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Nellie Day

Las Vegas has been one of the hardest hit markets in the nation following the recent downturn. It may arguably be the most burdened market in the West as we enter 2012. But will the New Year bring more of the same for this struggling desert oasis? Or are brighter times in its future as tourism, consumer spending and convention activity rebound?

WREB asked the city’s top commercial real estate experts to give their realistic opinions on what investors, owners and tenants should expect to see during the following year.


Andrew Gabriel, partner in McDonald Carano Wilson, on Las Vegas’ ability to recover:

The original Las Vegas investors and developers – and their lenders – have taken a big hit over the past few years, and they are unlikely to recover their losses anytime soon. The opportunities for new investors look good if they have some equity and are able to carry projects with lower occupancy levels and lower average rental rates. There is an oversupply in most commercial segments that will keep rental rates low for some time. What really needs to happen to turn around the Las Vegas commercial market is the passage of time.


John Restrepo, principal at RCG Economics, on product types to watch:

Based on our research and discussions with developers and brokers, the industrial and apartment markets will do the best in Las Vegas in 2012. The high rate of job market uncertainty, consumer balance sheet problems and implosion of the for-sale housing market has sparked a very healthy demand for rental housing, which we think will continue for some years. In fact, there are quite a few players buying up apartment complexes.

Multi-tenant, spec office and retail will probably do the worst, though anchored retail is likely to do better than the spec office market. The massive amount of spec office overbuilding that occurred during the boom, combined with very slow projected job growth, indicates that this market will take several years to recover. The anchored retail market is holding its own at the expense of the unanchored market. There is a significant move to quality by tenants in terms of location and being near national tenants, which is bolstered by historically low rents, and is providing stability to anchored centers.

Joseph E. Kupiec, Sr., principal and managing director at Avison Young, on the market for distressed assets:

We will continue to see distressed assets hitting the market in 2012. They may even debut at a brisker pace now that banks, servicers and receivers better understand the market. Until the market stabilizes, these types of dispositions will be the bulk of activity in Las Vegas.


Larry Monkarsh, owner of LM Construction Co., on Las Vegas building trends:

The main trend we see is one of frugality. It still seems that price is the number one motivator and indicator of a project's viability. If the margins aren't there, the risks far outweigh the reward and the deal won’t get done. We see many companies feeling out the waters for new locations – both for expansions and contractions alike. However, if the new landlord can't make it worth their while, companies will stay put and work a deal with their existing landlords. Playing one landlord off the other also seems to be the fad these days.



Bret Davis, senior vice president at Jones Lang LaSalle Americas, on the city’s job outlook:

Las Vegas has shown job gains in several industries, causing the unemployment rate to fall to 13.6 percent. This is down from 15.6 percent one year ago. While we need continued job growth, there are signs of optimism in the air. There’s talk of critical mass. There’s a palpable buzz. One company creating a lot of buzz is Zappos.com. The online retailer recently announced it will relocate its corporate headquarters to the former City Hall complex in Downtown Las Vegas in 2013. This has everyone’s attention. This move, which would bring with it more than 1,000 employees, could be the trigger to diversify and invigorate Las Vegas. It may even bring more businesses in from out of state.


Brent Pirosch, director of gaming consulting services at CBRE, on the Strip’s resort development and redesign efforts:

When it comes to the Strip, practicality and high returns are in, while glamour and heavy spending are out. In light of the fact that there is not any new resort development on the books for the next several years, and capital budgets are constrained by high debt loads, operators are going to be evaluating their existing operations to figure out new ways to exploit their real estate. However, new projects will still have to compete with capital needed for regular maintenance, so approved projects are more likely to focus on remodels and renovations with smaller cash outlays and quicker returns. The refurbishment/redevelopment cycle that began in 2009 will be critical in terms of maintaining market share in the coming years.

In the current refurbishment/redevelopment cycle Las Vegas finds itself in, it is becoming increasingly clear that operators are continuing to create amenities and experiences that attempt to capture customer spend (gaming and non-gaming) for every minute within a 24-hour period.


Tom Naseef, senior vice president in Colliers’ investment properties division, on population growth:

Over the past 12 months, the Greater Las Vegas area has added 200 new jobs, primarily in professional services, education, healthcare, leisure and hospitality. The monthly driver’s license count has increased by 11 percent from July 2010 to July 2011. The residential electric meter count was also up by 1.2 percent for the same period, suggesting Southern Nevada’s population continues to grow at a slow pace. A return of employment to the hospitality and leisure industries is a likely key to population growth. As jobs remain scarce and wages frozen, demand for multifamily rentals should remain steady.

Restrepo, on the single-family housing market and its effect on Vegas’ commercial market:

The single-family housing market is at the epicenter of the Great Recession’s impact on the Las Vegas commercial market. The residential market’s health both drives and is driven by the health of the job market. It’s sort of a “circle of life” thing. As long as the housing market continues to struggle, we don’t expect a rapidly recovering commercial market. We don’t project significant improvements in 2012, based on what our macroeconomic models are telling us.

Kupiec, on whether the fundamentals are in place for a recovery:

All of the fundamentals that helped spur growth over the past 10 years are still in place. Taxes are low, housing has once again become affordable and the climate in Southern Nevada is great. There is still opportunity here for those individuals who are well-educated and have a strong work ethic. I think one of the lessons learned from the recent recession was the need to further diversify the local economy. Gaming will always be the primary economic driver, but to lessen the impact of any future downturns, we need to add businesses in all sectors. Organizations, such as the Nevada Development Authority, have been working diligently to accomplish this goal.

Monkarsh, on Las Vegas’ growth sectors:

We see most of the growth in the medical industry. South Nevadans still have medical needs that aren't being met. That’s why most of the activity has been in the medical arena and in and around the area’s hospitals.

Naseef, on the industrial market’s struggle to recover:

Southern Nevada’s industrial market retreated back to negative absorption in the third quarter of 2011. Industrial continued to post strong absorption, but vacating tenants pushed it into negative net absorption. Between 2010 and 2011, the industrial employment sector lost 8,400 jobs. These lost numbers are too high to inspire confidence in near-term recovery for the local industrial sector. No sector of industrial employment added jobs over the third quarter.

Gabriel, on investing in Las Vegas’ commercial market:

With limited opportunities for refinancing, and many segments still experiencing soft rents and high vacancy rates, there will likely be more foreclosures and more commercial properties coming to market in 2012. On the legal side, since most REO properties are sold with limited seller reps and warranties – if any – buyers are cautioned to do their diligence. They need to carefully analyze these investments, without reliance on the sellers. Buyers need to keep an especially close eye on leases with above-market rents. The likely scenario is that these rents will decrease with the next tenant or with a lease renewal, making it very important to examine current lease terms.

Davis, on leasing activity:

In 2008 and 2009, during the height of the downturn, the majority of tenants signed short-term leases. As a result, we expect activity to increase in the coming years as a higher percentage of leases are set to expire in 2012 and 2013. The best options remain available for tenants that are able to take advantage of the timing. However, with no new development on the horizon, these options will continue to diminish, potentially resulting in increased competition for quality second-generation space. For sizeable tenants in the market, contiguous blocks of space within the desired building type are becoming increasingly hard to find.

Pirosch, on the Strip’s tourism industry:

After analyzing the direction of key indicators, especially household net worth, we believe Strip revenue from all sources will increase 1.9 percent to 5.7 percent in 2012. We believe that positive momentum that has built up in 2011 leisure spending, and that convention demand will continue into 2012. The convention market should especially be a catalyst for demand growth in 2012 because it represents an important sector of Las Vegas room demand. Convention bookings are already strong for 2012, reflecting solid demand and stronger pricing as Strip hotels have been able to be more selective about groups than they were last year.

Snapshot of 2011

The Las Vegas economy is slowly improving after several years of severe decline directly related to the recession. The unemployment rate still remains one of the highest in the country at 14 percent, which is significantly higher than the national average of 9 percent. In spite of this, we have seen a gradual increase in transaction velocity this year, both in sales and leasing, as compared to 2010. Due to excess capacity in all product types, it is certainly a tenant’s and buyer’s market with pricing at or near the bottom. With respect to leasing, not unexpectedly, vacancies are led by the office sector, at 23 percent; followed by the industrial sector, at 15 percent; and finally the retail sector, at 13 percent. As a result of excess capacity, development activity is virtually non-existent. Additionally, a once vibrant pre-recession investment sales market no longer exists, and sales activity has been primarily limited to distressed assets across the board. After assessing the damage in 2010, banks, servicers and receivers began releasing product to the market in 2011. We expect there will be much more of this in the coming year.

Las Vegas commercial markets remain challenged due to oversupply conditions and a relatively weak demand profile. Until broader improvements are reported in the region’s economy, particularly within the labor and housing markets, it is unlikely the commercial markets will return to pre-recession performances any time soon.

The best analogy for 2011 is shifting water in the swimming pool. Most activity within the market is existing tenants seeking better pricing and/or more efficient space. Leveraging this tenant-friendly environment, these companies may ultimately relocate, but keep relatively the same footprint when they move – resulting in a net neutral impact on absorption and overall vacancy. While the road to economic recovery remains uncertain, market conditions have remained largely tenant-favorable. Leasing volume has begun a slow rise, though early renewals remain the transaction of choice. Many opportunistic tenants are shopping the market well in advance of their lease expirations to leverage current conditions and reduce overhead by restructuring long-term leases that offer options for future growth. The significant increase in available space over the past several years continues to push landlords to reach historic high lease concessions and rental rates that are well below budget.

One of the biggest issues Las Vegas faced this year was the impact of recent Nevada legislation set forth in Assembly Bill 273. This legislation potentially limits the amount a lender can recover from a guarantor of a recourse loan in a deficiency action following a foreclosure. Nevada has experienced a large volume of commercial loan foreclosures. Many of these loans were made by community banks, taken over by the FDIC and sold in large portfolios to third parties. With the provisions of AB 273, a lender is limited on the amount it can possibly recover based on the amount the it paid for the loans. The courts are beginning to address some ambiguities in the Bill’s language now, but this has definitely been a major issue throughout 2011.

By nearly all counts, 2011 looks to be an improvement over 2010. Strip gaming revenue is up 3.9 percent through the end of the third quarter in 2011. Visitor volume is up 4.7 percent, average daily rates are up 10.7 percent and occupied room nights are up 5.9 percent.
— Pirosch

We’ve seen and felt some upward movement in the market this year. People were looking to do deals, but Las Vegas was and still is just a very difficult landscape to navigate. Lending has been a challenge and money remained really tight. Fortunately, we finally have a backlog of work that we didn't have at this time last year. We have some jobs booked for 2012, and we are crossing our fingers that they move forward. The indicators would tell us we will be lucky to sustain the 2011 levels in 2012.

Las Vegas has lost nearly 122,000 jobs since the Great Recession started in December 2007. These losses have devastated Las Vegas’ commercial market. Remember, we are just finishing the fourth year of the Great Recession, even if the official story is that the recession ended in the summer of 2009. While it may have looked like the economy and the commercial real estate market had hit the bottom in the past several months, there has been no hiring binge on the horizon.


At the high end of our 2012 forecast, total revenue on the Strip could be up 5.7 percent from 2011. However, what would be best for the Las Vegas market one year from now would be a continued ramp up of the national economy. A best-case scenario would include a rising stock market, a confirmed bottom for the housing market and the beginning of a sustained rise, along with faster employment growth and new air capacity. All these things affect how much visitors are willing to spend and their abilities to travel to Las Vegas. Therefore, a best-case scenario would be a sustained, synchronized rise in all those areas.
— Pirosch

Buyers who are now on the sidelines with cash reserves will step up and purchase more of our REO properties, or perhaps purchase notes in foreclosure with the goal of owning the property. They will do this based on a realistic analysis of market rents and vacancy rates, and with equity to stabilize the projects. 
— Gabriel

We see elevated vacancy rates similar to the ones we are seeing today, combined with slight improvements in absorption and reduced rents as distressed properties are brought under new ownership and re-priced. This latter process will continue to put pressure on existing performing properties. As a result, the Las Vegas commercial market will see an uneven recovery depending on product type, location and quality. We are not expecting any miracles, because the local, regional, national and global economies are not projected to recover very robustly. I know that’s not what a lot of folks want to hear, but it’s the reality and no amount of wishful thinking will change that reality.
— Restrepo

Southern Nevada has been clawing its way out of the recession since it began in 2008. Although there has been modest improvement in 2011, we need to see an accelerated national economic recovery with sustained growth for a best-case scenario to materialize. If a strong recovery takes hold, we will see positive absorption in all product types, as well as an increase in pricing. Perhaps then we will begin to chip away at the excess capacity in the market. Regardless, sales of distressed assets will continue, most likely at a brisker pace.
— Kupiec

This has been, and will continue to be, a long process. No one is expecting a quick turnaround. A best-case scenario would be continued job growth through 2012, causing the market to show signs of stabilization. This would lead to a shift from a bottoming market to a rising market with vacancy rates leveling off and beginning a trend downward. The best-case scenario would also involve firms gaining confidence in the macroeconomic environment as they begin to hire and grow. The next 12 to 24 months will certainly be interesting.
— Davis

Best case is that we would see positive absorption in all sectors. Stabilized rents and no new development.
— Naseef

Best-case scenario is that we are answering these same questions next year, meaning we are surviving. Once the survival threshold is reached, we can then start thinking about hiring again. That would be the best-case scenario for me – to be able to hire back some of the workforce we had to lay off.
— Monkarsh

©2011 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.

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