Las Vegas isn’t facing the challenges of filing office space that other metropolitan areas are dealing with in a post-COVID environment as employees here are returning to work in person rather than from home.
That’s good news for the most impacted commercial real estate segment across the U.S. where office demand has slowed, companies are cutting back on their space demands, and is especially evident in Manhattan and other urban areas where fewer people returning to the office on a daily basis has harmed restaurants and retail surrounding them.
The notion that Las Vegas is faring better than most metropolitan areas when it comes to office space came up during a recent breakfast panel discussion hosted by NAIOP Southern Nevada as part of a developers roundtable.
A report from Colliers showed demand for office space in Southern Nevada remained consistently strong in 2022, with the exception of the last quarter of the year when several large class B office suites were released to the market. Southern Nevada had 881,326 square feet of net absorption in 2022, according to Colliers research manager John Stater.
Demand for office space in 2021 and 2022 amounted to a combined 1.8 million square feet of net absorption, lower than the combined 2.5 million square feet of net absorption in 2017 and 2018, but significantly stronger than during 2019 and the lockdown year of 2020, Stater said.
“With office vacancy now 11.9 percent, a decade low, it is safe to say that the market has fully recovered from the lockdown recession of 2020, and is now ready to expand,” Stater said.
There is currently 628,723 square feet of office space under construction in the valley, and 797,410 square feet scheduled for completion in 2023, Stater said.
“Healthy vacancy and increased development are good signs for Southern Nevada’s office market, which suffered greatly during the Great Recession,” Stater said. “The possibility of recession in 2023 and the lackadaisical performance of the market at the close of the year make us hesitant to predict a strong year ahead, but a healthy 2023 is not out of the question.”
Jeff LaPour, principal of LaPour, said COVID gave the office sector “a gut punch,” and that’s still true, nationally, based on a report that showed 50 percent of office space in the U.S. has people back to work.
“That’s foreign to us in these markets because the majority of everybody I know and see in Phoenix and Las Vegas are 100 percent of the people are back, and not only are they back, they’re leasing super premium office space at rates that have never been paid before,” LaPour said.
Many urban markets, including downtown Los Angeles, are scrambling to find uses for buildings that may never be an office again, according to LaPour, who called it a tale of two markets.
“I think Las Vegas in particular has had a great deal of pent-up demand,” LaPour said. “We didn’t have new office construction outside of maybe one building in Summerlin for about a 12-year period and then 600,000 square feet came on about the same time. Almost all of it is absorbed. It’s an interesting differentiator between markets in the office.”
Sean Zaher, a senior vice president with CBRE, who moderated the NAIOP program, said it’s a flight to suburbia and flight to quality, and the Las Vegas 215 Beltway is seen as the premium spot where there’s the greatest tenant demand.
“There’s lots of misinformation about office, and it does have an identity crisis at the moment,” LaPour said. “But for the most part, tenants will pay what they need to pay to be where they want to be.”
Zaher said some major companies have demanded workers return to the office, even if it’s on a four-day-a-week schedule.
“I think what’s funny is the same companies that are saying you have to come back are the ones who said we’re never coming back,” LaPour said. “These extreme reactions are like this industry in general, and they all even out eventually. I think with the labor market where it is and how difficult it is to fill positions with qualified people with the right culture for your company, companies have realized the physical space is super important. (CBRE) moved into new space, and Colliers moved into our building. I hear from both companies all the time how surprised they are about the difference in how they all feel in these newer buildings. Maybe rent was one or two things everybody was worried about. I think the face value of the rent is one thing, but the payoff and benefit and ability to recruit and retain has far surpassed rent.”
Colliers reported triplenet asking lease rents was $1.20 a square foot starting 2023. It was 82 cents in the fourth quarter of 2021.
Jonathan Fore, managing partner with Fore Properties, called the back-to-work phenomena is regional.
“If you go to Washington, D.C. or New York, the central business district is a ghost town, but not here on the West Coast,” Fore said. “It’s been a lot different.”
The return to work has even impacted the multifamily market in Las Vegas, Fore said. People who were leasing in Las Vegas but had a job in New York or elsewhere are now having to return to their offices, he said.
“We’re seeing a little bit of a rise in (apartment) vacancy as a result,” Fore said.
The industrial market is also strong. Colliers reported a vacancy rate of 1.6 percent at the start of 2023.
Net absorption in the fourth quarter was 1.3 million square feet, bringing the year-end total to 7.4 million square feet.
This is the third highest annual net absorption recorded in the valley, behind 2021’s 11.9 million square feet, and 2017’s 7.8 million square feet, Stater said.
Rod Martin, a senior vice president with Majestic Realty, said tenant demand remains strong for their portfolio and has been 100 percent leased for two years.
“The market from the demand side is extremely strong and, quite frankly, pushing us over the edge to move forward (on projects),” Martin said. “The new project we’re looking to have up by the end of the year, maybe 50 percent of that is going to be filled by existing tenants because they haven’t had alternatives of where to go. We’re seeing organic growth and wished we had more products up over the last 12 months. We would have done a lot of leasing if we had more product up, but we just towed the line with the current economic times and tried to not get too out in front of ourselves.”
Zaher said CBRE has the current vacancy rate even lower at 1.3 percent with no available product available today with about 15 million square feet under construction, of which 45 percent is pre-leased. There’s 25 million square feet planned, but with the rising interest rates and capital markets it’s difficult to predict when that will be delivered, he said.
“I don’t think anybody in this market has ever seen an industrial market as strong as it’s been the last 24 months,” LaPour said. “It was beyond red hot, and I think so many players who had never been in industrial before threw their hat in the ring all at once. Yeah, we’re seeing a little bit of a timeout in the capital markets, but I don’t necessarily think that is a bad thing. At sub-2 percent, that’s a market where every single building is full except the most obsolete of the obsolete or something that’s brand new and hasn’t had a chance to fill yet.”
Even if half of the space in the pipeline isn’t absorbed, it doesn’t move the needle that high on vacancy, LaPour said.
“It’s a different kind of demand than we have seen historically,” LaPour said. “It’s much larger buildings and much larger tenants than there ever were. Back in the day, 20,000 or 30,000 square feet was a big deal here. Now it’s 500,000, 800,000 or 1 million square feet.”