MARKET HIGHLIGHT, JANUARY 2005

THIN CITY: LAND IN DEMAND IN LAS VEGAS
Mark Bouchard

In the last 15 years, Las Vegas has become a modern-day boomtown. The market’s population has grown 120 percent to 1.6 million since Steve Wynn launched the Mirage in 1989. Around 65,000 new residents flood the city annually, and some projections show an expected population of 3 million by 2020. While Nevada has become a top destination among retirees, job growth — driven by a resilient gaming industry — is also attracting thousands of young professionals to the market.

The Las Vegas area added 1,265 hotel rooms to its 130,500-room inventory in 2004, and will bring 5,500 rooms online in 2005. With the Clark County School District estimating that each new hotel room creates 10 jobs in the city, Las Vegas remains primed for sustained job formation. Analysts predict the market will add more than 30,000 jobs next year, boosting employment growth to 3.9 percent. That, in turn, will present ongoing opportunities for developers looking to furnish commercial services to an expanding population.

The market is not without its challenges. Though the West’s drought has garnered national headlines, the more immediate concern confronting developers in Southern Nevada entails a substantial dearth of land. The federal Bureau of Land Management (BLM) owns 87 percent of Nevada’s dirt. The agency is placing parcels in the hands of private developers through its Southern Nevada Public Lands Management Act, but many builders agree the supply is not coming online quickly enough. Through its public auctions, the BLM places 2,000 to 3,000 acres on the market annually, while development consumes 7,000 acres per year. Land, rather than water, has become Las Vegas’ most precious commodity. Parcels in some popular master-planned developments now cost as much as $600,000 per acre. Political pressure is increasing on the BLM to release acreage more quickly.

Spiraling land prices have made commercial projects increasingly difficult to pencil and have translated into skyrocketing home values. The median new home price in Las Vegas is $278,000, up from $140,000 in 1999. Yet, salaries in the service sector have failed to keep pace, and the deviation between housing appreciation and pay raises could generate quality-of-life concerns in the future. And though Las Vegas maintains a cost-of-living advantage over Los Angeles and San Francisco, other regional markets, such as Phoenix, provide more affordable housing. That could ultimately dampen the interest big corporations have in relocating to Las Vegas, though other factors such as a relatively low tax burden should offset higher housing prices for the foreseeable future.

Office

Job growth and a favorable tax climate continue to propel the Las Vegas office market. Vacancies dropped from 14.7 percent at the end of 2003 to 13.2 percent in the third quarter of 2004. In addition, monthly modified gross lease rates rose from around $1.80 to about $1.90 per square foot. Net absorption totaled 175,720 square feet.

Especially successful are office parks in outlying areas such as Summerlin, the southern suburb of Henderson and the Interstate 215 corridor in southwest Las Vegas. In Summerlin, Corrigan Investments and partners are developing the 72,000-square-foot Hughes West, while Business Bank of Nevada is developing a 150,000-square-foot office building. In Henderson, American Nevada Co. is building 115,000 square feet of Class A space at its 554,000-square-foot Green Valley Corporate Center South. The company has also leased most of a 61,000-square-foot Class A building at the Green Valley district’s edge. Monthly lease rates in Class A properties in both areas range from $2 to $2.35 per square foot.

Vast tracts of empty land and proximity to McCarran International Airport are also luring developers to the southern stretch of I-215 west of Interstate 15. Centra Properties has built 339,000 square feet of its 500,000-square-foot Centra Point at Durango and I-215, and Pageantry Cos. recently added 100,000 square feet to the market with its Pageantry Russell Plaza at I-215 and Russell Road. Space is leasing along I-215 for more than $2 per square foot per month.

Tenants of these newer office parks fall primarily into three categories. With five hospitals recently opened or under construction, medical space is a hot commodity. Longford Properties is finishing its 132,000-square-foot Longford Medical Plaza at Summerlin’s edge, and Plise Development & Construction will add 100,000 square feet of medical office space to its 250,000-square-foot Siena Office Park in Henderson. Postsecondary education is also a growth industry in southern Nevada with DeVry University, Le Cordon Bleu Culinary Institute and Touro University among the adult-education groups flocking to an underserved market. Finally, services related to growth, including homebuilders, engineers, title companies and real estate brokerages, are absorbing significant space.

The market’s key entry in 2004 was Crescent Real Estate Equities, which bought the 1.2 million-square-foot Hughes Center for $223 million. Crescent has two building pads remaining.

Lease rates will rise in newer developments as burgeoning land prices force rents upward. Beneficiaries will be properties in older sectors, such as the East Flamingo and East Tropicana corridors, where cost-conscious users will find lease rates 30 cents per square foot cheaper than those along I-215. However, with 2 million square feet of space under construction — and with an additional 3.3 million square feet planned — competition should check rate increases next year.

Industrial

Constricted supply of affordable industrial land and increased absorption have been the primary causes of the decreasing vacancy trend in 2004. Confidence in the economic recovery has encouraged many companies to move forward with expansion plans they postponed in the last few years.

At the end of 2003, the market-wide vacancy totaled 11 percent; in the third quarter of 2004, that rate had plummeted to 7.7 percent. Developers added 2.9 million square feet in 2003, down from the 5 million square feet added annually in the late 1990s and early 2000s. Through third quarter 2004, just 1.3 million square feet had come online. In 2003, net absorption totaled more than 1 million square feet, a number that promises to be even higher once the 2004 numbers come out.

Construction activity is particularly high in the southwest valley and North Las Vegas. Vendors and suppliers for the gaming industry are snapping up space along I-215 in southwest Las Vegas to be near the Las Vegas Strip. Properties such as the 400-acre Beltway Business Park, a joint venture of the Thomas & Mack Development Group and Majestic Realty Co. at I-215 and Jones Boulevard, are benefiting from the demand.

In North Las Vegas, large developers such as ProLogis Trust, DP Partners and Operating Engineers Pension Fund have long-term land holdings and can thus continue to build affordable product. Operating Engineers has completed half of the 4 million square feet planned in its Golden Triangle park at Craig Road and I-15. ProLogis is boosting its 1.1 million-square-foot Northtown portfolio with a 214,000-square-foot spec building at Las Vegas Corporate Center on Pecos Road near I-15. Also, DP Partners is erecting a 260,000-square-foot building as it leases up its 2 million-square-foot LogistiCenter near Pecos and Gowan roads.

Because of higher land prices and the ensuing higher rents in the southwest, North Las Vegas will likely continue to be popular among regional distributors and manufacturers. In North Las Vegas, a 50,000-square-foot tenant will find monthly rents of 33 cents per square foot; a similar building in the southwest will cost around 49 cents per square foot. Market-wide rents in the third quarter averaged 37 cents per square foot for distribution space, 52 cents per square foot for mid-bay space and 77 cents per square foot for flex and incubator space. That compares to 37 cents, 57 cents and 72 cents per square foot respectively in the same quarter a year ago. Concessions in the market have tightened considerably and should dwindle further, and lease rates should rise slightly in 2005.

Retail

With homebuilders adding more than 25,000 new homes a year to the Las Vegas market, the city remains substantially under-retailed. The vacancy rate in third quarter 2004 was a healthy 4.4 percent, although up from 3.4 percent in the same quarter a year ago. The increase in vacancy was due to the addition of 2.7 million square feet in 2004. However, net absorption totaled a robust 542,000 square feet.

The bulk of new development is occurring on the valley’s west side, where major master plans are under construction. In northwest Las Vegas, Montecito Cos. is building Montecito Marketplace, a Smith’s-anchored, 225,000-square-foot neighborhood center at Durango and Elkhorn roads. Two Wal-Mart-anchored power centers and a Costco-anchored power center are planned along I-215 between Durango Road and Cheyenne Avenue. In its Aliante master-planned development in North Las Vegas, American Nevada Co. has started construction of a 65,000-square-foot Smith’s Food & Drug to anchor a mixed-use project.

In southwest Las Vegas, Juliet Cos. is building its Target-anchored, 700,000-square-foot Blue Diamond Crossing power center at Blue Diamond Road and Valley View Boulevard. A Bass Pro Shops Outdoor World superstore absorbed 165,000 square feet adjacent to the Silverton Hotel & Casino at Blue Diamond and Industrial Road. At I-215 and Rainbow Boulevard, EJM Development will build the Arroyo, a 100-acre big box center. Neighborhood centers are also on tap, including Laurich Properties’ Albertsons-anchored Rainbow Square at Rainbow and Warm Springs Road.

As in other submarkets, rising land prices are affecting lease rates. At the end of 2003, the average monthly rent per square foot was $1.56; that figure had moved up slightly to $1.58 by the end of the second quarter of 2004. However, monthly rents in newer buildings cost $3 to $3.50 per square foot. Noticeable increases in rents are likely in 2005, but because demand for retail remains so substantial, sales per square foot should remain strong. Vacancy is expected to remain at or under 4 percent through 2005, even though the market will add roughly 2.2 million square feet of space.

The Las Vegas Strip provides a separate shopping environment for locals and tourists alike. Simon Property Group’s upscale Forum Shops at Caesars, the country’s highest grossing center at $1,438 per square foot in sales, recently opened a 175,000-square-foot addition to its existing 560,000 square feet of retail. General Growth Properties bought the Venetian’s 500,000-square-foot Grand Canal Shoppes Mall for $1.5 billion in April and will add 300,000 square feet. The 475,000-square-foot Desert Passage, which has struggled due to design flaws and traffic flow problems at the adjacent Aladdin, is undergoing redesign under new owners David Edelstein and RFR Holding.

Multifamily

The multifamily sector enjoyed a record year in 2004 — the total sales volume of $2 billion shattered the previous record of $700 million set in 2000. Sales for condominium conversions are propelling the market, with developers such as Pacifica Enterprises, Picerne Development and Sunvest Communities scooping up apartments and transforming them into for-sale units. About 13,000 units are slated for conversion to condominiums by the end of 2005. Because no more than 10 percent of renters purchase their converted dwellings, the trend will yield substantial demand for apartments. In addition, developers will raze an additional 3,000 units on valuable land to maximize use.

That supply-and-demand imbalance is coalescing with fresh barriers to entry to further squeeze the market. Homebuilders, with their heavier buying clout, are winning the battle for the $600,000-per-acre parcels in popular neighborhoods. The numbers reflect dwindling construction: Landlords contributed 4,200 new units to the market in 2004, down from a high of 9,000 units in 1998 and a 10-year average of 5,800 apartments per year. Projections show just 3,700 new units coming online in 2005.

These factors are fostering a positive environment for property owners. In January 2004, vacancy rates were 7.2 percent, with sizable concessions — typically a month’s free rent on a 12-month lease — rampant in the market. By October, vacancies had dwindled to 4 percent, with concessions normally $250 off the first month’s rent. Property revenues have risen 10 percent to 15 percent. Monthly rents increased from an average of $766 in third quarter 2003 to $798 in the same period last year. In 2005, concessions should disappear altogether and rents should increase an additional 5 to 8 percent.

Sales will slacken as well, with available inventory slashed over the last year as conversions have reigned. Major deals in 2004 included the $47 million sale of the 524-unit Fountains at Flamingo in southwest Las Vegas, which Equity Residential Properties Trust sold into syndication, and the $37 million sale of the 420-unit Montego Bay, which Equity sold to Sterling Equities. As the blistering pace of sales to conversions slows, the average sales price of $71,184 per unit — up from $56,510 a year earlier — will stabilize.

Given high prices for land and complexes, developers will have to change the nature of their properties. Expect suburban buildings to rise from the traditional two stories to four levels and densities to increase from 18 to 50 units per acre. Developers will squeeze more units into a project by designing smaller homes, from the average 900 to 1,000 square feet today to 700 square feet in coming years.

Hospitality

Dominated by Las Vegas Boulevard — the Strip — the city’s hospitality segment has recovered fully from the economic fallout following Sept. 11, 2001. As wary consumers avoided air travel, Las Vegas’ marketing experts retooled advertising campaigns to target regional markets an easy drive away.

Though visitor volume was soft in 2002 and 2003, a brightening economic picture and pent-up travel demand helped the city post its best year ever in 2004. Through September, visitor volume was up 5.5 percent over the same period in 2003. The performance surpassed by 4.4 percent the volume in the first 9 months of 2000, when the city set its full-year record of 36 million visitors. Occupancy levels hover around 90 percent, compared to 73.4 percent in primary competitor Orlando. Average daily room rates were $89, an improvement from the $82.50 average of a year ago.

As a result, the city’s key hospitality players have enjoyed record quarters in 2004. MGM Mirage’s Bellagio opened a 900-room addition, Mandalay Resort Group opened its 1,100-room The Hotel at Mandalay Bay and Sheldon Adelson began a 3,000-room property adjacent to his Venetian.

Poised to drive the market to a new level is Wynn Las Vegas, the $2.7 billion luxury resort gaming wunderkind Steve Wynn is building at the Strip and Spring Mountain Road. Upon its completion in April, Wynn Las Vegas — like previous Wynn properties such as the Mirage and Bellagio — will reach a new high in resort development. In addition, the property will lure capital to the North Strip, where Phil Ruffin’s New Frontier and Boyd Gaming’s Stardust will be replaced with new concepts. Donald Trump plans to build his Trump Towers on the New Frontier site as well. These projects should create demand for property along the Strip north of Spring Mountain, including vacant lots such as the 26-acre parcel at Sahara Avenue. Existing developments, including the Riviera and the Wet ’n Wild water theme park, will fall to the wrecking ball as developers find financing to build bigger and better uses.

The portion of Las Vegas Boulevard south of Mandalay Bay is also positioned to thrive in coming years. Three megaresort pads across from Mandalay Bay are awaiting developers, and Coast Resorts is building its $350 million South Coast locals property near Silverado Ranch Boulevard. In addition, Turnberry Associates and Centra Properties are developing a $300 million, 1.5 million-square-foot mixed-use project at Interstates 15 and 215.

Resort markets off the Strip are flourishing as well. Station Casinos is adding 300 rooms to its $300 million, 200-room Green Valley Ranch resort; the company also broke ground on its $475 million, 400-room Red Rock Station in Summerlin. Business hotels and motels around the Las Vegas Convention Center on Paradise Road are also benefiting from the spillover of rising occupancy and room rates on the Strip.

Mark Bouchard is managing director of CB Richard Ellis‚ Las Vegas offices. CB Richard Ellis professionals Brad Peterson, Spence Ballif, John Knott, Donna Alderson and Zack Hussain contributed to this article.



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