Monday, February 27, 2012

Hot & Cold - Mapping Asking Rents in Southern Nevada

My project today was to map asking rents in Southern Nevada using a rent index.

Click for a larger map

The key with rents, of course, is that are highly variable between different product types. While Class A Office product can pull in $3.00 per square foot (psf) on a monthly basis, warehouse pulls in maybe $0.30 psf. To smooth out the differences, I decided to index asking rents for each product type based on the weighted average for that product type in the fourth quarter of 2011. Thus, a warehouse space that was asking the same as the average asking rent for warehouse would be indexed as a "1"; anything asking more would have an index number of higher than 1 and anything lower would have an index number lower than 1. By indexing the availabilities in the database, I can compare different product types on the map above.

The map above ignores anything at or near an average asking price. For the purposes of this map, they are just added noise. Screening them out, we can see some regions of Southern Nevada in terms of how much landlords are asking for rent.

The highest asking rental rates appear to wrap around the west and south portions of the Valley, while lower asking rents predominate in the east, center and north portions. This makes sense. The west and south feature newer construction, while the center and east feature older construction. One might deduce from this map, then, that newer properties command higher rents than older properties, and perhaps they are right. Then again, perhaps they are wrong.

The values on this map are based on "asking" rents, not actual rents. The proof in the pudding is in the taste, and the proof in the asking rents is in the absorption. The question, then, is this: Are those high asking rates scaring prospective tenants away, or are tenants still willing to pay more for the more expensive, newer buildings?

On a submarket basis, combining office, industrial and retail properties, net absorption in 2011 broke down as follows:

Positive Net Absorption (2011 YTD): Airport (197,000 SF), Downtown (325,000 SF), Henderson (234,000 SF), Northwest (31,000 SF), Southwest (342,000 SF)

Negative Net Absorption (2011 YTD): East Las Vegas (-263,000 SF), North Las Vegas (-386,000 SF), West/Central (-294,000 SF)

Lo and behold, we're seeing more positive net absorption in the expensive parts of town than in the inexpensive parts of town. Two exceptions pop out, though. Downtown is seeing big positive net absorption in a fairly reasonably priced part of town, but much of this is due to the completion of the Las Vegas Metropolitan Police Department's new headquarters, which is owned by a private development entity and leased to the LVMPD. The other exception seems to be the Northwest submarket - pretty expensive, but fairly weak net absorption. This, however, may be more of a case of zombie properties, in particular office product owned by General Growth Properties, being unable to compete with other product for tenants.

In the near term, pricing still seems to be a major concern of businesses. There's still plenty of recession to go around, and everybody wants to make it through to the other side. Still, location and age of product clearly play a role in the desirability of space, and though newer properties are more expensive than average, they are still quite affordable compared to rates they were asking two or three years ago. Apparently, tenants are taking the opportunity to move up in the world.

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