MARKET HIGHLIGHT, JULY 2005

VIVA LAS VEGAS REAL ESTATE
Kevin Higgins and Kit Graski

Marking its centennial birthday celebration in May 2005, Las Vegas has come a long way from its earlier humble days as a vast, desolate desert valley in the West. Known as the entertainment capital of the world, Las Vegas’ flashy lights along The Strip, memorable entertainers, world-class hotels and casinos, and luxury resorts attract more than 38 million tourists each year.

However, beyond the glitz and glamour of The Strip live more than 1.75 million local residents in Las Vegas Valley. In addition to the current residents, more than 5,000 people move to Las Vegas each month, making it one of the country’s fastest growing cities. As a result of this robust growth, Las Vegas’ economy added 59,800 new jobs in 2004, a 7.6-percent growth rate with continuing job growth projected this year.

The rapid population increase has fueled the demand for additional retail, industrial, office and medical space. According to the official Web site of Clark County Nevada, every hour, 24 hours a day, 365 days a year, another two acres of Las Vegas’ land is developed for commercial or residential use. The Las Vegas commercial real estate market continues to grow as commercially zoned land prices increase due to the stiff competition between residential and commercial developers trying to acquire every piece of available space.

Office

At the end of first quarter 2005, the office market in Las Vegas comprised 33.7 million square feet of inventory within 1,161 buildings. With more than 2 million square feet currently under construction and 5.5 million square feet of construction planned for the future, the office sector is experiencing a heavy amount of activity. Vacancy stands at 10.6 percent, and asking rates average $1.95 per square foot, according to Applied Analysis.

There is currently 2.3 million square feet of office space under construction, with 814,000 square feet planned for the southwest submarket alone. The southwest submarket accounts for 30 percent of the office development activity in the city, causing concern about an imbalance in the market due to construction projects being ahead of schedule. Many of the current projects may be completed around the same time, flooding the market with available product, which may lead to increasing vacancy rates and a decrease in asking rates.

The low cost of financing continues to enable small business owners to acquire their own buildings, despite interest rates being on the rise. With the major residential development taking place in southwest Las Vegas along the 215-Beltway, office development has “followed the rooftops,” providing easy access for current and future employees to their workplaces. National companies have also recognized Las Vegas as a major second-tier market into which many are opening new offices.

Notable office projects include the Beltway Business Park, a mixed-use office and industrial project under development by Thomas & Mack Development Group, and Centra Pointe, a 300,000-square-foot office park located at I-215 and Sunset, under development by CENTRA Properties. Developers that have major office projects in the works include EJM Development, Nigro & Associates, Shea Development and Investment Equities.

There is talk of several mixed-use office projects planned for the future including both retail and office components. Residents of Las Vegas will be able to work and play within close proximity to their homes and families.

Industrial

The Las Vegas industrial market includes 80.2 million square feet of inventory across 2,529 buildings. Distribution space makes up nearly 37 percent of the total Las Vegas industrial market. National and regional firms continue to be attracted to Las Vegas’ industrial market, although many national firms find it difficult to relocate due to the limited amount of large distribution space available.

There is currently 2.5 million square feet of industrial space under construction, with 2.8 million square feet planned for future development. The vacancy rate is 7.2 percent, and the asking rate is 59 cents per square foot, according to Applied Analysis. The industrial submarket in the North Las Vegas area makes up 41 percent of the product under construction. North Las Vegas largely comprises of distribution companies that serve the city’s 1.7 million residents and the 250,000 tourists that are in town on any given day. Many of the distribution companies in this area support the hotel and resort properties, supply kitchen and paper goods, and also include retail providers such as Wal-Mart, Fellows, OfficeMax and RC Wiley.

Throughout the next 12 to 18 months the most significant area of the proposed new development will be the Speedway Industrial area located off of I-15. This proposed industrial area, if successful, could impact the future of the industrial market in Las Vegas on a very large scale. In the not too distant future, the APEX Industrial Park located at I-15 and I-93 could play an even larger role in the Las Vegas industrial market.

Additional small-scale projects in Las Vegas include Park View Center, a 34-acre business park located near Eastern and Sunset; Beltway Business Park in the southwest submarket at I-215 and Warm Springs, which is under development by Thomas & Mack Development Group; Golden Triangle Industrial Park, a 276-acre complex being developed by Operating Engineers Trust Fund; and LogistiCenter, a 2 million-square-foot industrial park being developed by DP Properties.

New developers are finding it difficult to keep up with the fast-paced industrial market in Las Vegas due to the lack of available industrial-zoned land and the ever-increasing land prices. New developers need to be aggressive in their sales and on their leasing up assumptions, and make decisions very quickly.

In Las Vegas, the entire due diligence and escrow process typically takes 60 to 90 days total. The fast-paced market keeps new developers second-guessing and hesitant, which often results in them losing their opportunities. The speed of the Las Vegas commercial real estate market is flowing rapidly. In order to be successful in this city, new developers cannot just stick their big toe in the water, but have to jump in headfirst. If they hesitate, they will find their competition is ahead of the game, already downstream.

The most active players in the market are Thomas & Mack Development Group, Trammel Crow Company, Panattoni Construction, Operating Engineers Trust Fund, Harsch Investments, Jackson-Shaw Company and DP Properties. The most successful players are implementing creative development strategies to overcome the high land prices and limited available land opportunities.

Retail

At the end of first quarter 2005, the Las Vegas retail market comprised 41.1 million square feet of inventory in 258 anchored centers. Most new retail centers are located along the I-215 beltway in the northwest and southwest submarkets, where the most significant residential development is occurring.

The current retail market in Las Vegas is thriving with approximately 2 million square feet of retail space under construction and an additional 4.9 million square feet of retail planned for future development. The vacancy rate is 3.9 percent. New retail additions contributed 250,000 square feet, while demand remained positive with 196,000 square feet absorbed through the end of the quarter.

The 5,000 new residents moving to Las Vegas each month are fueling the demand for power centers. Last year alone, 35,500 new home-building permits were issued. Power centers will support the retail needs of new residents and homeowners, many of whom are buying homes for the first time or making improvements or upgrades to their existing homes. The trend of retail power centers springing up on the outer areas of the city captures a newer market and relieves some of the pent-up demand for retail in the center of Las Vegas. More than 2.3 million square feet of retail power centers are planned across the Las Vegas Valley, with 1.6 million square feet in the southwest submarket alone.

More than seven major power center projects are underway, with many additional projects in the pipeline. The Arroyo Market Square, a 950,000-square-foot power center, will be located off the I-215 beltway and Rainbow and is being developed by Laurich Properties and EJM Development. Another project is Blue Diamond Crossing, a 65-acre project located at Valley View and Blue Diamond. Shadow Mountain, a 364,000-square-foot power center, is in the works by Shadow Mountain Marketplace, a new player in the Las Vegas retail market.

Additional significant retail power centers are McCarran Marketplace, a 750,000-square-foot center located at Eastern and Russel being developed by Marnell Properties; Town Square, a 1.2 million-square-foot project located at Sunset and Las Vegas Boulevard which is under development by Turnberry & Associates and CENTRA Properties; and Centennial Marketplace, a 350,000-square-foot Wal-Mart-anchored power center being developed by Green Street Properties.

The Great Mall is another retail project anticipated by many residents in the northwest part of the Valley. The project is proposed by Las Vegas-based Triple 5 Nevada Development Corporation, which built The Mall of America in Minnesota, the nation’s largest retail and entertainment complex. The Great Mall will be a 1.2 million-square-foot indoor shopping mall anchored by national tenants.

As an extremely difficult market to enter, the fast-paced nature of Las Vegas does not welcome many new players. The most active retail developers include Triple 5 Nevada Development Corporation, Laurich Properties and Weingarten Realty Investors. Developers have difficulty justifying the high price of land, but the demand and success of the current retail market allows for the major projects to lease well. Throughout the past 12 months, Southern Nevada’s taxable retail sales have been in excess of $30.5 billion dollars, a 15 percent increase from last year. With numbers to prove it, the Las Vegas retail market will continue to be prosperous and make its mark on the national retail map.

Hospitality

One of the only places in the world where a person can see the Egyptian pyramids, the Eiffel Tower, float in a gondola through a Venetian canal and see the statue of Liberty all in one day, Las Vegas has been branded as the entertainment and hospitality capital of the world. Las Vegas’ hospitality market includes 14 of the nation’s 15 largest hotels. According to Applied Analysis, Clark County saw $3.36 billion of hotel revenue in the 12 months ending in February.

Wynn Las Vegas opened on April 28, 2005, debuting as a $2.4 billion hotel and resort located on 197 acres at the site of the former Desert Inn Resort and Casino across the street from the Fashion Show Mall and adjacent to the Venetian. In a prime location within close proximity to the Las Vegas Convention Center, Wynn Las Vegas features an 111,000-square-foot casino with approximately 2,700 rooms, 18 restaurants, retail shopping and a championship 18-hole golf course. Steve Wynn, the well-known hotel developer who also built Bellagio, The Mirage, Treasure Island and Golden Nugget, is responsible for this masterpiece on The Strip.

With surging population numbers due to steady job growth, a strong economy and less-expensive quality housing, the hospitality market is expanding externally by building resorts and casinos on the outskirts of Las Vegas. Red Rock Resort and Casino and South Coast Hotel and Casino are just two casinos expected to open in the near future, with additional projects in the pipeline. These hotels and casinos will cater to the local residents of Las Vegas and the booming economy off The Strip.

The Red Rock Station Resort and Casino, an $800 million resort located at the intersection of I-215 and West Charleston Boulevard, broke ground on April 15, 2005. The 870,000-square-foot casino will feature 400 hotel rooms, 2,700 slot and video poker machines, 10 full-service restaurants, a nightclub and a 16-screen Regal Cinemas. Red Rock Station is expected to be completed in early 2006.

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. Expected to open in early 2006, the South Coast is situated on 60 acres and is located in the southern part of the Valley, one of the fastest growing areas in Las Vegas. It is also positioned as a gateway to Las Vegas for the million of visitors traveling from California.

Moving forward from a time where the lights of the city could not be seen from the distance to the gleaming entertainment capital of the world, Las Vegas encompasses a city outside of the glamour of The Strip. Las Vegas’ active commercial real estate market is continuing to expand to accommodate the growing population of new residents who decide to call Sin City their home. With national corporations relocating to find success in this business-friendly economy to young families looking for a solid economy with job opportunity and growth, as well as quality housing, Las Vegas is one of the fastest growing cities in the nation. As the population continues to grow, coupled with an entertainment climate to drives tourists to this jewel in the desert, Las Vegas is poised for a strong commercial real estate market across all sectors.

Kevin Higgins and Kit Graski are senior vice presidents for Voit Commercial Brokerage in Las Vegas.

Condo Developments: A High-Rising Industry in Vegas If you have avoided coverage of Las Vegas’ booming real estate market, there are a few other tidbits you should be aware of: astronauts landed on the moon, the Berlin Wall fell and it turns out cigarettes are bad for your health. All weak attempts at comic relief aside, commentary on the region’s phenomenal growth has been prolific and seemingly omnipresent in the journals of note. Gordon Of particular relevance during the past 12 months is the emergence of luxury high-rise condominium towers in and around the Las Vegas Valley. I will begin where I am most comfortable, with the numbers. More than 55 luxury condominium projects have been announced since 2001, including more than 100 towers, which, if built, would contain just more than 40,000 units. These projects have an estimated development cost of $17 billion, and have put significant upward pressure on land prices in suburban areas as well as within the city’s urban core. Only two projects have actually been built — Park Towers and Turnberry Place, both of which opened in 2001; nine others are presently under construction. Roughly 50 percent of the units currently under construction and 70 percent of announced projects are located within the central gaming/business district, which includes the Las Vegas Strip. Development has taken all forms, including raw development, mixed-use joint ventures and several apartment-to-condominium conversions. During the past several months, dozens of studies for existing and potential high-rise developers have been performed. Generally speaking, they all have two questions in common: 1) how deep is the market? and 2) at what price can we expect to sell our product? It is simply unrealistic to believe that all of the announced projects will proceed as planned, particularly given the illusory financial capacity of many whose business plan is to put up a sign and sell the sizzle. The absorption question is a vital one: Is there sufficient demand to absorb 40,000 units in a market that has never had more than 250 high-rise units developed in a single year (at Park Towers and Turnberry Place)? The answer is no, but marketing to 38 million visitors appears the key to rapid product movement. Some 51 percent of high-rise condo unit owners have primary addresses out of state, and that number appears to be about a third lower than the mix reported for projects currently seeking contract commitments. Pricing is the second key consideration. Average unit costs are currently approaching $500,000, averaging between $300 and $400 per square foot. Notable projects, such as Trump Tower, are reportedly getting as much as $1,000 per square foot, and there are plenty north of $600 per square foot. The pool of local purchasers at this threshold is obviously low; however, this is not the primary or even secondary target market for the products in the pipeline. These towers are designed and marketed as resort residential — a consumer base with exponentially greater buying power and a seeming unquenchable thirst for the allure of Las Vegas. Today, nearly every developer is attempting to skim the cream off the top of the market. Look for a mid-market target shift for many projects during the next 12 to 18 months. This is particularly true for suburban mid- and high-rise offerings, which appear to be gaining momentum. No one can tell what tomorrow will bring. Those expecting Miami-style condo wars are sharply contrasted by those who believe this is a passing fad born of hyperbole and a renewed desire for conspicuous consumption. Both are probably right to some extent. However, today, the numbers favor those building beds in the city that never sleeps.  Brian Gordon is a principal with Applied Analysis, a Nevada-based advisory service firm providing a wide range of consultation services — including urban economic consulting, market analysis, and hospitality industry and gaming consulting — for public and private entities.

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