Rise in Office Building Belies
Market Ratings for Las Vegas

Las Vegas, though still enjoying heady times, may be taking a gamble with a surge in new office buildings.

The Las Vegas region's suburban office market tied with Cincinnati and Ventura County, Calif., for the weakest ratings out of 52 suburban markets nationwide, while Las Vegas's central business district tied with Wilmington, Del., for the lowest ranking out of 46 core office markets surveyed in a Moody's Investors Service report. The new quarterly report based on third-quarter data is expected to be released this week.

The low ratings in both the suburbs and the central business district stemmed largely from Moody's views that new construction is outstripping demand in Las Vegas. Although industry estimates vary widely, Moody's expects about 3.2 million square feet of new suburban office space to be under construction or completed from the end of the third quarter of 2006 through the third quarter of 2007, while the increase in demand for offices from tenants is expected to be only about 1.3 million square feet of space.

Area developers are putting up new buildings on the assumption that the economy will continue at its current pace, says Sally Gordon, senior vice president of Moody's Investors Service. Yet even high-growth markets have lulls, and Ms. Gordon says the Las Vegas pace isn't sustainable over the long haul.Though job growth is slowing, there's no denying the Las Vegas economy is currently enjoying heady times. The casino and tourism industry, the engine of the local economy, is undergoing a building boom as hotel-related projects under construction or proposed to be completed through 2010 are valued at about $31 billion, according to the Las Vegas Convention and Visitors Authority.

Boosters say those projects will help the economy continue to generate jobs and boost demand for places to work, live and shop. Job levels rose at a well-above-average rate of 4.9% in November from November 2005, though that is down from the year-earlier increase of about 7% in November 2005 from November 2004.

For now, the rental-apartment market is particularly strong, with vacancies falling to the low single-digit percentages, while retail and office vacancies are rising, and warehouse vacancies are expected to rise going forward, according to Property & Portfolio Research Inc., a Boston-based real-estate research firm.

Phenomenal population growth also fuels developers' confidence in the need for more office space. New residents continued to flock to Las Vegas at an above-average rate, pushing the population up to about 1.8 million in the third quarter, according to Moody's Economy.com. The relative affordability of housing attracts residents priced out of some markets on the West Coast.

Among the neighborhoods poised for new development is downtown Las Vegas, which is already seeing the addition of several new residential towers. Construction is also set to begin in 2007 on the Lou Ruvo Brain Institute, a Frank Gehry-designed building that will include research and treatment facilities for memory-disorder diseases such as Alzheimer's disease. It will serve as an anchor in a mixed-use project called Union Park planned for 61 acres of a former rail yard near the existing downtown. Nearby, a 300,000-square-foot high-end office building that includes some retail space is slated to be completed by Molasky Group of Cos. this summer. Irwin Molasky, chairman of the Las Vegas-based real-estate development company, says the office building is already 95% preleased. He doesn't agree with analysts who predict a slower Las Vegas economy could be on the horizon. "When the rest of the world gets pneumonia, we might get the sniffles," says Mr. Molasky.

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