WESTERN SNAPSHOT, DECEMBER 2005

Las Vegas Industrial Market

Gordon

Thus far, the market has been able to sustain average land prices in excess of $600,000 per acre. This having been said, developers are second only to casino operators in terms of land supply holdings, and first-in, first-out land accounting has helped bolster profitability and temper the full impact of land price escalations. At the same time, it has also catalyzed new breeds of residential and commercial development in and around the central business district. Perhaps most visible are high-rise condominiums. With more than 50,000 high-density units slated for development, the “resort residential” has emerged as a force to be reckoned with. The nearly-100,000 full-time residents that migrate to Southern Nevada each year, 38 million annual visitors and a dwindling supply of raw, developable land are pressing up densities and creating new markets. While a number of sectors have breathed a new life in the face of changing conditions, the same cannot be said of the industrial sector. Current industrial market performance remains relatively healthy, but there are significant concerns regarding its long-range outlook.

As of third quarter 2005, the Southern Nevada industrial market comprised 82 million square feet of space with a 4 percent vacancy rate. During the past year, 4 million square feet of space came on-line, while a record 6.8 million square feet were absorbed. To put this into perspective, the industrial market has nearly doubled in the last decade with approximately 3.8 million square feet developed annually. The market has remained balanced though with an average of 3.3 million square feet absorbed annually.

Currently, 3.6 million square feet of space is under construction, while another 5.5 million square feet is speculated for future development. There is no expectation that all planned space will not develop as programmed; although it appears that less than 2 years of inventory remains in the pipeline. Beyond that, property suitable for industrial development remains limited and is rapidly eroding. The primary culprit is the conversion of industrially zoned property to higher-density commercial uses. Prices are also an issue. Not only have land escalations made traditional speculative development untenable, but construction costs are up more than 60 percent when compared to 2 years ago, and rents have failed to keep pace.

Land values make development of future industrial product a challenge because substitute goods in areas such as Phoenix and California's Inland Empire are less expensive economically and, in some cases, monetarily. Rapid land price escalations have well-positioned landowners with a lower cost basis. These include those developers able to negotiate favorable deals through government property acquisitions or trades and those whose market tenure is now paying dividends. For industrial developers not in the Vegas market, pricing has become a barrier to entry.

Industrial developers are faced with an old question with a new twist: “Do we build, or do we sell?” The underlying value of raw industrial land is rarely put to its highest and best use through vertical industrial development. The result is a new calculus that demands either an expanded skill set or a development decision that might run afoul to profit-maximizing behavior.

The development of today is a function of the market and decisions made 18 to 24 months ago. This is evidenced by the notable projects listed below:  

• Park West, a $40 million, 330,000-square-foot complex in the southwest portion of the Valley by Pannatoni Development. The 22.5-acre site was purchased for nearly $1 million per acre. The project will include a mix of office and industrial buildings.

• Northeast Crossing Commerce Center, a 29-acre project in the northeast Las Vegas area developed by Jackson Shaw Co. The $32 million project will include for-sale buildings.

• Logisticenter, a 102-acre industrial project in North Las Vegas that includes the 513,240-square-foot build-to-suit property currently underway for CDW Corporation. At build-out, the business park will contain over 2 million square feet of distribution space.

• Golden Triangle Industrial Park, a 276-acre industrial park developed by Operating Engineers Trust Fund in North Las Vegas. While a significant share of space has been developed, several buildings remain for future development.

With few exceptions, future growth will likely gravitate to areas outside of the Valley. Some of these include those listed below:

• Apex Industrial Park, a 21,000-acre site designed for heavy and light industrial uses. The site is located along Interstate 15, a major thoroughfare spanning from Southern California to Utah, and is less than 30 minutes north of downtown Las Vegas.

• Northern portions of Clark County, including Mesquite, Nevada. The area north of Las Vegas provides accessibility to Interstate 15 and the same tax advantages available throughout the state. Land values tend to be less than the Las Vegas Valley and provide an opportunity for industrial development.

• Northwestern Arizona. A programmed bypass bridge near Hoover Dam, along with a highway bypass around Boulder City will significantly reduce travel times from Arizona to Southern Nevada. Major thoroughfares between the two states will provide increased accessibility for distributors of goods, as property values in that area remain less than half of those in Las Vegas.

• Given land availability constraints, pricing premiums and rising construction costs, the industrial market should maintain below-average vacancies (less than 7 percent) over the course of the next six to eight quarters. During that same time, one should anticipate lease rates to increase from their current average of 63 cents per square foot.

At projected pricing levels, distribution firms will likely seek out alternative locations throughout the southwest region. Limited new growth and expansions will likely be linked to inter-industry connections (e.g., industrial developers servicing the gaming industry). Public policy decisions may be the final measure of intervention that will alter this likely scenario; however, this may be too little too late in absence of a significant policy shift as it relates to land supply releases.

Brian Gordon is a principal with Applied Analysis, a Nevada-based business advisory firm providing a wide range of services, including urban economic consulting, market analysis, public policy analysis, hospitality industry and gaming consulting.


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