For Southern Nevada’s industrial market, the Great Recession is over and a new era is beginning. The area has added 23,000 industrial jobs, expanded occupancy by more than 13 million square feet and seen vacancy fall to 5.8 percent from a high of 14.3 percent.
The office and retail markets, on the other hand, are still struggling. Both have seen recovery, but not to the extent, and not at the rate, of the industrial market. Since 2010, the office market has added more than 16,000 jobs and has seen vacancy lower from 22 percent to 17.9 percent, still far above the pre-recession average of less than 10 percent. Retail has added about as many jobs as the office market, but vacancy has dropped by less than a percentage point. Why?
Since electronic computing’s introduction in the 1950s, it has been changing the way people do business, making employees more productive and allowing businesses to do more with less. The greatest impact from a real estate perspective has been on office space.
Office real estate is not facing extinction, of course, but it does face many challenges due to technology. Computers and the internet make people more productive, so businesses require fewer employees. They also make workspace more efficient, replacing large filing cabinets and multiple machines with smaller desktop or laptop computers and printers. Cloud computing allows businesses to use somebody else’s servers kept in less expensive industrial space.
All of these pressures allow businesses to reduce their office footprint, and therefore reduce their rent expenses. The Burnham-Moores Center for Real Estate at the University of San Diego has estimated that the 250 square feet per employee we assumed in the early 2000s has probably turned into 200 square feet now, and is heading toward 180 square feet or less in the next five years.
If the office market is feeling a light crunch, retail might be suffering even more. E-commerce is growing year by year, and it affects retail real estate by permitting retailers to reach wider markets with smaller retail footprints, shifting their real estate needs away from more expensive retail showroom space to less expensive warehouse space, and away from multiple locations to a single location with an internet presence. Warehouse buildings in Southern Nevada have seen occupied square footage increase by more than 6 million square feet over the past three years. Retail occupancy, by comparison, has expanded by only about 1 million square feet.
The trend to reduce costs will continue to be pushed as far as possible, as the aim of businesses is to reduce costs. Minimizing one’s real estate footprint, or shifting to less expensive real estate, achieves that goal. Technology is the means by which real estate users will do this, and landlords are going to have to find a way to get ahead of the trend.
John Stater is a research and Geographic Information Services manager at Colliers International – Las Vegas.