As seemingly with most businesses and families, the commercial office market in Clark County has made it through the recession and is well on the road to recovery. Vacancy rates are on the decline, rental rates and concessions have stabilized, and landlords and tenants find they are in better health overall. The outlook looks promising, but the effects of the Great Recession are still lingering with a few new “rules.”
1. Tenants are seeking shorter lease terms and those confident enough to sign longer term leases are frequently requesting early termination clauses at the 36th month. During the recession, we witnessed businesses with 5,000 square-foot spaces once busy with 25 employees reduced to a staff of three. We learned that the economy can change sharply in a short period of time, demanding greater flexibility in office space.
2. First generation space is still plentiful in the marketplace. Landlords cannot justify spending significant tenant improvement dollars on lease terms less than five years, leaving desirable second generation space in relatively short supply. Even landlords who can attract tenants willing to commit to a five-year term are finding it difficult to compete with rental rates offered by other landlords who can spend less on improving second generation space.
3. Size matters. 1,000 to 2,500 square-foot spaces make up the vast majority of transactions within Clark County. Small users who moved into home offices during the recession are seeking smaller suites while larger users who ended up with too much space during the downturn are rightsizing to more efficient space. Startups are also a common product of economic downturns adding another competing group into the mix.
4. Companies are upgrading their space. In an effort to increase occupancy, landlords reduced their rental rates to attract new tenants during the downturn. As organizations’ finances have improved along with lower rental rates, many businesses are upgrading their spaces which have created a relatively higher demand for Class “A” space and a relatively lower demand for Class “C” space.
Even with these new rules, glimpses of the future are already visible today. Vacancy rates are declining and will continue to decline as the economy improves. These lower vacancy rates will not immediately yield new office construction as developers will wait for rents to increase to justify the expense of new office product. Given the cost of new construction today, rents will likely have to increase more than 25 percent before we see a significant wave of new office construction. Given these market forces, tenants who are able should buck the trend and lock in as long of a lease term as possible. Other business owners who are able to purchase should consider existing product that is on the market for well below replacement cost. Finally, landlords and investors should rest well knowing that the rent stagnation we have experienced in the past decade is unwinding. As desirable second generation space becomes increasingly scarce, the long-vacant first generation space and challenging second generation space will finally lease up and new competing product will take time to enter the marketplace.
Adam Roselli is a Certified Commercial Investment Member (CCIM) with Eric Fuller & Associates. He can be reached at360.750.5595 ext. 15.