Tuesday, January 24, 2012

Digging Into the Office Data

Aside from my normal analysis for the quarterly reports, most of my analysis comes about due to my mind wandering while I'm updating my database (a three to four hour task every day of the week).

Yesterday, I began to wonder about where the net absorption had been going over the last decade in the office market - sort of looking back to look forward.

So, today I put together some numbers comparing the share of office net absorption claimed by the different classes of product and the different submarkets here in Fabulous Las Vegas (or Fabulous Southern Nevada, to be more precise).

Share of Net Absorption by Class, 2001-2011

No surprise here. Southern Nevada is a third tier office market that leans heavily on its Class B and Class C product. If we look at this same graph, but leaving out the last 4 years of recession-era data ...

Share of Net Absorption by Class, 2001-2007

... we see that over the last four year a tiny shift from Class C to Class A and Class B product has occurred, most likely a result of lower rents allowing businesses to "move up in the world" and take better space.

Share of Net Absorption by Submarket, 2001-2011

The recession has been felt most keenly by the older submarkets of East Las Vegas and West Central, with both turning in negative net absorption for the decade. The Southwest and Henderson submarkets appear to have been the key benefactors of this flight.

Share of Net Absorption by Submarket, 2001-2007

Screening out the recession data, we see that East Las Vegas and West Central turn positive, but not by much. More interesting, perhaps, is the switch between Henderson and the Northwest submarket. Pre-recession, Northwest was firing on all cylinders. Unfortunately, a great deal of its office space was caught up in the restructuring of General Growth Properties, and languished in the form of "zombie buildings", unable to offer tenant improvements and thus compete with non-distressed office space elsewhere.

Henderson has done well, but they're about to lose a significant tenant in the form of Zappos.com, which is moving to the Downtown submarket by 2014.

Moving forward, one might want to focus on Class B and Class C office product in the Southwest and Northwest submarkets, and perhaps in the Airport and Henderson submarkets as well. All of these classes of office have fairly high vacancy rates in these submarkets at the moment ...

... so there's probably little need for development over the next few years. Class B product in the Airport submarket looks the most promising, but it is worth remembering that there isn't much vacant land on which to develop large office products in the Airport submarket - most of that sort of development will probably be shifted south into the western reaches of the Henderson submarket if it occurs at all.

I'll leave you with the following graph, which tracks quarterly office net absorption by class over the past decade. It's been quite a roller coaster ride, but at least things look to be heading up, assuming we can weather the deleveraging storm on the horizon.

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