MARKET HIGHLIGHT, JANUARY 2010

LAS VEGAS
Michael Mixer

Which sector leads the way in Southern Nevada to start the new year and will the opening of MGM Mirage’s massive CityCenter development begin Las Vegas’ hospitality resurgence?

Industrial

The industrial sector continues to lead the Las Vegas commercial real estate market, with the best vacancy rate (13.3 percent) and lease rates that are getting close to stabilization. While not the leading sector in terms of transaction volume, it is the one doing the least worst, in part because it was not as overbuilt going into the downturn.

A bottom in this sector — positive absorption — will not be seen until late 2010 or early 2011. Developers will watch closely for this transition, and some will announce new building plans by third quarter 2011. Some stalled projects may start coming back online in the fourth quarter if significant pre-leasing returns. Even now, a few developers are tentative moving forward, including Las Vegas-based Marnell Properties, which recently announced it is moving ahead with a 200,000-square-foot project at McCarran Airport with 75 percent pre-leasing in place.

Certain valley submarkets are faring better than others. Industrial properties in the southwest with good access to the Interstate 15 and the I-215 beltway remain in demand for businesses that exist to service the resort corridor.

Office

Reaching a level of positive absorption in the Las Vegas office sector may be slow going in 2010. It was particularly overbuilt, especially as it relates to owner-user and incubator space, especially in the southwest submarket. One bright spot is Hughes Center, which offers the largest density of true Class A office product in the valley. As many tenants grow weary of volatile landlords and buildings, Hughes Center continues to provide quality ownership, which has translated into lower vacancy as compared to the rest of the market.

The office sector’s recovery will stem from new businesses moving to Las Vegas and existing businesses expanding. Businesses facing tax hikes as their state governments deal with budget shortfalls may find opportunities in Las Vegas given its tax-friendly status, low cost of living for employees and lower lease rates as compared to neighboring markets.

The driver to positive absorption in 2010 and beyond will depend largely on new job growth. The opening of MGM Mirage’s CityCenter is expected to provide an additional 12,000 new jobs to the local economy, but the long-term effect this will have on office absorption and new tenants remains unknown at this time. Given the trend in the decline in negative absorption throughout 2009 — 413,000 square feet in first quarter, 297,000 in second and 39,000 in third — it is feasible that vacancy rates may begin to stabilize in early 2010, and, with enough job growth, the sector may return to positive absorption in late 2010.

Retail

Southern Nevada’s retail market continued its slow glide downward in the third quarter, and vacancy in retail centers has risen for the past 6 quarters. Consumer demand has all but dried up, and several retailers have closed their doors as a result. Empty centers dot the valley’s landscape, and many new centers strapped with debt and unanchored retail centers may die on the vine waiting for demand to return.

Tenant retention is the key in 2010, and operators should focus on cutting rates and offering incentives to prop up occupancy. The best news is that leasing activity is inching up, and the total number of retail availabilities is actually declining. There are retail leases getting done now, many as a result of tenants relocating to other centers for better deals. This leasing activity comes at the expense of rental rates, which continue to soften due to weakening demand. Overall, the average asking rents have decreased nearly 15 percent this year to approximately $1.69 per square foot NNN monthly.

Las Vegas’ retail market will begin to turn around in 2011, reaching positive absorption beginning in the first quarter.

Hospitality

Hotels/resorts have been hit particularly hard by the recession, with unprecedented demand declines for the industry nationwide and locally. However, many agree that this sector has hit bottom, and it may be one of the first to bounce back.

Hotels have cut room rates to historic lows in response to waning demand, and investors and consumers are taking note. Hoteliers are noting that travel planners are more price sensitive than ever, demanding discounts to retain their business.

At 86 percent before the holidays, hotel occupancy will begin to increase again in the third quarter of next year. However, room rates will take more time to recover. Many of the resorts are now indicating strong convention bookings for 2010 and 2011. This is an excellent sign that corporate travel budgets are being restored as the national recession eases and businesses are adjusting to operating in a slower economy. In 2011, a seller’s market will start to emerge as average daily rates begin to recover and occupancy levels continue to increase.

Land

Land has been the hardest-hit sector, with values falling more than 50 percent from their 2007 peak. With replacement building costs outweighing new construction and demand for new development nonexistent, land values will not begin to increase until 2012 and could decrease further before then.

One bright spot: Homebuilders have started buying up finished residential lots in anticipation of a housing turnaround. Following the build-out of these lots, builders may once again consider buying “paper” lots — i.e., unimproved, but entitled land.

A New Identity

At the peak, Las Vegas became prohibitively expensive, which became especially apparent as the recession took hold. Now, however, the city is returning to its value-oriented roots, with properties on and off the Strip offering rooms for unheard-of prices and with enticing vacation packages.

The expectation here is that tourism demand will start to return in late 2010, as investors and tourists reconnect with Las Vegas and consumer confidence and demand improve. New “must-see” resort openings such as MGM Mirage’s CityCenter will further entice visitors to come to Las Vegas.

Las Vegas will likely fare better in terms of recovery time than some of its southwest neighbors, such as Arizona and California, as its tourism/convention business returns. While similar in climate and market conditions, Las Vegas has the draw of The Strip. And tourists are taking notice of the bargains being offered on Las Vegas Boulevard. As long as Nevada stays tax-friendly in light of budget challenges, it will be successful in drawing new residents and businesses from California, which has raised taxes even higher to deal with its state budget shortfalls.

Michael Mixer is managing partner of Colliers International – Las Vegas.

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