The Great Recession caused many changes in the U.S. economy. Employment growth, after a slow start, recovered nicely and continues today. The lack of labor productivity growth, however, led to slower-than-usual growth in real gross domestic product during the recovery. This caused many analysts to refer to the post-Great Recession as a “new normal.” The Southern Nevada commercial real estate markets also experienced a pronounced jump in vacancy rates. An unanswered question for these markets is whether they will recover to the typical vacancy rates enjoyed before the recession or to some “new normal” as a result of the severe downturn. This is an important issue for developers who are planning to add to the stock of commercial real estate here.
The five years prior to the recession, vacancy rates in Southern Nevada commercial real estate markets averaged over about 6.75, 3.5, and 9 percent in the industrial, retail and office markets, respectively. These averages hide movements. The industrial market vacancy rate rose from about 5.25 percent in the beginning of 2001 to about 10.25 percent at the end of 2002 and then fell to 3.5 percent by the end of 2006. The retail market vacancy rate moved between 3 and 4 percent. Finally, the office market vacancy rate moved between 8 and 10 percent.
Since the recession, vacancy rates have averaged about 11.5, 10 and 23 percent in those markets. The industrial market vacancy rate peaked at about 17 percent in early 2011 and fell to just below 7 percent in the second quarter this year. The retail market vacancy rate peaked at about 11.5 percent in the third quarter of 2010 and has fallen to about 8 percent now. Finally, the office market vacancy rate peaked at nearly 25 percent at the end of 2011 and has fallen to slightly above 19 percent.
The industrial market vacancy rate has returned to a level experienced in the pre-Great Recession period. Both the retail and office market vacancy rates, though, remain at double their typical vacancy rates.
Interestingly, there is a link between the recovery of the vacancy rates and the asking rents on the office, retail and industrial real estate. That is, the asking rents fell from their peaks to the current rates by about 19, 26 and 43 percent for the office, retail and industrial markets, respectively.
What are the takeaways? First, developers, when penciling out plans for a new piece of commercial real estate, should consider some sensitivity analysis to different vacancy rates in the project under consideration. Second, further reductions in vacancy rates in retail and office markets probably will occur when the asking rents match the fall in rates experienced in the industrial market.
Stephen M. Miller is an economics professor and director of the Center for Business and Economic Research at UNLV’s Lee Business School.