Many in the industry said the commercial markets -- industrial, office and retail -- remain strong but significant challenges will remain throughout the rest of the year that will not only shape the markets, but could determine the health of the commercial sectors as well.

Office

The office market has become an intricate market as different sectors and other factors have an increasing effect on the supply.

There continued to be strength in the office market during the first quarter, but the amount of office space under construction and under development should be some cause for concern, local experts said.

At the end of the first quarter, there was almost 2.3 million square feet of office space under construction and 5.5 million square feet planned for future development, Applied Analysis reported.

"Despite strength in the valleywide office market, we are somewhat concerned about the short-term imbalance in the southwest part of the valley, as office developers are about 12 to 18 months ahead of the curve, particularly in the medical sector, and several projects are in the development pipeline," Brian Gordon, principal of Applied Analysis said.

Randy Broadhead, senior vice president in CB Richard Ellis' office division, said if even half or three quarters of the planned projects come to fruition, vacancy rates will go up. CB Richard Ellis reported about 1.6 million square feet of office space under construction and another 4.7 million square feet in the planning stages. Numbers between firms differ because of research methods used.

"Right now the market is very healthy," he said. "Most of the time, it's a good rule of thumb that half of space planned actually gets out of the ground."

As land prices go up, so too must rents for many of the valley's offices.

Restrepo Consulting and Colliers International reported that asking lease rates have consistently increased since the third quarter 2003 from $1.84, reaching $2.09 per square foot in the first quarter of 2005.

Increases in rent will cause some tenants to look toward lower-grade apartments in older areas of town rather than pay the rents on new offices, Grubb & Ellis reported.

Low interest rates continue to be a challenge to landlords as small users look to buy their own building. Vic Donovan, managing partner of Colliers said it will be important to monitor the amount of investment in the for-sale office market to see to what extent it impacts the for-lease market.

Industrial

During the first quarter of 2005, the industrial market remained strong, but brokers, developers and users of space continue to worry about the effect of land prices on the market sector.

Land prices continue to increase, causing some developers, particularly those building distribution space, to enter (or propose) joint ventures with property owners, Kevin Higgins, senior vice president of Voit Commercial Brokerage said.

"In order for certain developers to afford these new pricing levels, profit-sharing with land owners is the vehicle to continue developing real estate," he said.

Developers also are looking at projects that include more showroom and office space, rather than straight industrial warehouse, to justify land costs and rent, said Mike Lyons, senior vice president of NAI Horizon's industrial division.

John Restrepo, principal of Restrepo Consulting Group LLC, said the decline in the valley's industrial vacancy rate is in part because of the significant loss of available land for industrial development.

While land costs and availability were restrictive to many during the first quarter, Restrepo said there was a healthy balance between demand and supply, with demand (net absorption) keeping pace with completions; there was almost 1.1 million square feet of industrial space added to the market during the first three months of the year.

Brokers and market analysts said local governments need to be more cognizant about "down zoning" industrial land for residential uses.

"Local governments have to realize there has to be industrial base, or job base," Lyons said. "If industrial is pushed out further and further, there will not be the job base that communities need."

Lyons said all small and large users are turning to other cities, such as Reno and Sparks and neighboring states like Arizona and California that offer more competitive land prices and availability.

He said even in certain parts of California, such as the Inland Empire, land costs are more affordable.

"Where we're really being hurt is the large users that are looking for 100,000 (square feet), 150,000 square feet on up, and we just don't have those buildings available," Lyons said.

As the upward price of land -- and population growth -- continues many industrial users will start to seriously consider Mesquite Laughlin and Pahrump, Applied Analysis reported, while acknowledging that those areas won't works for all users.

"Every so many years we go through an adjustment, but this is the tightest I've seen ever," said Lyons, who has worked in Las Vegas since 1979. "This is one of the first times we've had more clients than we've had inventory, and usually it's just the opposite."

Retail

The Las Vegas Valley retail market showed stable performance during the first quarter and had a healthy balance between demand and supply, Restrepo Consulting Group and Colliers International reported.

Demand, also called net absorption, also kept pace with completions, with net absorption exceeding completions by 20 percent, the two firms reported.

The healthiest markets were North Las Vegas, Henderson and the northwest, with vacancies of 1 to 2 percentage points below the valley average, Restrepo reported.

"The continuing trend of retail development along the valley's freeways and our suburban population centers, especially in Green Valley, North Las Vegas, the southwest and the northwest continues unabated,' he said. "The demands being generated by a growing economy and population-base have been of the major drivers."

Applied Analysis reported that there was 1.3 million square feet under construction during the first quarter and more than 4.8 million square feet for future development.

Economic factors, such as rising gas prices, along with other increases in the overall cost of living in Southern Nevada, such as housing prices, will absorb some disposable income, Gordon said.