack of new construction really helped to build a reputable demand in our market.”
Matthew Nelson, vice president of brokerage services for J.A. Kenney Real Estate Co., said 2023 felt “treacherous” to him and cited that the first and second quarter had some legacy loans and old construction costs on the retail side. He spoke optimistically about retail because of the migration from California that continues to grow the population and will go from 2 million to 3 million quickly.
“The migration is real,” Nelson said. “People are standing at the doorstep and want to be here. There are great opportunities in Southern Nevada.”
Mathias Hughes, vice president and investment officer with Prologis covering Las Vegas, Phoenix and Reno, said that 2023 industrial was the tale of two markets. Rising costs and interest rates made it more difficult on the investment side. It has caused a lot of uncertainty and promoted reassessment that’s not unique to Las Vegas.
“All of these markets have the same dynamics, and there’s been a lot of wait-and-see for a lot of folks,” Hughes said.
There’s been a lot of product under construction in Las Vegas with 17 million square feet across the valley and adding 13 percent of inventory in one year, Hughes added in calling the market amazing. Las Vegas is in a prime location to serve the West Coast at a fraction of the cost of California.
Last summer, San Francisco-based Pro Logis acquired 879 acres at the Apex Industrial Park in North Las Vegas and announced plans to build an 11-million-square-foot industrial project.
“When I talk to customers, Southern Nevada is not a tough sell on the industrial side,” Hughes said. “It starts at the ease of doing business. These big multinationals have locations all over the place and when they call up and say we like a site and what is entitlement process and they can’t believe it’s true (of the ease to get projects done).
California is continuing to be a tough place to operate and develop. It’s a counterbalance to California and a great place to operate and do business.”
