MARKET HIGHLIGHT, JANUARY 2007

LAS VEGAS MARKET HIGHLIGHT
Zach Hussain, Donna Alderson, Brad Peterson and Spencer Ballif

Most know that Las Vegas is a happening place. That certainly goes for its commercial real estate market as well. Demand for land is the common denominator across all sectors in the gaming capital.

Retail

Construction of new hotel-casinos on the Las Vegas Strip and in the outlying areas will continue to drive the local economy in 2007, bringing new jobs and employees to Southern Nevada. This will be good news for a slow housing market and great news for retailers. Despite the dramatic population growth in recent years, the region remains substantially underserved in the retail arena. Third quarter 2006 saw retail vacancy rates at 3.88 percent, up from 3.23 percent the same quarter in 2005. Lease rates average $1.92 per square foot, up from $1.89 in second quarter 2006. There is 7.2 million square feet of retail space under construction with an additional 10.5 million planned in the next 12 months. Net absorption through third quarter 2006 totaled 1.75 million square feet.

As luxury mid- and high-rise condominiums continue to change the residential landscape, urban mixed-use developments serving residents and visitors in Las Vegas’ central core are gaining momentum and acceptance. Town Square, a 1.2 million-square-foot mixed-use project under construction at the Interstate 15 and 215 junction, is being developed by Centra and Turnberry Associates. The Plise Companies’ City Crossing, a mixed-use project on 126 acres of prime real estate in west Henderson, will offer approximately 400,000 square feet of boutique shopping, 150,000 square feet of diverse dining and entertainment options, 1 million square feet of Class A high-rise office space, and 2,500 luxury residences. Another mixed-use project is the 1.4 million-square-foot Village at Queensridge, which is being developed by Great Wash Park LLC in Summerlin.

Hot retail submarkets in Southern Nevada include Henderson, southwest Las Vegas and North Las Vegas. For the time being, the central east, western and Nellis corridors are slow submarkets for retail development.

As in the office and industrial markets, rising land prices are affecting retail lease rates. At the end of third quarter 2006, the average monthly rent per square foot was $1.92 per square foot, up from $1.68 a year before. Rent increases are likely this year, but because demand for retail remains so substantial, sales per square foot should remain strong. Vacancy is expected to remain at or below 3.75 percent throughout 2007.

Active Las Vegas developers are Territory Inc., Laurich, Centra, Juliette, Plise, Nigro, Great American Capital, Olympia Group and Marnell Corrao. Hispanic retailer La Curacao is looking to enter the Las Vegas market, and European grocer TESCO is aggressively seeking to add multiple stores in the Valley. Lifestyle tenants like Williams-Sonoma, H&M and Crate & Barrel are aggressively entering or expanding in the Las Vegas Market.

— Zack Hussain is a retail broker in the Las Vegas office of CB Richard Ellis.

Industrial

The largest contributing factor affecting industrial development in Las Vegas is the price and availability of land. During the last 5 years, larger industrial tracts have been absorbed by residential developers. The dwindling land supply and strong demand for industrial space has pushed the median price of land to more than $10 per square foot, an increase of more than 150 percent since 2000.

The dramatic increase in land prices has made speculative, rental industrial space difficult to make profitable. Developers have to be creative in decreasing their land basis, including selling portions of vacant land, offering both for-sale and for-lease product, offering options to purchase on leases, and developing a portion of the property with higher-end product.

At the end of third quarter 2006, the market vacancy rate was 3.89 percent, down from 4.84 percent for the same period in 2005. During the last 2 years, lease rates have steadily increased and will likely continue to increase until supply and demand stabilize. Market rents in third quarter 2006 averaged about 53 cents per square foot for distribution space, 81 cents per square foot for mid-bay space and 98 cents per square foot for flex and incubator space. That compares to 37 cents, 52 cents and 77 cents per square foot, respectively, in third quarter 2005.

Because of higher land prices and the ensuing higher rents in the south end of the valley, North Las Vegas will likely continue to be popular among larger, regional distributors and manufacturers. In North Las Vegas, a 50,000-square-foot tenant will find monthly rents of approximately 43 cents per square foot while a similar space in the southwest submarket will cost around 55 cents per square foot.

Demand for industrial space has been high throughout the Las Vegas market, with construction activity particularly high in the North Las Vegas area. Some of the larger projects that are under construction include: the final 253,200-square-foot building of the 1.5 million-square-foot ProLogis Park North; DP Partners’ Logisticenter Building 3, which will be the largest speculative building ever built in Southern Nevada at 513,240 square feet; Operating Engineers Pension Fund’s Golden Triangle Industrial Park with two buildings under construction totaling more than 187,000 square feet with 90 additional acres available for future development; and the 492,500-square-foot Cheyenne Industrial Center, being developed by Panattoni Development. Currently there is more than 2 million square feet of for-sale freestanding and industrial condos planned or under construction.

As a result of the market’s low vacancy rates and strong lease rates, Las Vegas is attracting the attention of investors from around the country. Real Capital Analytics reported that the average per-square-foot purchase price for industrial properties is about $154 per square foot. This is approximately 51 percent higher than 12 months prior. Also reported was that the weighted average cap rate is 6.9 percent, approximately 16 base points lower than a year before.

— Donna Alderson is an industrial broker in the Las Vegas office of CB Richard Ellis.

Office

The Las Vegas office market continues to demonstrate significant inventory growth despite rising land and construction costs. Net absorption at the end of third quarter 2006 was nearly 1.8 million square feet with a projected 2.3 million square feet by year’s end. Third quarter vacancy dropped to a record-low 9.18 percent, down from 9.3 percent the previous quarter. This came when more than 255,000 square feet was added to the 24.7 million square feet of existing office product.

The Las Vegas Valley’s southwest submarket is showing the highest rate of growth in office space with 1.6 million square feet of space under construction. Currently, 35 percent of the Valley’s construction is occurring in the southwest. With the long-awaited completion of the I-215 freeway, all the submarkets from the southeast to the west are experiencing heavy office activity.

The average full-service gross asking rates continued to grow in the third quarter, reaching $1.91 per square foot. Tenants continue to relocate to new office space and do not seem discouraged with the rising rental rates for Class A and B office space. Land values and construction costs continue to affect the commercial market, pushing the average Class A lease rate to $2.47 per square foot.

Construction activity at the end of third quarter rose to more than 4.54 million square feet. Noteworthy projects under construction include the six-story, 150,000-square-foot Charleston Pavilion Center; the eight-story, 229,000-square-foot Rainbow Sunset Pavilion; the Beltway Corporate Center, consisting of two three-story buildings and 128,000 square feet; and the 125,000-square-foot Arroyo.

Higher occupancy costs will collide head on with a record amount of office inventory that is coming to the Las Vegas market. Up to 25 percent of the entire office inventory will be built in the next 2 years. Most of this new construction will be vertical product compared to the large number of one-story, large bay, flex space that has been built in the past.

Office users wishing to own their space have increased significantly in the last 2 years. This demand has been fed by numerous developments that have offered multiple small buildings or lots for sale. At the beginning of that supply curve, prices were less than $200 per square foot shell but now have risen to between $215 and $260 per square foot. As the market trends toward vertical product type, these well-located, one- to two-story buildings will be difficult to find.

Unparalleled increases in land and construction costs, causing rental rates and sales prices to skyrocket, are major challenges in Las Vegas’ office market. During the last 2 years, rental rates have risen 25 to 35 percent. This increase, coupled with rising tenant-improvement costs and landlord allowances, will stretch the limits of what many corporations are willing to pay compared to what they have paid in the past.

— Brad Peterson is a senior vice president in the Las Vegas office of CB Richard Ellis.

Multifamily

The Las Vegas market continues to show strength as supply remains in check and job growth continues to be robust. In 2006, there were approximately 3,300 new units delivered to the market, up from 2,000 new apartment units delivered in 2005, but considerably less than the sector’s 11-year average annual construction of 5,700.

The market’s vacancy increased slightly to an average of 4.86 percent through October 2006, up from 4.61 percent at year-end 2005. The shadow rental inventory of condo conversions and investment homes have added volume to the market, slightly offsetting the lack of production of new apartment properties. The average rent for the Las Vegas apartment market in third quarter 2006 was $894 or $0.95 per square foot, up 5.67 percent from third quarter 2005 when the average market rent was $846 or $0.90 per square foot.

Las Vegas’ job growth continues to look very bright as evidenced by current large hotel-casino projects such as MGM Mirage’s City Center (7,315 rooms), Palazzo (3,025 rooms), Cosmopolitan (3,000 rooms) and Encore at Wynn (2,042 rooms), which total 15,382 rooms at a combined cost of more than $12.5 billion.

Approximately 4,500 new units will be built in Las Vegas this year, a 36 percent increase over the 2006 numbers, but still well below the market’s historical averages. With the continued population and job growth, expect shadow rental inventory from condo conversion investments to diminish considerably this year. Rental rates should grow between 5 and 6 percent.

While condo conversions were a big part of the Las Vegas market from 2004 to 2006, there will not be many conversions in the next 2 years. The market experienced 6,000 units converted in 2004, 8,700 units in 2005 and approximately 3,900 units in 2006. However, the market has become over supplied with conversions, and the current inventory won’t be absorbed for some time.

Multifamily sales volume in 2005 was approximately $2.25 billion, up from a record number in 2004 of $2.1 billion. In 2006, the numbers will reach approximately $1.8 billion. With so much inventory being turned in the last 3 years, sales volume is expected to decline in 2007.

— Spencer Ballif is a senior vice president with CB Richard Ellis Las Vegas.

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