MARKET HIGHLIGHT, JANUARY 2008

LAS VEGAS
David Scherer, Xavier Wasiak, Christopher Bentley and Tami Lord

Like the rest of the West, Las Vegas is feeling the effects of a sagging residential market. However, powerful fundamentals, like impressive job growth, keep the market zipping along. The city’s multifamily sector stands to benefit from the residential slowdown and the employment growth related to Vegas’ burgeoning hospitality sector.

Office

The Las Vegas office market experienced an increased vacancy level during 2007, but is better positioned to improve during the near-term than most cities in the country. Exceptional job growth, a tempered supply of new office product as a result of excessive land and construction costs, and steady demand support the long-term strength of the market. The office sector has demonstrated solid activity since the end of 2003, and this positive growth is expected to generally continue through 2010.

The vitality of the local economy has helped Las Vegas maintain its position as one of the healthier markets in the country. The Forbes and Milken Institute’s annual studies ranked Las Vegas first in 2002, third in 2003, first in 2004 and second in both 2005 and 2006 in tems of the best places in the country for job growth. Numerous other reports list Las Vegas as one of the top five cities for job growth through 2010.

New construction through 2010 related to growth around the Las Vegas Boulevard area is valued at approximately $30 billion. This construction will result in approximately 35,000 new hotel rooms. Between 70,000 and 90,000 new jobs will be created as a result of this new construction. In addition, Las Vegas has close to 40 million annual visitors and continues to attract 60,000 new residents per year. The outcome of this activity is job growth in the service sector, which requires the absorption of office space.

Despite these positive factors, the supply of office product is constrained due to the high cost of land and commercial construction. The cost of new development has outpaced the increase in office rental rates, with one result being a diminishing developer profit margin. Therefore, developers are quicker to react in postponing planned new construction if the office market moves in a negative direction.

The greater Las Vegas office market has maintained a steady average quarterly absorption in the previous six quarters of approximately 450,000 square feet. From the end of 2003 through third quarter 2006, the steady demand for office space has caused a general downward trend in vacancy rates. Because of this positive movement of the market, more new product came online in 2007, which has pushed vacancy rates upwards about 300 basis points from mid-2006 levels. Even so, the market is reacting to the increase in vacancy rates, resulting in a reduction of the square footage under construction at the end of 2007. The office market should improve in its occupancy level in 2008.

The Las Vegas office market, which is approximately 30 million square feet, is mostly composed of Class B buildings, with about 25 percent of the market being Class A product. A positive aspect for owners has been the steady increase in rental rates. Class A rates have increased approximately 18 percent in the previous year, and Class B rates have increased approximately 7 percent. In previous years, with escalating rental rates, for-sale office condo products were an attractive alternative to leasing. Yet, with the increase in construction and land costs, the financial benefit of ownership has decreased. While the advantages of ownership will always remain attractive to certain companies, the demand for such product has decreased during the previous year.

— David R. Scherer is a senior vice president in Grubb & Ellis|Las Vegas’s Office Group.

Industrial

These are interesting times in Las Vegas. Commercial construction is at historic all-time highs, residential home sales and values continue to suffer, and industrial land prices have, at the moment, leveled off. With a current overall average vacancy rate of 5.9 percent in a tracked industrial market of just more than 91 million square feet of product, it is difficult to say that times are tough. Of course, it depends whom you ask.

Developers are facing the brunt of the struggles with higher than ever land prices. Although they have leveled, land prices are difficult to find for less than $11 to $12 per square foot in North Las Vegas, long regarded as the most affordable of submarkets in the Las Vegas Valley. Some quick math will tell you that, at those prices, warehouse/distribution projects that are 50,000 square feet or more are difficult to justify financially at the $0.44 to $0.48 per square foot average base rental rates for that submarket. The product type favored, and potentially still profitable, at such prices are the small 4,000 to 10,000-square-foot industrial buildings/condos for-sale projects that have been popular in the West in the past few years. In fact, they have been so popular that twice as many such buildings have been built or are under construction this year than in 2006. More buildings of that type and size range are available in today’s market than at any other time in our market’s history, leading some to wonder if our market has the depth and demand to prevent eventual decreases in pricing.

Not all sizes are similarly affected, however. Buildings exceeding 10,000 square feet for sale, especially those more than 50,000 square feet, continue to see record sale prices, from $85 to $120 per square foot in North Las Vegas to $150 to $200 per square foot in the southwest submarket. The demand for those sizes of buildings appears to run deep, and few buildings are available. Panattoni Development recently completed one such project, Cheyenne Industrial Center, in North Las Vegas. With almost 500,000 square feet in four buildings that were leased and sold well before the project was completed, this very successful project took advantage of the lack of larger product available for sale and lease. Home Depot Supply Inc. and Johnstone Supply Company were among the tenants, and a combination of users/investors made up the purchasers that took about half of the project. At the time of closing, one purchaser of a 100,000-square-foot building within the project for $75 per square foot, shell price, had already seen a likely 10 percent increase in the value of his building.

Demand for lease product in Las Vegas Valley remained strong this last quarter with more than 2 million square feet absorbed. Some think, however, that activity from the 400,000+-square-foot user is diminishing. No doubt, the decline came partially because of the increased cost of living Las Vegas experienced during the last 2 years, reflected most dramatically in the rise of home prices. One can venture to consider whether the recent, similarly dramatic reduction in home prices will help entice those larger users, looking to expand/relocate to the southwest, back to Las Vegas. Regardless, current home-based demand for warehouse/distribution space remains healthy and we cannot foresee any substantial decline in the near future.

— Xavier J. Wasiak is a senior vice president in Grubb & Ellis|Las Vegas’s Industrial Group.

Multifamily

Due to the sub-prime market implosion, an increasing number of Class A tenants are entering Las Vegas multifamily market. Once able to purchase a home with little or no money down, residents are now required to come up with a substantial down payment. Consequently, an increasing number of people are turning to high-end multifamily rentals. Developers are building Class A properties to meet the anticipated demand of this influx, while investors are seeking Class B product and performing capital improvements to upgrade them to the B+ and A categories. Centrally located C properties are also experiencing demand as development activity in the resort corridor is leading to a large number of construction laborers as tenants.

At the end of third quarter, investment totals for multifamily product exceeding 100 units stood at more than $954 million, divided among 31 properties and 9,040 units. Senior apartments, timeshares, land-value purchases, daily/weekly rentals and non-arms-length sales are excluded from these totals.

Bacarra Apartments, formerly Courtney’s Bay Apartments, in Las Vegas’ southeast submarket, recently traded at $153,889 per unit and $161.42 per square foot, one of the highest per-unit and per-square-foot sales this year. Topping the list for total sales price is Allanza at the Lakes at $102.95 million, followed by Fountains at Flamingo ($60.85 million), Summerhill Villas ($52 million) and Entrata di Paradiso ($55 million).

There was a slight drop in occupancy levels during the third quarter, which is partly due to the shadow market created by the number of single-family homes for sale. During the same period, however, rental rates steadily increased above the rate of inflationary rent growth.

Virtually no inventory of multifamily product has entered the market since late third quarter. That is expected to change in early 2008. Many owners are talking about listing properties shortly into the new year, and buyers are anxious to invest. By the early part of 2008, the dust should settle after the lending shake-up, which will allow investment companies time to reevaluate and reposition.

New developments are being constructed around the Interstate 215 beltway, from the southwest up to the northwest and continuing around to North Las Vegas. Alliance Residential’s 336-unit Broadstone Montecito is an  Class A+ property in the northwest submarket currently in lease-up, while Picerne Real Estate Group and Ovation Development are constructing several new Class A+ 3-story multifamily developments, particularly in the new North Las Vegas area.

Other notable projects under construction with 2008 completion dates include The Reserve by Bean Investments, The Preserve and Presidio by Picerne, Acapella by Ovation, and Broadstone Azure and Broadstone Indigo by Alliance Residential. Units in lease-up total 5,586 spread across 19 properties, while there are 2,397 units currently under construction spread across 12 properties.

Nearly 40,000 hotel rooms are coming on line in the next 4 years, creating more than 285,000 new jobs. Demand for multifamily product will increase to meet the housing needs of these new employees. Forbes magazine recently ranked Las Vegas number 1 fastest-growing area. The diversification of job categories that comes with the maturing of any city is yielding a larger sector of renters coming into the market as Class A type clients. In 2008, rents are expected to continue to grow, while vacancy rates should drop.

— Christopher Bentley is president and broker of record for Las Vegas-based The Bentley Group Real Estate Advisors.

Retail

Like many cities with warm climates throughout the West, Las Vegas is adopting the concept of outdoor lifestyle components, even in traditional power and grocery center developments. Developers are lacing their projects with landscaped sidewalks and village streetscapes, adding a pedestrian element to the center. Additionally, as retail centers have become amenities to other businesses, developers are incorporating hospitality and office components into traditional retail projects.

The Interstate 215 beltway remains an attractive development location for big box retailers that need significant amounts of land for their stores, while other retailers are looking toward older areas of the city for infill opportunities. One of the best examples of infill redevelopment was the former antique mall at the southwest corner of Tropicana Avenue and Jones Boulevard, which now houses Office Depot and Fresh & Easy.

Las Vegas continues to have a considerable amount of new retail development with approximately 4.1 million square feet currently under construction. Several new developments coming online include Town Square, a 1.5 million-square-foot regional lifestyle center situated on 117 acres on Las Vegas’ South Strip, and The Arroyo Market Square, a 945,000-square-foot center situated on 90 acres at the northwest corner of Rainbow Boulevard and Badura Avenue, along I-215.

Town Square, a joint venture between Centra Properties and Turnberry Associates, will feature approximately 150 retail stores, 12 restaurants, an 18-screen movie theatre and Class A office space, while the Arroyo Market Square will feature a number of retailers and restaurants. Developed by EJM Development, The Arroyo Market Square recently saw the opening of Best Buy, Marshalls and Bed, Bath & Beyond.

The market is also experiencing the emergence of multiple Target, Office Depot and Fresh & Easy locations throughout. The area will continue to see new restaurants and eateries making their Las Vegas debut. Las Vegas’ most active developers include General Growth Properties, Regency, Juliet Cos., Territory Incorporated, Marnell Corrao Associates, Merrill Companies and Green Street Properties.

The market is undergoing a correction with a slight hesitation as the industry awaits results from holiday retail sales and housing sales. Well-anchored centers are still performing well because land prices and lease rates are experiencing only a minor slowdown. For those in the brokerage industry, the days of order taking have become a memory.

As the market continues this correction in 2008, the more sophisticated developers will take advantage of the market taking a downturn through the resulting lower pricing opportunities. The same is true for more sophisticated tenants. They will continue to grow and expand throughout the Las Vegas market as long as they make their bottom line numbers.

— Tami Lord is vice president of Voit Commercial Brokerage in Las Vegas.

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