MARKET HIGHLIGHT, JANUARY 2006

LAS VEGAS: LAND IN DEMAND
Kevin Higgins and Kit Graski

More than 37 million visitors come to Las Vegas each year, yet few visitors ever look past the neon lights of The Strip to the major commercial development and economic growth that is making the city that never sleeps one of the fastest growing cities in the United States. Las Vegas' commercial real estate market is home to new and innovative projects that cater to local and national companies as well as the 2 million residents and 5,000 newcomers who move to the Las Vegas Valley every month.

Investors are flocking to this hot market and acquiring any product that becomes available in order to secure their place. These investors include everyone from large institutional investors to local “mom-and-pop” companies. One of the hottest investment markets in the country, Las Vegas is expected to continue its commercial real estate momentum in office, industrial, retail and hospitality.

Office

The Las Vegas office market consists of 35.9 million square feet of inventory located within 1,275 buildings. Presently, 9.6 percent of the total inventory is vacant. In third quarter 2005, developers completed 621,000 square feet of new product, and strong demand led to net absorption of 920,000 square feet. This brings the year-to-date total for net absorption to more than 2 million square feet. There are currently 2.9 million square feet under construction throughout the Las Vegas Valley.

The south and southwest submarkets along the Interstate 215 beltway continue to lead the office sector in new construction activity, with an additional 1.6 million square feet under construction. This area will develop into a major office corridor due to its close proximity and easy access to several major master-planned residential communities.

Sale and lease rates for office product have increased in the last quarter and will continue to increase due to a rise in land prices and construction costs. These increases in rates have been necessary in order to make new development economically feasible. Fortunately, developers and landlords have not seen resistance to the increases from tenants and buyers. For reasons mentioned above, Las Vegas will continue to see the trend of office product for sale. The for-sale product enables developers to take advantage of the attractive interest rates and financing options that buyers have available to them, thus making the local development costs more palatable.

A couple notable mid-/high-rise office projects are currently planned and will break ground in early 2006. New additions impacting the market include the 11–story, 250,000-square-foot office building at the Hughes Center by Crescent Real Estate Equities; the 265,000-square-foot Molasky Corporate Center in downtown Las Vegas; and the six-story Business Bank of Nevada building located in Summerlin, Nevada. It should be noted that these various mid- and high-rise office projects are distributed throughout the Las Vegas Valley. A few other developers that have major office projects under construction include Thomas & Mack Development Company; American Nevada Company; Investment Equities; Shea Development; Nigro & Associates; Glen, Smith & Glen Development; and The Plise Companies.

Mixed-use business parks with industrial, retail and office components are cropping up along the southwest I-215 beltway and in the airport submarket as well. A few of these business park projects include EJM Development's The Arroyo, a more than 1 million-square-foot office, retail and industrial project; Thomas & Mack Company and Majestic Realty Company's joint venture called the Beltway Business Park, a 400-acre master-planned business park with more than 470,000 square feet of class A office space and more than 1.3 million square feet of industrial product; and Palm Court, a joint development between Rancho Development Company and Voit Development Company that consists of approximately 140,000 square feet of retail, office, and industrial product with immediate access to the airport.

Industrial

The Las Vegas industrial market consists of 2,580 buildings totaling 82 million square feet of inventory. In third quarter 2005, the Las Vegas industrial market had net absorption of 1.42 million square feet, which outpaced new additions to the market by 40 percent. There are currently 3.64 million square feet of space under construction.

As a result of the rising land prices and construction costs, many developers have been hesitant to deliver the product currently in demand. This has pushed the market-wide vacancy rate to 4 percent, down 3.9 percentage points from a year ago. Naturally, with a shortage of industrial land, rising development costs and limited new product, coupled with the strong industrial demand of a growing economy, lease rates and sales prices continue to climb.

Construction for the third quarter was evenly spread between all major submarkets. However, due to a lack of available or affordable land in the southwest, airport and Henderson submarkets, North Las Vegas will soon become home to the majority of all future industrial development. There are currently 1.7 million square feet under construction and another 1.6 million square feet planned for future development.

Rising land costs have forced virtually all big box developers to North Las Vegas and particularly the speedway area, which is evolving into a very active industrial market. This area will be home to a great deal of activity in the coming years, not only from developers but users that cannot find large enough contiguous parcels to accommodate their needs anywhere else in Las Vegas.

The most active players in the industrial market are Majestic Realty Company, EJM Development, ProLogis Corp., Juliet Land Company, Harsch Investment Properties, Jackson Shaw, DP Properties, Panattoni Construction, Operating Engineers Trust Fund, LaPour Partners, Hedley Construction and Management, and Rancho Development Company.

CIP Real Estate and Hedley Construction and Management Company from California recently entered the market, creating more competition and forcing the seasoned players in the Las Vegas industrial market to devise creative ideas to acquire the limited land available. Hedley will be developing several industrial condominium projects, which will help justify land and construction costs.

Retail

The Las Vegas retail market currently comprises 266 anchored centers totaling 41.8 million square feet of inventory. Most of the retail development remains close to the substantial residential growth in the valley along I-215 in the southwest and northwest submarkets.

With 1.6 million square feet of retail space under construction and 5.8 million square feet planned for future development, the retail market is keeping up with the rapid growth Las Vegas is experiencing. Current retail vacancies decreased to 3 percent, down 3.6 percentage points from 1 year ago. New retail additions contributed 388,000 square feet in 2005.

The high land prices are creating a push towards mixed-use projects with residential located above retail to help developers subsidize the land values. Governmental entities in Las Vegas are encouraging the development of mixed-use projects to metropolize Las Vegas. One of the major mixed-use projects that will impact the market is Town Square, a 1.1 million-square-foot mixed-use lifestyle center slated for completion in 2006 or early 2007. Centra Properties and Turnberry & Associates, a developer new to the Las Vegas retail market, are building the project. Town Square will be located at Sunset and Las Vegas boulevards.

With most of the high-end retailers located on the Las Vegas Strip, many national players in the retail market are taking advantage of the residential growth towards the suburbs by building their new retail projects in this area. Laurich Properties and EJM Development are developing the Arroyo Marketplace Square, a 950,000-square-foot power center located off the I-215 beltway and Rainbow. The Arroyo Marketplace Square is in close proximity to the previously mentioned major office development, Arroyo Corporate Center.

National retailers Wal-Mart and Costco are entering the northwest market. The retail growth in the southwest and northwest submarkets has been fueled by the availability of land for retail development complimented by the substantial amount of residential growth.

The retail market in Las Vegas is continuing to get more aggressive as cap rates continue to decrease. Best in the West, a 475,000-square-foot shopping center located on Rainbow and Lake Mead, sold for $65 million in 2005 with less than a 7-percent cap rate.

Given that the fast-paced nature of the Las Vegas retail market does not welcome many new players, the seasoned players are offering new residents new retail developments to satisfy the demand. Unanchored strip-center development is taking place across Las Vegas, and developers are busy locating parcels in high-demand locations to draw in national tenants in order to cater to the residential development around that area.

Taxable retail sales have been in excess of $40.8 billion and will continue to increase in 2006. Las Vegas is poised to be one of the strongest and most prosperous retail markets in the country throughout the upcoming year.

Hospitality

Las Vegas' hospitality market is the most popular and well-known hotel market in the entire world. It is home to 17 of the 20 largest hotels in the world and approximately 135,313 hotel rooms. In 2005 alone, 3,800 rooms came online, with 2,275 more rooms projected to come online in 2006. The hospitality market will continue to thrive in 2006, with approximately nine additional hotels entering the market creating more competition.

Wynn Las Vegas debuted in 2005, featuring an 111,000-square-foot casino with approximately 2,700 rooms, 18 restaurants, retail shopping and a championship 18-hole golf course. The $2.4 billion hotel and resort is located on 197 acres across from the Fashion Show Mall and the Venetian on Las Vegas Boulevard. Built by one of the most well-known hotel developers in the world, Wynn Las Vegas has raised the bar in one of the most popular hospitality markets.

In 2006, hotel developers will have a new lineup of hotels opening in the outskirts of Las Vegas so that residents can enjoy the casino experience off the Strip and close to home. The rapid population growth has created an increased need for hotels. Developers like Coast Casinos and Station Casinos Companies have previously brought this type of project to the public in the past. These particular developers are masters at catering to the residents of Las Vegas. Their success will continue in 2006 with South Coast Hotel & Casino and Red Rock Station Resort & Casino both coming on-line in the early months of the year.

The Red Rock Station Resort & Casino, one of the biggest hotels to open in 2006, is an $800 million resort located at the intersection of I-215 and West Charleston Boulevard. The resort will feature an 87,000-square-foot casino, 400 hotel rooms, 2,700 slot and video poker machines, 10 full-service restaurants, a nightclub, and a 16-screen Regal Cinemas.

The South Coast Hotel and Casino, the $500 million resort adjacent to I-15, will feature a 25-story tower, 660 state-of-the-art rooms and 25 beautifully appointed suites.   The South Coast also includes more than six restaurants, a nightclub, a 16-screen movie theater and a 64-lane bowling alley. The South Coast is situated on 60 acres in the southern part of the Valley, which is one of the fastest growing areas in Las Vegas. It is also situated as a gateway for the millions of visitors traveling from California to Las Vegas.

Another new hotel debuting a brand new theme in 2006 is the former Hotel San Remo, which is being transformed into the world's first Hooters Casino Hotel. The $130 million redevelopment project will open to the public in February 2006, boasting 696 rooms and eight new restaurants and bars. In the second half of 2006, the former Aladdin Hotel & Casino will transform itself from a Middle Eastern theme into a trendy, sleek hotel renamed Planet Hollywood Resort & Casino.

Looking forward to 2007, Las Vegas will debut Palazzo, a $1.6 billion hotel and casino that will have 3,020 hotel rooms accompanied by 450,000 square feet of meeting space built by the Las Vegas Sands Corporation. Mixed-use hotel and residential towers are also expected in the near future, entering an era known as the “Manhattanization” of Las Vegas.

Senior vice presidents Kevin Higgins and Kit Graski are based in Voit Commercial Brokerage's Las Vegas office.


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