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.
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.