During the great recession, of all the commercial real estate sectors, none were affected greater than the office market. For a company the two biggest cuts to the bottom line during the downturn were in space needs and staffing. The need to survive by going lean provided companies the opportunity to reassess their ability to provide services with less overhead than previously believed.
As the market has recovered, we have not experienced the same pre-recession organic growth within the traditional sectors of legal, finance and professional users. The majority of businesses continue to be very cautious as it pertains to taking on too much space for too long of a term without the appropriate flexibilities to adapt quickly to the ever-changing economy.
What has transpired is a new outlook on how the office space is utilized to build collaboration, efficiency and productivity. These new trends have spawned from the massive growth within the tech industry and the success in the open plan workplace. With senior employees and executives giving up their private offices work side-by-side with their colleagues, pressures are now being put on the traditional sectors to incorporate many of the same trends to attract the new millennial work-force.
Depending on the industry, there is a fine-line of how much you veer from the traditional layout. Law firms and financial companies still maintain the private office concept, however we are seeing a massive shift to same-size offices for the senior partners to the new hire, as well as full glass offices to incorporate natural light and collaboration and café style break rooms.
How does this affect your tenancy, particularly in Las Vegas? With Las Vegas historically 12-24 months behind the national trends in office space design, we are quickly catching up. The difference between Las Vegas and the major markets seeing these changes are:
· Minimal New Development – With the lack of new office development in Las Vegas (The Gramercy Phase II, only active office development), we are seeing tenants build-out the open plan workplace in buildings that were not designed for these layouts.
· Restrooms – With companies using less space, but not decreasing employees, existing buildings were built to a code based off a certain amount of private offices vs. open work space. This original design dictated how many restrooms were required in a building. With companies using 20-40% less space, this leaves the landlord the ability to lease additional space in the building, which equates to more people using the facilities. Landlords may have to start incorporating additional restrooms to accommodate these new open plan.
· Parking – Much like the restroom concern, parking is just as much, if not more of an issue and concern. With the market recovering, and landlords leasing up their buildings, what used to be an oversight when it comes to parking allocation, is being taken much more seriously. With the new open plan concepts, the existing inventory was not designed to accommodate the new parking ratios of 6-10 per 1,000 square feet of leased space. With traditional parking ratios of 3.5-5 per 1,000, landlords are either going to have to buy additional land, build a parking structure, leave space unoccupied in the building to accommodate the tenant’s high ratio, or focus on tenants that don’t require todays parking needs.
· Live-Work-Play – Unlike many of the traditional cities across the United States, Las Vegas is lacking Live-Work-Play options. With the majority of development happening in the suburban market, having an urban environment that provides a true live-work-play lifestyle in Las Vegas isn’t in the cards for the foreseeable future.
When exploring your office space needs, be sure to understand your needs today versus those same needs in 3-5 years from now, and how todays trends are going to affect your tenancy for the entire lease term. Having a complete and comprehensive strategy to align your facility needs with your business objectives will help overcome unforeseen obstacles down the road.
Shifting to a Landlord Market?
As the 2nd Quarter of 2016 has come to a close, we read all of the market reports, “with the slow pace of improvement and absorption” on the office front, “development isn’t needed due to the vacancy rates”, etc. the numbers minor improvements in the way of movement; however, the picture from ground level is much more interesting and one all tenant’s need to stay in front of. We know that your lease is typically not on your mind until the year of expiration, and you hate having to deal with the renewal/relocation questions and process. This will prove to be a very volatile 12-36 month swing in rental rates in the Las Vegas market shifting from what is still a tenant market, quickly to a landlord market, depending on location, of course. Are you aware of the changing dynamics and whether now is the time to start understanding the market so you can best determine how to align your real estate with your businesses strategy?
With vacancy rates ranging from 16.7% to 19.2% (depending on who’s report you read) or about 7.3 million square feet of vacant space, how can this be shifting to a landlord market? It’s the market dynamics. Since the recession, we have seen a steady increase in rental rates market-wide. This has come to a trickle over the last 6 months, with some Class A properties actually lowering prices. It’s when you get down to the details of the deals and the inventory to see what is truly going on.
During the recession we saw a huge “flight to quality” as C users moved into B, and B into A buildings, for cheaper than what they were previously paying. This took up a good portion of the space in the desired business parks, but it’s only over the last 24 months, as the Las Vegas economy recovers, that we have seen the majority of the remaining good space be absorbed. New businesses are opening, companies are relocating from other states, existing companies are expanding and hiring, and all of this is happening quickly. Now as clients are exploring the alternative options, we are not only seeing fewer potential spaces that fit the requirement of: geography, building class, cultural fit, size of space, desired layout, security, amenities, parking, etc… but the rental rates are higher, landlords are giving less in the way of free rent, tenant improvements and other concessions.
The supply of “quality” buildings is quickly dwindling in the suburban markets. This will not only raise the rental rates of the suburban inventory, but as the buildings fill up, this will force tenants back into the core of town, which will enable those landlords to also take advantage of the tight market.
The biggest concern from a tenant’s perspective should be the lack of any new office developments currently under construction. This stems from the developers also reading the market reports with high vacancy numbers. We now have seen other sectors (residential, industrial, retail) purchase premium land over the last 36 months, bringing prices for the good land locations to numbers that don’t make sense to develop office buildings based off the rental rates needed to achieve an appropriate return for the developer or landlord.
The best way to protect yourself from being a victim of the shift to a market is to stay well ahead of your expiration and align yourself with a market expert. We always recommend starting to analyze your space needs 24 months ahead of expiring.
CLIENTS REPRESENTED THIS QUARTER
Bank of Internet – 24,000sf (New Lease)
Bergman Walls Architects – 11,400sf (New Lease)
Rod Perdew – 6,000sf – (New Lease)
Dignity Health – 2,400sf – (New Lease)
Rob Jensen Co. – 2,100sf (Sublease)
Crawford & Company – 1,600sf (Relocation)
DaVita Medical Group – 3,700sf (Renewal)
Wright, Finlay & Zak – 9,800sf (Expansion)
Glumac – 1,600sf (Renewal)
Trident Construction – 18,600sf (Sale)
Your Lease is Expiring! Do you know your options? Do you have enough time to achieve your space needs? Do you know where to start?
Our team receives calls on a daily basis from Tenants in a panic. Their lease either expires in 1-6 months or they need space in 2-4 weeks. Leasing office space is a complex timely process with significant financial commitments to be considered by the Tenant.
The number one rule when it comes to leasing is to Start Early! Whether you plan on renewing, relocating or are looking for new space, it is important to allow enough time to evaluate your current situation, your projected future needs, assess the options in the marketplace and have the leverage you need to negotiate a favorable lease.
I want to renew my lease:
If you plan on renewing, the ability to execute a transaction in a shorter period is easily achievable. However, by doing so your current Landlord can make the assumption you do not plan on relocating. This gives the Landlord the leverage they need to keep you as a Tenant at less favorable terms than could have otherwise been achieved. Landlords know that Tenants will renew 70% of the time, as they understand the disruptions associated with an office relocation. In order to achieve the best renewal terms possible, you have to put your Landlord in a competitive environment, forcing them to get aggressive to retain your tenancy. Landlords understand the leasing process and the time needed to complete a transaction. By utilizing a Tenant Representation broker and implementing the proper timing to address a renewal, the Landlord realizes you are being informed about the current market conditions, the alternative options and they take your potential relocation much more seriously.
I want to relocate:
What do you need to consider when looking at a relocation? First you should establish an internal committee led by a senior employee and supported by the key decision-makers and department leaders (IT, Human Resources, office manager, etc.). Your Tenant Representation broker should have a single point of contact within this committee to keep the process simple.
The committee should work together to determine the following key components when considering new space.
When should I start?
Depending on the size of your organization and current market conditions, you should start the process of evaluating your office needs 18-24 months ahead of your current lease expiration. If you are a larger organization, we recommend 24-60 months of lead time.
By starting the process early, the burden of an upcoming lease expiration is eliminated, allowing employees to focus on business operations. The more time you have to negotiate results in better leasing terms whether it’s a renewal or relocation.
Where do I start?
By utilizing a Tenant Representation broker, the process becomes much more fluid and efficient. Our team handles lease negotiations on a daily basis, while a Tenant’s need to focus on their lease once every 3-10 years. Ensure your Tenant Representative is well qualified and has the technical skill, market knowledge and experience that your organization deserves. A Tenant Representative knows how to listen effectively to their client’s needs to ensure they are delivering and focusing on the important issues.
During this process, your Representative will familiarize you with the local office market conditions and review your existing lease commitments. By knowing the market vacancies, supply projections, current rental rates and tenant concessions, you will be in the position of leverage to best negotiate your next lease.
Cushman & Wakefield | Commerce can provide you with the Representation services needed to assist your company with your facility needs now and in the future.
Contact our team to discuss your specific office needs and the current opportunities in the Las Vegas market.