Industry Insight

Economic Review Q2

Posted by jstater on July 08, 2009
Economy / No Comments

Since last quarter, the recession has deepened in Southern Nevada. The Las Vegas-Paradise MSA lost 58,600 jobs between May 2008 and May 2009, sending the unemployment rate to 11.1 percent. The largest loss of jobs occurred in construction (-17.3 percent), information (-10.9 percent) and professional & businesses services (-9.3 percent). Gaming revenues and visitor volume are down compared to April 2008, and only the deep discounts offered by local hotels have improved room occupancy. The Hooters Hotel is now in default and Riviera Holdings Corp is delisting its stock from the Amex by the end of June. Several projects, including the Fontainebleu Resort, Boyd Gaming Group’s Echelon project, the Las Vegas Sands Corporation’s condominium towers, Harrah Entertainment Inc.’s expansion of Caesar’s Palace, General Growth’s Shoppes at Summerlin and the Great Mall of Vegas have seen their construction plans shelved or have had their construction delayed. Condo projects in Southern Nevada have seen their prices fall approximately 30 percent from their peak. Vantage Lofts, only partially completed, is in bankruptcy, while the Allure Condo Tower is in the process of auctioning units after original purchase contracts were cancelled. Home foreclosures remain high throughout the Valley, and apartment occupancy is at its lowest level in 10 years.

There is reason to be optimistic, however, as the United States economy might be on the verge of recovery. The rate of job losses has decelerated since its peak in February 2009 and might even level off sometime in the fourth quarter of this year. The New York Fed’s Treasury Spread model, a prediction based on the slope of the yield curve, suggests that the recovery has already begun. The spread between 10-year and 3-month Treasury rates has been above 2 percent for the last 15 months, a pattern consistent with recoveries following the past six recessions. The Conference Board’s consumer confidence index posted large gains in April and May, and is now up to September 2008 levels. The CBOE Volatility Index (also called the “Fear Index”) has dropped to its lowest closing since September 2008. Finally, UNLV’s Center for Business and Economic Research’s Southern Nevada Index of Leading Economic Indicators trended up in May 2009 compared to April 2009, though it remains 3.19 percent below the value for May 2008.

Metrics for Recovery

The keys to Southern Nevada’s economic recovery are the leisure/hospitality and construction industries. The openings of CityCenter, the Hard Rock Hotel and Cosmopolitan Hotel should add over 13,000 jobs to the leisure/hospitality sector of the economy. Unfortunately, those jobs could be short lived if those properties fail to turn a profit. Unless visitor volume rebounds, the new properties will simply spread tourists and their dollars more thinly among the existing “Strip” properties.

The construction industry needs new home inventory and commercial real estate inventory to drop before it can recover. Currently, there is a seven month supply of homes (new and resale) in Southern Nevada. Single-family home sales increased between May 2008 and May 2009 by 60.7 percent, and the median price dropped by 40.9% over the same period.

Looking Ahead

The United States might be standing at the threshold of economic recovery. While there are many signs that recovery is imminent, there is no clear evidence that recovery has started or is even guaranteed to start by the end of the year. Moreover, there are many potential pitfalls ahead, not the least of which is the potential for 30-year mortgage rates to increase as a result of massive borrowing by the federal government. Economic recovery in Southern Nevada will probably lag behind the rest of the country. We think employment and wages will have to rebound nationally before visitor volume and gaming revenue can rebound locally. Since commercial real estate occupancy tends to lag six to nine months behind employment gains, the local real estate market may not see sustained recovery begin until 2011.

– John Matt Stater

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Language of Leasing: “Class A”

Posted by mhatala on April 14, 2009
Tenant Rep / No Comments
 

    

The phrase “Class A” is often found on advertising materials for office projects, but what does it mean? There’s no official classification system for office buildings, however the generally accepted practice is to divide office buildings into 3 categories: Class “A”, “B”, or “C”. The definition of each class varies by market, making comparisons difficult. 

In the Las Vegas market, buildings are classified as “Class A” based on the following three criteria:

1/ Construction Type

Poured-in-place concrete, or more commonly, steel frame construction. These construction methods are consistent with buildings that are 3 or more stories tall.

2/ Age

A building that was classified as “Class A” when constructed, may shift to “Class B” over time if its desirability falls behind newer Class A projects.

3/ Amenities that include most or all of the following:

Access to dining amenities

Parking structures

Security services

On-site property management

www.VegasValleyOfficeTeam.com

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In Depth: Fear of Commitment; a Guide to Lease Term

Posted by mhatala on April 14, 2009
Tenant Rep / No Comments

In recent years, three to five year terms were the norm for the Las Vegas office market. In the face of uncertainty, many tenants are asking for terms of one to three years. How do you determine the “right” lease term?

Your real estate decisions should support your business plan. We’ll explore how two business scenarios affect leasing strategy. Firstly, a “Survival” strategy focuses on defensive measures. The “Flexibility” strategy takes a longer term approach and is designed to take advantage of the opportunities offered by the current market.

Survival

If your business forecast includes falling income and reduced head count in the near term, the focus will be on short term survival. Priorities will include minimizing rental expenses and lease commitments. 

The objective in this scenario is to negotiate the short lease term (one to three years) without incurring a substantial rate premium. Fortunately, current market conditions are conducive to this strategy as most landlords are focused on shoring up cash flow for the short term. 

The sweet spot between rate and term will vary based on your landlord’s (and possibly their lender’s) perspective. Proposing more than one term can yield the answer. 

If you’re concerned about survival, a short lease term will have the additional benefit of reducing your liabilities. This is particularly relevant if your lease contains a personal guaranty (a common requirement for small businesses). In the event that you’re forced to close the location, minimal liabilities (including loans, lines of credit and leases) will help reduce the effect on your business or personal credit. 

Flexibility

In the second scenario, the viability of the business is secure, however there’s uncertainty regarding future needs (ie contraction versus expansion). The objective is to balance cost control with flexibility. The key difference between this situation and the “Survival” scenario is that the real estate decisions are based on a longer timeline. 

For example, what happens when a short term lease expires in two years? If the economy is in recovery mode, rental rates will spike as demand outstrips supply. Rental rate increases will be more dramatic than in past cycles because the lending environment has frozen almost all speculative development. The result is a two year period (“Development Lag”) during which developers and lenders will scramble to catch up.

During the Development Lag period, landlords with existing product will enjoy unprecedented pricing power. In the absence of alternatives (new development), tenants will be competing for a shrinking supply of office space. Ideally, you would avoid entering a new lease during this period. 

A good leasing strategy will address the short and long term factors affecting the business. For example, a 3 – 5 year lease term could include the following features:

Reduced lease rate

Rental abatement (free rent) in the near term

Option to Terminate

Option to Expand

Option to Renew

The strategic approach will allow the business to balance real estate expenses with flexibility. Just as importantly, your business will enter the next economic phase with lower real estate expenses than the competitors who failed to take a long term approach.

Your tenant broker can provide guidance on leasing strategies that support your business model, allowing you to focus on your business.

www.VegasValleyOfficeTeam.com

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Moving? Landlords Picking Up the Tab.

Posted by mhatala on April 14, 2009
Tenant Rep / 1 Comment

In today’s market, landlords are covering an increasing portion of the tenant improvement cost, often 100%. Factors that affect a landlord’s willingness to cover these costs include:

Tenant’s financial strength

Total cost to complete the tenant improvements

Layout of the space (unique or re-leasable?)

Lease duration

What about the other moving costs? Items such as cabling, changing stationary and moving or buying furniture are typically born by the tenant. A new trend creeping into the tenant-friendly market is the willingness of landlords to contribute to these expenses. The landlord’s contribution can take several forms, including:

A “moving allowance”, to reimburse the tenant’s actual moving expenses. 

The ability to apply unused tenant improvement funds to moving expenses.

Additional free rent

Your tenant broker can provide a strategy to capitalize on current market conditions. Removing the moving costs from the equation allows a tenant to consider all of the opportunities the market has to offer.

www.VegasValleyOfficeTeam.com

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Can I see your financials Mr. Landlord?

Posted by mhatala on April 14, 2009
Tenant Rep / No Comments

  

Landlords review tenants’ financial statements to measure risk before entering a lease transaction. Historically, financial information has typically flowed in one direction. Current market conditions have created a new question for tenants, “What is the financial strength of my landlord?”

A landlord’s financial challenges can affect tenants in several ways but typically a delay or failure to make necessary repairs to the property is the most common. The issue is particularly critical at lease signing or renewal when tenant improvements are involved. The cost of the tenant improvements is usually funded to a large extent by the landlord. At the time these checks are written, the tenant has already signed the lease and there’s no time to find an alternative location. 

Tenants can minimize their exposure to under capitalized landlords by doing some homework before entering or renewing their lease. The use of a good tenant broker is the first step, as they have constant interaction with all major landlords in their market. Tenant brokers’ fees are paid by landlords so it’s in their interest to research financial solvency. As an intermediary, the tenant’s broker can ask the “hard questions” about the source of funds, debt structure, and overall financial strength of the landlord.

The majority of landlords have the capital necessary to continue their operations through the down cycle. However, savvy tenants will conduct their own due diligence to ensure that the landlord is capable of fulfilling their lease obligations for the long term.

www.VegasValleyOfficeTeam.com

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Market Buzz

Posted by mhatala on April 14, 2009
Tenant Rep / No Comments

  

The office market continues to favor tenants. Market indicators show no immediate sign of reversing this trend. It’s likely that 2009 will be remembered as “The Tenant’s Year” as the real estate pendulum continues to swing in their favor. Current trends include:

Blend and Extend

Early renewals in exchange for tenant-favorable terms.

Focus on Second Generation Space

Tenants and landlords are reluctant to part with the capital required to build tenant spaces from shell condition, especially given the many second generation options available.

Reduced Term

Uncertainty on the part of tenants and landlords has resulted in a fear of commitment. Tenants fear a long term lease liability in the face of economic uncertainty. Landlords are concerned about being locked into today’s (low) rates when the economy rebounds.

Impossible to Pick the Bottom 

Despite the search for a clear “turning point” at which the market shifts back to positive, a less transparent “bounce” along the bottom is more likely. In other words, we won’t know that we’ve hit the bottom until 6 to 12 months after the fact.

Tenants with lease expirations in 2009 or 2010 should be talking to their brokers about strategy; the opportunities have never been greater.

www.VegasValleyOfficeTeam.com

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Colliers VQR – Q1 Office Review

Posted by jstater on April 01, 2009
Office / No Comments

The Las Vegas office market continued to languish in the first quarter of 2009. New completions increased this quarter over last and net absorption fell dramatically. The transaction volume increased slightly over last quarter, but mostly represented office tenants looking to downsize or find lower rents, rather than the expansions or new business creation that was needed to fuel recovery. Landlords began to decrease asking rents and prices. The teaser rates that circulated in the fourth quarter of 2008 became the advertised asking rates of this quarter. Developers put new projects on hold, which should reduce the amount of vacant space that would otherwise have entered the market in 2009 and 2010. 

Employment in sectors traditionally associated with office space decreased for the third straight quarter. Between February 2008 and February 2009, a total of 7,900 office jobs were lost, with the largest losses experienced by the professional and business services sector. The bright spot for office employment has been the health care and social assistance sector, which has posted quarterly gains in employment in every quarter since the second quarter of 2004. Since increases in occupied office space tend to lag about 6 to 12 months behind employment increases in these sectors, employment numbers are the best indicator of eventual recovery for the office market. Unemployment in the Las Vegas MSA stood at 10.1 percent as of February 2009, up from 5.1 percent in February 2008. 

A total of 631,690 square feet (SF) of new office space was completed in the first quarter of 2009. All product types had new completions this quarter and new office product was located in the Northwest and Southwest submarkets. Most of this space began construction before the existence of the recession became readily apparent in mid-2008. Vacancy in this newly completed space stood at approximately 76 percent. Prominent new completions included Montecito Point (187,000 SF), The Arroyo Business Center (139,000 SF), 3755 Breakthrough Way at the Nevada Cancer Institute Campus (101,000 SF), Summerlin Medical Center (78,000 SF) and Centennial Hills Center (58,000 SF). 

Forward supply of office space in the Valley stood at 904,000 SF in the first quarter of 2009. This was a significant drop from last quarter, when 1.8-million SF was either under construction or planned to begin construction by the end of 2009. Some construction on projects has been halted and many other proposed projects are presently unable to find financing. Over half of this forward supply was in Class A professional office. The Southwest had more forward supply space than any other submarket and its share of forward supply has increased since last quarter. Despite the fact that the Southwest submarket was very hot through the recent development bubble, the continued determination of developers to build in a submarket with one of the Valley’s highest vacancy rates indicates their faith that population growth there will continue to be explosive when the local economy recovers. 

Office vacancy increased for the tenth straight quarter, reaching 20.9 percent. The previous low was in the third quarter of 2006, when office vacancy stood at 8.7 percent. If one included sub-lease space, the Las Vegas Valley had a total of 9,137,967 square feet of office space in search of a tenant. Assuming a pre-housing bubble net absorption of 350,000 square feet per quarter, that represented a 6.5 year supply of office space. This over-supply of office space put downward pressure on asking rental rates. Many short-term “teaser rates” were now being promoted as full term asking rates, and even stalwarts of optimism like American Nevada Corp began to lower its published rates. These revaluations 

increased the volume of signed leases this quarter over last, with the odd side-effect of the average asking lease rate in decreasing by $0.01 as price-conscious tenants snapped up deals. When adjusted for inflation, the average asking rent for office space in the Valley actually decreased by $0.01 this quarter, and has decreased by $0.26 since it peaked in the fourth quarter of 2007. 

The Valley’s highest vacancy rate this quarter was in the Airport submarket, at 27.9 percent. East Las Vegas, Henderson, North Las Vegas, Northwest and Southwest all had total vacancy near or above 20 percent. The Downtown and West Central submarkets, which experienced very little new office construction since 2003, had the Valley’s lowest vacancy rates at 9.2 percent and 13.5 percent respectively. 

There has been a sharp increase in the available inventory of office properties for sale on either an owner/user or investment basis over the past year, with a corresponding decline in the inventory that has actually sold. The average asking price for owner/ user sales dropped this quarter over last, but remains higher than in the first quarter of 2008. The average asking price for investment sales has dropped from $330 psf in the first quarter of 2008 to $246 psf this quarter. The average price of buildings that sold in the first quarter on an owner/user basis was $155 psf. There were no investment sales of office product this quarter. 

Class A office properties had a higher vacancy rate than other property types, at 28.3 percent. They also had the Valley’s highest availability rate of sub-lease space at 3.3 percent. Much of the pain Class A office is feeling can be traced to the Airport and Southwest submarkets, both of which had vacancy rates exceeding 65 percent. In the case of the Airport submarket, one project, the Town Square development, represented 63 percent of the submarket’s Class A vacancy. The problem in the Southwest comes down to ill-timed development, as the Southwest’s Class A market expanded from 0 to 170,972 square feet in just three years, the same time period in which net absorption of such space dropped by over 500,000 square feet Valley-wide. In response to lower demand, asking rental rates for Class A professional office dropped Valley-wide by $0.05 per square foot (PSF) on a full service basis (FSG) this quarter over last. 

Net absorption of the different classes of professional office space followed slightly different trajectories since the mini-recession of 2001/2002. Class A office saw conservative growth for most of this decade and then spiked in 2007, only to fall hard in 2008. First quarter 2009 performance suggests that demand for Class A office will continue to fall through 2009. Net absorption of Class B office peaked in 2004 and has decreased in each quarter thereafter. Demand for Class B space fell off a cliff in 2008 and seems likely to continue to fall at a similar rate through 2009. 

Class C office space tends to cater to small businesses and incorporates more owner-user space than either Class A or B product. Net absorption of Class C product followed the residential bubble quite closely, expanding quickly in 2004 and 2005 and then contracting in 2007 and even more quickly in 2008. First quarter performance suggests that Class C office product faces a brighter year ahead than either Class A or Class B product. This change in trajectory might be a function of pricing. The average asking rental rate for Class C space increased from $1.71 psf FSG in the fourth quarter of 2002 to a peak of $2.50 psf FSG in the fourth quarter of 2007. Since then, it has decreased by $0.39 to $2.11 psf FSG. 

Office occupancy tends to track closely with employment in sectors traditionally associated with office. While these sectors have contracted by 14,000 jobs since they peaked in the first quarter of 2007, the office occupancy rate has declined by 10 points, from 89.1 percent to 79.1 percent. During that same two year period, occupied office square footage actually grew through the four quarters of 2007 before declining for the four quarters of 2008. From the first quarter of 2007 to the first quarter of 2009, total occupied office space has increased by over 700,000 square feet. Currently, the Valley is supporting 149 square feet of occupied office space per office job, compared to 137 square feet per office job in the first quarter of 2007, and 117 square feet per office job in the first quarter of 2003. These numbers suggest that there might be a long way to go before demand for office space increases. 

We think that local firms will continue to downsize through 2009, and probably for six to twelve months after the Las Vegas Valley has experienced sustained increases in office employment. Asking rents should continue to decline, as landlords compete for scarce tenants. Most lease activity in 2009 will consist of tenants moving within the Valley, searching for lower rent or smaller spaces. If government estimates of national economic recovery in the fourth quarter of 2009 are correct, we predict that the Valley office market will begin to see recovery in late 2010 or early 2011. 

Metrics for Recovery 

Despite the somewhat bleak picture painted above, the national and local economies will recover. We think that several metrics can be established to predict how quickly that recovery will occur for the commercial real estate market. The health of the commercial real estate market is tied directly to employment. Employees take up space, and thus increases in employment eventually translate into demand for more space. Our study of the Southern Nevada real estate market for the past ten years has taught us that there is usually a 9 to 12 month lag between employment gains and increases in occupied square footage. Employment will, therefore, be the best indicator of impending recovery for the real estate market. Of primary importance to the Southern Nevada economy is employment in the leisure & hospitality and construction sectors. Gaming revenue is probably the best indicator of employment growth in the leisure & hospitality sector. Renewed employment growth in construction requires an increase in demand for new homes. A good indicator of renewed demand for new homes, and thus an increase in construction jobs, is a shrinking gap between the median price for a new home and the median price for an existing home. As employment in leisure & hospitality and construction grows, employment in other sectors will follow suit and we will begin to see an increase in demand for commercial space. 

Looking Ahead 

The Congressional Budget Office and Federal Reserve chairman Ben Bernanke recently predicted that economic recovery should begin by the end of 2009, while some economists have offered more dire predictions for the future. Whoever turns out to be correct, there can be no doubt that we are seeing the imposition of business fundamentals in our economy. Businesses that want to stay in business will need to show a profit. Lenders who want to stay in business will have to lend money only to people who can pay it back. For genuine recovery, American citizens, businesses and governments will need to pay down their debts, which will require both time and discipline. In the meantime, growth, when it comes, could be slower than we have become accustomed. We think that if there is an end to the recession in the last quarter of 2009, we will see gains in employment in 2010 and increases in the occupancy of commercial real estate in 2011. 

– John Matt Stater

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Colliers VQR – Q1 Economic Review

Posted by jstater on April 01, 2009
Economy / No Comments

Now that we all know that Southern Nevada, and indeed much of the world, is experiencing an economic recession, it is important to understand how we got here and how we’re going to get back to economic growth. For Southern Nevada, two of our key engines of growth failed in 2007. Throughout the 1990’s and 2000’s, Southern Nevada was one of the country’s fastest growing metropolitan areas. The availability of jobs, affordable homes, a warm climate and exciting entertainment venues drew people to Southern Nevada from all over the United States. From 1990 to 2005, Clark County’s population increased by approximately 250 percent, and construction employment grew at virtually the same rate. By 2002, we began to see the effect of the housing bubble that was caused by low interest rates and the encouragement of sub-prime loans by the federal government. The strong, but ultimately unsustainable, housing sales that resulted increased the demand for land in the Valley, driving up property values at an artificial rate. When the financial system collapsed under the weight of these risky loans, Southern Nevada was left with a significant inventory of new homes in the Valley and a dearth of new residential construction. The shock wave that would rock the local economy had begun. 

The Las Vegas metropolitan area lost 21,300 construction jobs and 4,300 financial activities jobs as residential development slowed in 2007 and 2008. A lack of new home owners meant a decrease in demand for furniture, so furniture stores began to close, affecting not only the retail market, but also the industrial buildings that housed their goods. People all over the country were being more careful with their 

money and high fuel costs were making travel by car and plane less attractive. Visitor volume and gaming revenues in Clark County fell throughout 2007 and 2008, resulting in the loss of 10,600 jobs in the leisure & hospitality sector during those two years. 

Just as there was a housing bubble in Southern Nevada in 2005/2006, there was a similar bubble in commercial real estate development. After the slow¬down following the dot-com bust and the terrorist attacks on September 11th, 2001, a sharp spike in demand occurred for commercial space. Development of this space increased to meet this demand, but unfortunately did not react quickly enough to the decline in demand we began to experience in 2007/2008. This left commercial real estate in Southern Nevada both over-supplied and over-valued. This overstock in both residential and commercial real estate has left the formerly booming land market at a standstill.

– John Matt Stater

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Colliers VQR – Q1 Retail Review

Posted by jstater on April 01, 2009
Retail / No Comments

The Las Vegas Valley retail market had an uneven performance in 2008, with quarterly net absorption ranging between -416,000 square feet and 1.2-million square feet. Despite those ups and downs, vacancy rose steadily through 2008, and continued to rise in the first quarter of 2009 to a ten-year high of 7.5 percent. The $0.08 decline in the average asking rental rate reflected the weak prospects for future demand that most landlords have come to accept. Despite this, developers were poised to bring as much as 1.3-million square feet of new retail product on the market in 2009. 

In 2008, retail employment dropped in the first quarter and then seemed to hit a plateau of about 102,000 jobs through the rest of the year. In February 2009, retail employment dropped to 95,800 jobs, a loss of 4,100 jobs since February 2008. Most signs pointed to a continuance of this trend through 2009, with recent or expected closures of local outlets by such retailers as Circuit City, Longs Drugs, Vons, Albertsons, Great Indoors, Mervyns, Chili’s, Dillard’s, Zappo’s, Shoe Pavilion and Linens-n-Things. Target is one of the few retailers that plans to expand, with three new stores under construction in Southern Nevada. 

One new retail center, Desert Marketplace, was completed this quarter, while we reclassified an older freestanding Wal-Mart as a Neighborhood Center due to the addition of inline retail space. Several projects were under construction in the Valley, including three that should be completed by the end of the year: Deer Springs Town Center (688,000 square feet), The Edge at Mountain’s Edge (296,000 square feet) and the Target-anchored center at 6097 N. Decatur Blvd (390,000 square feet). Including these centers, forward supply  of retail space in the Valley reached 3,958,112 square feet. Although this was a 427,250 square foot decrease from last quarter, it still represents a high level of retail development given the current economic conditions. This is especially true since half of the space currently under construction only went vertical in the latter-half of 2008. Most of the Valley’s forward supply of retail was in the form of Power Centers and Community Centers, with only 427,000 square feet of Neighborhood Centers planned or under construction. 

Vacancy in retail centers has risen for the past six months, and was 4.1-points higher this quarter than in the first quarter of 2008. Vacancy increases of 2-points or more were experienced in every submarket but Downtown, Henderson and the Southwest. Power Centers had the lowest vacancy rate and experienced the smallest increase in vacancy this quarter. Vacancy in Community Centers and Neighborhood Centers increased this quarter by about 2-points. 

The amount of retail product for sale on both an owner/user basis and investment basis increased in the first quarter of 2009 to 140,921 square feet and 273,256 square feet respectively from one year ago. The average price for both types of product decreased. Sales of owner/user retail product increased in the first quarter of 2009 to 175,542 square feet, while investment sales declined to 16,200 square feet . The average cap rate for retail product has increased from 6.7% in the first quarter of 2008 to 7.8% in the first quarter of 2009. 

The number of vacant units that are 10,000 square feet in size or larger increased dramatically over last quarter, and now represents 42 percent of all vacant retail space. The number of these units available for lease or sale increased from 49 to 54 between the fourth quarter of 2008 and the first quarter of 2009, with four more such units to be vacated by the end of the year. Retailers that have left these spaces include Rite-Aid, Pier One, Smith’s Food & Drug, Wickes Furniture, Raley’s, Thomasville, Sav-On, Walgreens, Sport’s Authority, Lucky’s, Albertson’s, Long’s Drugs, Sportsman’s Warehouse and Office Max. 

Most submarkets had substantial decreases in their average asking rent this quarter over last, with asking rents increasing in Henderson and the Northeast and remaining stable in the Downtown submarket. Neighborhood Centers had the highest average asking rent, at $1.97 per square foot (psf) on a triple-net (NNN) basis, a decline of $0.19 from last quarter. The average asking rent in Power Centers showed a similar decrease of $0.20 to $1.88 psf NNN, while the average asking rent of Community Centers increased slightly to $1.96 psf NNN. Overall, the Valley’s lowest asking rents were found in the Downtown, Northeast and West Central submarkets, while the Northwest and Southwest submarkets had the highest asking rents. Adjusted for inflation, the average asking rental rate for retail space was $0.06 lower this quarter than it was in the first quarter of 2007, and virtually the same as it was at the end of 2003. 

The Las Vegas Valley retail market has seen vacancy increase dramatically since 2006, when it averaged 2.8 percent for the year. While some of this increase is due to the same oversupply problems experienced by the office and industrial sectors, much of the cause can be attributed to the rapid expansion of big box retailers that took place in the early 2000’s. Most of these retailers were selling the same products as their competitors at roughly the same price, and all at the same time that online retailers like Amazon. com and brick & mortar retailers like Wal-Mart were taking advantage of their respective business models to offer comparable or better selection at lower prices. The mini-recession of 2001/2002 took some of these retailers out of the market, especially in computer sales. Other anchor spots were vacated at that time due to consolidation among large grocery store chains with locations in Southern Nevada. The current recession is now poised to remove several more of these big box retailers from the local scene. Given this situation, and the fact that a quick recovery fueled by debt-funded consumer spending is unlikely, we think that the Southern Nevada retail market will take longer to recover after this recession than after past recessions. 

Metrics for Recovery 

Despite the somewhat bleak picture painted above, the national and local economies will recover. We think that several metrics can be established to predict how quickly that recovery will occur for the commercial real estate market. The health of the commercial real estate market is tied directly to employment. Employees take up space, and thus increases in employment eventually translate into demand for more space. Our study of the Southern Nevada real estate market for the past ten years has taught us that there is usually a 9 to 12 month lag between employment gains and increases in occupied square footage. Employment will, therefore, be the best indicator of impending recovery for the real estate market. Of primary importance to the Southern Nevada economy is employment in the leisure & hospitality and construction sectors. Gaming revenue is probably the best indicator of employment growth in the leisure & hospitality sector. Renewed employment growth in construction requires an increase in demand for new homes. A good indicator of renewed demand for new homes, and thus an increase in construction jobs, is a shrinking gap between the median price for a new home and the median price for an existing home. As employment in leisure & hospitality and construction grows, employment in other sectors will follow suit and we will begin to see an increase in demand for commercial space. 

Looking Ahead 

The Congressional Budget Office and Federal Reserve chairman Ben Bernanke recently predicted that economic recovery should begin by the end of 2009, while some economists have offered more dire predictions for the future. Whoever turns out to be correct, there can be no doubt that we are seeing the imposition of business fundamentals in our economy. Businesses that want to stay in business will need to show a profit. Lenders who want to stay in business will have to lend money only to people who can pay it back. For genuine recovery, American citizens, businesses and governments will need to pay down their debts, which will require both time and discipline. In the meantime, growth, when it comes, could be slower than we have become accustomed. We think that if there is an end to the recession in the last quarter of 2009, we will see gains in employment in 2010 and increases in the occupancy of commercial real estate in 2011.

– John Matt Stater

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Colliers VQR – Q1 Industrial Review

Posted by jstater on April 01, 2009
Industrial / No Comments

The industrial market continued to struggle with low demand in the first quarter of 2009. Landlords and developers adjusted to the new realities of the marketplace by putting the brakes on new development. Leases signed this quarter were predominantly small in size and short in term. These deals mostly represented downsizing or bargain hunting by existing tenants, rather than new entries into the Valley. These small leases were overwhelmed by the large number of new availabilities that entered the market in the first quarter of 2009, keeping industrial vacancy on the rise. 

Employment in traditionally industrial sectors continued to decline in the first quarter of 2009. Between February 2008 and February 2009, a total of 15,600 industrial jobs were lost, with the largest losses experienced by the construction sector. Over the same period, only two sectors of employment, education & health services and government, showed an increase in employment. The declines in construction employment were especially damaging to the local economy because construction employment accounted for 11.1 percent of total employment in the Valley, compared to just 5.5 percent for the United States as a whole . Unemployment in the Las Vegas MSA stood at 10.1 percent as of February 2009, up from 5.5 percent in February 2008. 

A total of 739,048 square feet of new industrial space was completed this quarter, most of it in the Light Distribution category. Construction on most of this space began between February and June of 2008, before it was apparent that the nation was in a recession. Since then, approximately 307,000 square feet of new industrial space began construction. Vacancy in newly completed space stood at approximately 96 percent this quarter. Prominent new completions included Sunset Pointe Industrial Center (104,000 square feet), The Arroyo South Business Center (380,000 square feet), Sun Arville Business Center (50,000 square feet), The Seven Series at Hughes Airport Center (103,000 square feet) and phase one of Buffalo/215 Business Park (73,000 square feet). 

Forward supply of industrial space in the Valley stood at 2.2-million square feet in the first quarter of 2009. This was 1.6-million square feet lower than last quarter. Most of this forward supply (60 percent) was in Warehouse/Distribution buildings, with the balance in Light Industrial, Light Distribution and Incubator. The North Las Vegas submarket had the lion’s share of this forward supply space (1.8-million square feet). Forward supply in the Southwest submarket once rivaled that of North Las Vegas, but has recently fallen to a mere 341,675 SF, with most of that space under construction. 

Industrial vacancy increased to 11.1 percent this quarter, a 0.8-point increase from one quarter ago and a 4.2-point increase from one year ago. Industrial vacancy has increased for the past eleven quarters, from a low of 3.1 percent in the second quarter of 2006. The last time industrial vacancy was close to the present rate was in the fourth quarter of 2003, when it stood at 10 percent. The Valley’s highest vacancy rate was in the Northwest submarket, at 24.5 percent. The lowest was in East Las Vegas, at 8.5 percent. All submarkets except North Las Vegas experienced an increase in vacancy rates this quarter over last. 

The weighted average asking rental rate for industrial space remained stable this quarter at $0.76 per square foot (psf) on a triple-net basis (NNN). If adjusted for inflation, the average asking rental rate has decreased by $0.05 since the second quarter of 2006. The 405 new direct lease availabilities that entered the industrial market this quarter had an average asking rental rate of $0.65 psf NNN. 

The inventory of owner/user industrial properties available for sale increased this quarter to 4,065,448 square feet, an increase of almost 3,000,000 square feet since the first quarter of 2008. The inventory of industrial buildings up for sale as investments has increased from 241,053 square feet in the first quarter of 2008 to 1,050,278 square feet this quarter. Asking prices for both owner/user and investment properties declined over the same period. Similar declines have been seen in the number of industrial buildings selling for either owner/user or investment purposes and in the prices those sales have commanded. 

Warehouse/Distribution continued to be the healthiest product type in the Valley. It had the lowest vacancy rate among product types at 6.3 percent and the highest net absorption at 26,403 SF this quarter. The average asking rental rate for Warehouse/Distribution decreased this quarter by $0.02 to $0.58 psf NNN. The strongest Warehouse/ Distribution submarket was North Las Vegas, with a 4.3 percent vacancy rate, $0.49 psf NNN average asking rental rate and 114,382 SF of net absorption. Warehouse/Distribution vacancy has not yet begun to approach the high of 11.5 percent experienced in the first quarter of 2004. Recent tenants have cited the state of Nevada’s pro-business policies as well as competitive asking rents as reasons they leased Warehouse/Distribution space in Southern Nevada. 

Demand for Light Distribution space was impacted negatively by weak employment numbers in both the leisure & hospitality and retail sectors. Light Distribution space in the Southwest, which often services the resort casinos on the Las Vegas “Strip”, experienced an 8.9-point increase in vacancy over the past twelve months, from 8.6 percent in the first quarter of 2008 to the current 17.1 percent. 

Development of Light Industrial space became quite popular over the past two years as land values exploded due to the housing bubble. From 2007 to present, over 2.2-million square feet of Light Industrial space was completed in the Las Vegas Valley. Over that same period, Light Industrial vacancy increased from 3.8 percent to 11.2 percent. Much of the Light Industrial space that is now on the market is for sale. Since sales are now almost non-existent, we think Light Industrial vacancy will remain high for the foreseeable future. 

Vacancy in Incubator space stood at 14.1 percent this quarter, an increase of 7.5-points since the first quarter of 2008 and a clear sign that the creation of new businesses in the Las Vegas Valley has decreased significantly. A reinvigoration of the market for Incubator space will be an indicator that recovery is ahead. 

The Las Vegas industrial market will not experience significant recovery without a marked increase in employment, especially in the construction and leisure & hospitality sectors. New leisure & hospitality jobs will boost demand for Light Distribution space near the Las Vegas “Strip”, and the resulting revival of retail jobs throughout the Valley will help both the Incubator and R&D/Flex markets. While Warehouse/Distribution space remains comparatively healthy, increasing unemployment in California and Arizona could prove harmful. 

On the upside for the local economy, institutional problems in California could drive employers and entrepreneurs to the more pro-business environment of Nevada. The Nevada Development Authority (NDA) has seen a slight uptick in inquiries from California over the last few months. If we see sustained employment gains in 2010, we will see a corresponding increase in demand for industrial space in 2011. 

Metrics for Recovery 

Despite the somewhat bleak picture painted above, the national and local economies will recover. We think that several metrics can be established to predict how quickly that recovery will occur for the commercial real estate market. The health of the commercial real estate market is tied directly to employment. Employees take up space, and thus increases in employment eventually translate into demand for more space. Our study of the Southern Nevada real estate market for the past ten years has taught us that there is usually a 9 to 12 month lag between employment gains and increases in occupied square footage. Employment will, therefore, be the best indicator of impending recovery for the real estate market. Of primary importance to the Southern Nevada economy is employment in the leisure & hospitality and construction sectors. Gaming revenue is probably the best indicator of employment growth in the leisure & hospitality sector. Renewed employment growth in construction requires an increase in demand for new homes. A good indicator of renewed demand for new homes, and thus an increase in construction jobs, is a shrinking gap between the median price for a new home and the median price for an existing home. As employment in leisure & hospitality and construction grows, employment in other sectors will follow suit and we will begin to see an increase in demand for commercial space. 

Looking Ahead 

The Congressional Budget Office and Federal Reserve chairman Ben Bernanke recently predicted that economic recovery should begin by the end of 2009, while some economists have offered more dire predictions for the future. Whoever turns out to be correct, there can be no doubt that we are seeing the imposition of business fundamentals in our economy. Businesses that want to stay in business will need to show a profit. Lenders who want to stay in business will have to lend money only to people who can pay it back. For genuine recovery, American citizens, businesses and governments will need to pay down their debts, which will require both time and discipline. In the meantime, growth, when it comes, could be slower than we have become accustomed. We think that if there is an end to the recession in the last quarter of 2009, we will see gains in employment in 2010 and increases in the occupancy of commercial real estate in 2011. 

– John Matt Stater

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