MARKET HIGHLIGHT, JULY 2006

LAS VEGAS MARKET HIGHLIGHT
Taber Thill, Pat Marsh, Ben Jensen, Scot Marker and Andrew Miller

It’s no gamble putting money into Las Vegas commercial real estate. The question is more about how fast you can act when an opportunity arises. After all, like tourists on The Strip, the city is flooded with real estate players ready to get into the game of low vacancies and high returns on investments.

Office

The 2006 Las Vegas office market remains hot after a stellar 2005 run. With the overall vacancy rate at 8.4 percent, the valley is approaching numbers it has not seen since first quarter 2000, when office vacancy was at 8.2 percent. The valley’s average rental rate of $2.17 per square foot, full service gross, represents an all-time market high and is a 9 percent increase from 2 years ago. Class A office space continues to constitute the most demand with lease rates as high as $3.50 per square foot and a vacancy rate of 5.9 percent. The largest concentration of Class A office space is in Howard Hughes Center, which encompasses approximately 1.1 million square feet, boasts a vacancy rate of 0.2 percent and has an average rental rate of $2.80 per square foot.

Although there has been some activity from firms outside of Nevada expanding into the Las Vegas market, the overwhelming majority of office demand is fueled by companies already existing and growing within the valley. The leasing market has not been the only benefactor of this healthy market. Developers have capitalized on users looking to own their office. Owner/user buildings, with an average cost of $245 per square foot of gray shell, still remain popular despite the lack of savings versus leasing.

The southwest submarket continues to lead office development in the valley. Ideally located between the two largest residential master plans in Southern Nevada (Summerlin and Green Valley), the southwest sector will evolve into one of the valley’s core submarkets. Currently, 24 percent of the construction in the valley occurs in this area.

Increasing land prices and construction costs have pushed future development toward mid-rise Class A and B office products. The majority of these planned mid-rise office buildings will be a smaller component of mixed-use developments incorporating both retail and residential spaces.

— Taber Thill is an office broker with Colliers International in Las Vegas.

Industrial

The nation has watched as Las Vegas has risen to become one of the hottest real estate markets in the country. However, few outside the Las Vegas Valley realize the underlying reasons for this rapid increase in prices and demand.

The federal government, administered by the Bureau of Land Management (BLM), owns or manages more than 88 percent of Clark County and more than 86 percent of the state of Nevada. Only a small portion of the BLM land within the valley has been available for release in semi-annual auctions through the Southern Nevada Public Land Management Act. Because of pent-up demand, each one of these auctions has seen land prices pushed to new highs. What has ensued from this constriction of supply has been a rapid appreciation in the price of industrial land, buildings and rents. For example, land at the northeastern edge of the valley near the Las Vegas Motor Speedway was commonly selling for under $2 per square foot just over 3 years ago and was the least expensive land in the valley. Today, land in the Speedway area is difficult to find under $9 per square foot. Industrial space for lease has reached its lowest level of vacancy on record — 3.9 percent. During the last seven quarters, absorption has outpaced new supply at an average of 1.58 square feet absorbed to every one square foot of space completed. The total existing industrial space in the valley has almost reached 90 million, and rents in first quarter 2006 reached an average of 68 cents per square foot per month, 12 cents higher than 2004.

Some of the last remaining planned distribution projects are DP Partners 513,240-square-foot LogistiCenter (final phase) and Operating Engineers’ 1.3 million-square-foot facility in the Golden Triangle Industrial Park.

With these changes throughout the valley, industrial areas that were once on the border of the valley and even outside the valley are becoming realistic options and, in some cases, the only realistic choice for industrial users and developers. Developers are looking for reasonable alternatives such as Pahrump and Mesquite, Nevada; Kingman, Arizona; and most notably Apex Industrial Park, located just north of Las Vegas.

Apex Industrial Park is the largest industrial park in Southern Nevada (approximately 10,000 acres). The park’s southern boundary is located just four miles north of the Las Vegas Motor Speedway on Interstate 15. Because of users’ immediate needs and the park’s inability to quickly provide services, most businesses have chosen other locations within the valley for their manufacturing and distribution needs. The owners of Apex have recently begun a special improvement district (SID), which will provide water, sewer and power to all areas of the park through municipal bond financing. The timing for the completion of this SID is 24 months. Apex should provide much needed relief for the strong demand and continued growth of the Las Vegas industrial market.

— Pat Marsh and Ben Jensen are industrial brokers with Colliers International in Las Vegas.

Retail

The Las Vegas retail market is still very strong from an investment standpoint. Investment properties in the city are highly sought after by investors throughout the country. From small, triple-net, single- and multi-tenant projects to large grocery-anchored centers, the cap rate continues to be aggressive as it ranges from 6 to 7 percent depending on the overall credit.

Retail vacancy is still hovering in the 5-percent range. Currently, lease rates for retail space in prime locations range from $33 to $45 per square foot. Larger anchor tenants are paying $16 to $19 per square foot, which is more than they have ever paid in the past.

As land values continue to increase, the abundant and popular mixed-use projects have become an economically viable option for the Las Vegas market. Within these mixed-use developments are retail environments that will greatly affect the market. Some of the more prominent mixed-use projects are Panorama, Cosmopolitan Resort & Casino and the City Center project on Las Vegas Boulevard.

The southwest area of Las Vegas will be the submarket to watch in the near future, as this area is experiencing tremendous amounts of growth. For example, Juliet Companies is developing a $110 million shopping center called Blue Diamond Crossing. Located at the northwest corner of Blue Diamond Road and Valley View Boulevard, the 590,000-square-foot complex will feature several national tenants and restaurants, including Target, Kohl’s, Applebee’s and Del Taco. Another great center in this trade area is the Arroyo Market Square, located on Interstate 215 and Rainbow Boulevard, which will be tenanted by The Home Depot, Wal-Mart and Michaels. Although the southwest is booming with development, the northwest and southern areas of town continue to see some big projects under construction, such as Territory Inc.’s Centennial Gateway and Merrill Companies’ Stations Plaza.

The Las Vegas market is very similar to many Southern California and Arizona markets, yet the difference lies in the size of the market and its maturity. For the most part, the market is very new, which compares to both the Mesa and Chandler markets in Arizona. However, there are more mature markets in Arizona and California, where lower lease rates and second generation spaces can be obtained for tenants who still want to be positioned in strong retail trade areas.           

Like the first half, the second half of 2006 should remain constant. Retail will be a strong component of the development in the market. Although residential slowdown may slightly affect development, it is too early to tell how much of an effect it will have on the overall market. 

— Scot Marker is a retail broker for Colliers International in Las Vegas

Multifamily

Until recently, Las Vegas presented one of the most stable and boring apartment markets in the nation. During the past 3 years or so, the market has started a quiet transformation to a much more complex and sophisticated one.

With market occupancies now at 97 percent, rents growing during the past 18 months at a clip of 0.5 to 0.75 percent per month (depending on the submarket and seasonal influences) and the elimination of virtually all rental concessions, the market is both healthy and fundamentally sound. What has changed to make the market so dramatically different?

First, land costs for new apartments have grown from $13,000 per unit in 2002 to nearly $40,000 per unit in 2006. On top of rising Southern Nevada real estate values, hard construction costs grew nearly 30 percent between 2004 and 2006. A new apartment development started in 2002 might have cost around $90,000 per unit to build. Today, it would be difficult to find a site and build an apartment for less than $150,000 per unit. With apartment income lagging behind costs since 2002, fewer apartments have been started than have been demanded.

Secondly, given the escalation of for-sale housing costs from 2003 to 2005, the need for affordable housing has been met to some degree through the conversion of apartments to condominiums. Since 2004, more than 17,000 apartments have been converted or are in the process of conversion in metropolitan Las Vegas. This number exceeds the quantity of new apartments completed during the same timeframe.

On the demand side of the equation, things have been even more unusual. The shift in the for-sale/rental balance of the housing market, both in Las Vegas and nationally, has been historically significant. The combination of low interest rates and an overheated sale housing market triggered a near exodus from apartment communities. The counter-balance for the rental market during this time was the continued rapid in-migration into Las Vegas and the lack of new competing apartments being delivered.

At the same time, the emergence of the so-called “shadow rental market” is making a major dent in the apartment sector. Many of the converted condominiums — often estimated to be between 40 and 50 percent of total conversions — are making their way back onto the market as rentals. Similarly, the number of rental homes escalated significantly during 2003 and 2004 as investors bought into the rapid appreciation of the housing market. To some extent, many of these rentals compete directly with apartments. A big question is to what extent the new condominiums — both high-rise and mid-rise — will be rented and draw demand from the top-end of the apartment market.

With rapidly improving fundamentals and the potential for significant rent increases, the market is entering a period in which apartment values will continue to escalate through property performance rather than inexpensive capital.

— Andrew Miller is the founder and president of Vested Housing Group in Las Vegas.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.