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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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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