MARKET HIGHLIGHT, JULY 2007

LAS VEGAS
Jeremy Aguero, Karolina Janik, Brad Peterson and Jeffrey Mitchell

Despite the rising costs of land, construction and housing, people and companies still remain quite focused on Southern Nevada. The lights are still bright in Las Vegas.

Multifamily

The combination of sharply rising housing and construction costs, along with strong population and employment growth, were anticipated by many analysts to create a supply crunch in Las Vegas’ apartment market in the past year or so. This trend failed to emerge and, in fact, recently released statistics suggest that occupancy rates have actually fallen, even as very few newly constructed projects have entered the market.

The multifamily market fundamentals are appealing and certainly point to the potential of imbalance. Apartments account for 21 percent of the region’s housing stock (approximately 160,000 units), and Southern Nevada ranks among the nation’s lowest communities in terms of homeownership (59.5 percent).

In March 2007, the U.S. Bureau of Labor Statistics reported the Las Vegas metropolitan statistical area had the third fastest-expanding employment base in the nation. With $30 billion in announced casino-hotel mega-resorts planned to enter the market during the next 5 years, prospects for future employment growth also ranks among the nation’s highest.

Apartment occupancy rates are consistently in the mid 90s and exceeded 96 percent in some key submarkets in 2005.

The ratio between average monthly housing cost and average monthly rental rates in the Las Vegas area (2.3 to 1) ranks 28th highest among the nation’s 274 major areas, suggesting significant upward potential in pricing.

Perhaps most importantly, very few apartment units are being added to the market. In fact, the number of rental units actually declined by more than 15,000 as low interest rates and aggressive lending programs added fuel to the apartment-to-condominium conversion fire between 2003 and 2005.

And yet, occupancy rates have slipped during the past 12 months, and rental rates have reported only modest increases (up 4.3 percent between 1st quarter 2006 and 1st quarter 2007). The reasons for this trend are many. Secondary markets are swollen. Apartments taken off the market and converted to condominiums have now re-entered the market, with the vast majority being individual investor rental units. The number of single-family rentals is also at or near its all-time high.

These markets do have some competitive disadvantages. A lack of uniform professional management has plagued the condo conversion market, and irregular pricing and credit practices in both segments have increased costs and decreased returns. This is clearly evidenced by the fact that of the 26,000 housing units on the resale market as of mid-May 2007 (also a record), 54.6 percent are either vacant or tenant occupied.

Contrary to some local reports, pricing in the housing market has fallen and continues to fall. These decreases have largely taken the form of incentives and other seller concessions, both of which are significant.

Population and employment growth, while still among the nation’s highest, are both off the pace reported 1 year ago. The rate of growth that was sufficient to rank the area third nationally is roughly half the peak growth rate reported during 2004 (nearly 8 percent).

However, most apartment market analysts actually had it right; they were just a bit aggressive as to timing. There is almost always a lag in employment growth between the openings of major projects. The last wave completed in 2005 and 2006 with Wynn Las Vegas and Red Rock Hotel, Casino & Spa entering the market, and the next wave will commence with the opening of the Palazzo project in late 2007/early 2008.

Even assuming modest growth rates, the next 5 years will see the Las Vegas area’s population base expand by 400,000 or roughly 154,000 households. Even if we take the optimistic stance that homeownership rates will remain stable — they are likely to decline — this translates into an increase of 67,000 renting households. Construction costs will be an issue, but there is significant room for rental price increases. Watch for the issue to become acute in 2009.

— Jeremy Aguero is a principal at Applied Analysis in Las Vegas.

Industrial

The constantly growing Las Vegas industrial market currently has almost 88 million square feet of existing space, compared to 74 million square feet only 3 years ago. The rising costs of land and construction have not slowed down developers, with almost 4.5 million square feet currently under construction and another 5.8 million square feet planned in the next 12 months.

Companies are moving to Southern Nevada to take advantage of the favorable tax structure, excellent state incentives, employment opportunities and the remarkable economic growth. With single-family home construction slowing down, more labor and materials will be available. This will relieve commercial developers’ concerns about getting product out of the ground and completed. Future demand is expected to increase, and, to accommodate that demand, developers and investors are looking at locations outside the metropolitan area of Las Vegas. The outlying areas offer companies the same affordable rates while the local government has started to work on solutions to provide more land for industrial development.

Las Vegas’ overall industrial vacancy registered at 3.8 percent at the end of the first quarter, with distribution space leading the way. The southwest and airport submarkets continue to be the most desirable.

Three major developers continue to add industrial product to the submarket. One of the developers, Juliet Companies, is building the Blue Diamond Business Center, which will consist of approximately 1.5 million square feet of distribution and mid-bay space located in the northwest quadrant of Interstate 15 and Blue Diamond Road. This year, Juliet Companies plans on adding two more mid-bay buildings and another 250,000-square-foot big box distribution building.

EJM Development has two mid-bay buildings and a big box distribution building under construction at its new master-planned industrial/office project located near the I-215 Beltway and Buffalo Drive. The development will add another 300,000 square feet to the developer’s existing 4 million-square-foot Las Vegas portfolio. Majestic Realty plans on adding three new big box distribution buildings to its existing 400-acre Beltway Business Park located near the I-215 Beltway and Jones Boulevard. The buildings totaling approximately 852,000 square feet are slated for completion in first quarter 2008.

North Las Vegas is also seeing new development with The Operating Engineers finishing two new buildings totaling approximately 187,000 square feet at their Golden Triangle Industrial Park located near Interstate 15 and Craig Road. Panattoni Development is constructing almost 500,000 square feet of big box distribution product at its 26-acre project located on Cheyenne Boulevard. Thomas & Mack Development Group is breaking ground on its first two buildings at the Northern Beltway Industrial Park, a 100-acre, master-planned industrial park located near I-15 and I-215 Beltway. DP Partners is constructing a 500,000 square feet distribution building at the LogistiCenter, a 2 million-square-foot industrial park located near Craig Road. Jackson Shaw plans on adding freestanding buildings, mid-bay and distribution space to its 26-acre industrial park located near Cheyenne and Lamb Boulevard. Another 160 acres has been secured by major developers in North Las Vegas for future industrial construction.

The millions of square feet of industrial product currently under construction or planned in the next 12 months should cater to Southern Nevada’s high demand and provide some relief to the rising lease rates.

— Karolina Janik is a vice president for CB Richard Ellis in Las Vegas.

Office

In a Southern Nevada economy fueled by an expanding population and strong employment growth, Las Vegas’ office market continues to show strong signs of growth in new construction and user demand. The market shows no signs of slowing down in 2007, following a record year of net absorption (1.9 million square feet) in 2006. Steady leasing activity led to an increase in overall first quarter absorption — 275,000 square feet. Leasing activity is expected to continue to increase throughout 2007.

For the past 5 quarters, the Las Vegas office market has seen overall vacancy rates remain below 10 percent; vacancy currently stands at 9.49 percent. Southern Nevada is experiencing record construction for office buildings, so it won’t be surprising to see vacancy rates increase in the next 12 to 24 months. Approximately 3.8 million square feet of office space is being built, with plans for another 3 million. Tenant demand is anticipated to remain strong to steadily absorb the record amount of inventory being placed on the market in the next few years.

User demand and activity is highest along the Interstate 215 Beltway in the southwest submarket, where the majority of the valley’s new construction is taking place. As traffic congestion becomes an issue, I-215 is seen as the best solution for accessibility to both the east and west submarket, as well as to the airport.

There are more Class A buildings under construction and planned than the market has seen for some time. Large projects include 3883 Howard Hughes Parkway, a 239,000-square-foot Class A building in the Hughes Center. The building will come online in second quarter 2007 with 73 percent of the space pre-leased. Another successful Class A building is The Pavilion in Summerlin. Construction starts soon on the building, and it’s already seen 75 percent of its 152,468 square feet pre-leased.

Three factors have affected lease rates throughout the Las Vegas Valley. Rates have increased significantly due to construction costs, increased land values and demand. These factors have continued to push the market ceiling for rates higher and higher, especially in the new buildings. New Class A buildings are seeing rental rates of $3 per square foot, full service gross, while the Class B market has increased in the range of $2.40 to $2.70 per square foot.

For the past few years, the market has focused on the for-sale office condo development. Experts in the market believe that, although the product type has substantial interest, it may have already hit its peak. Only 1.9 million square feet is dedicated to for-sale product, which translates into only 7 percent of the total office market space. Looking toward 2008, the for-sale product type might no longer be the talk of the town. “Green” buildings, however, will be a focus for 2007 and 2008. The buildings provide property-tax breaks and insurance savings and will be looked at as alternatives to traditional office buildings.

— Brad Peterson is a senior vice president for CB Richard Ellis in Las Vegas.

Retail

Las Vegas’ retail market has grown notably in the last year; many projects were completed and more are underway. Sites seeking residential developers have switched to retail because the cooling housing market has given retail developers an opportunity to acquire land.

Before 2006, landowners expected premiums associated with medium- to high-density residential use, and many expanding and emerging residential areas lacked quality retail amenities because of overheated housing development, such as the far northwest submarket, portions of the southwest (Mountain’s Edge) area and North Las Vegas.

During first quarter 2007, the retail market reported inventory of 46.2 million square feet in 295 anchored centers. Vacancy rates reached 2.5 percent by quarter’s end, a modest decline from 2.7 percent in 2006’s fourth quarter and 2.6 percent 1 year ago. The market experienced its second largest quarterly expansion of nearly 1.8 million square feet, which almost matched the 10-year average, as several major retail centers completed construction.

Demand kept pace with completions, yielding 1.8 million square feet of net absorption in the first quarter. During the past year, the market demanded nearly 3.2 million square feet, also on par with new supply. These figures include pent-up demand from 2005-2006.

Average asking monthly retail rents reached $2.08 per square foot at the close of the quarter, 19 percent above the $1.75 seen 1 year ago. Price escalation continued, as overall development costs remained high. Power centers reported average rates of $2.22 per square foot, community centers $2.00 and neighborhood centers $2.07 for non-anchor space. Expect vacancies to remain tight because much of the space under construction is pre-leased.

Future supply remains healthy, as 4.8 million square feet are under construction. In addition to space already underway, the market reported another 14.1 million square feet of planned retail space. That total includes competitive regional and mixed-use centers like the 1.8 million-square-foot Town Square on the South Strip, the 700,000-square-foot Village at Queensridge in west Las Vegas, the 1.2 million-square-foot “Heart of North Las Vegas” and the more than 1 million-square-foot The Shoppes at Summerlin Centre, which will feature a Nordstrom, Macy’s, Dillard’s and Neiman Marcus west of the city.

New inventory in the southeast, north, southwest and east submarkets includes McCarran Marketplace, which is anchored by Wal-Mart Supercenter and Lowe’s Home Improvement Warehouse; the Albertsons neighborhood center at Warm Springs Road and Rainbow Boulevard; the Mariana’s Supermarkets-anchored Cheyenne Pointe in North Las Vegas; and the Silverado Plaza, located at Eastern Avenue at Silverado Ranch Boulevard.

Retailers pursuing multiple opportunities include Wal-Mart, Kohl’s, Target, Dunkin’ Donuts and Tesco, a major international retailer with footprints of 10,000 square feet. Much smaller than typical supermarkets, it plans 15 Fresh & Easy stores to sell products for specific neighborhood demographics.

While the size and scope of projects continue to affect pricing and investment strategies, market capitalization rates may have hit bottom. Pricing has climbed above $300 per square foot, doubling in the past decade. While prices have increased, lower interest rates and a competitive investment market have allowed buyers to pay premiums, with cap rates approaching 7 percent for quality multi-tenant investments and less than 7 percent for credit single-tenant investments, down from 10 to 11 percent in the mid- to late-1990s.

The latest figures demonstrate the health of Las Vegas’ retail sector, and because the substantial pent-up demand of the past 2 years has been met, expect more balanced land distribution in future quarters.

Continued but slower population growth and a settling housing market should increase confidence. In the near-term, retail players should be concerned about housing price instability, consumer spending slowdown and rising interest rates. While longer-run expansion appears inevitable, the next two quarters should see a moderate drop in retail demand.

— Jeffrey Mitchell is a retail specialist for Commerce CRG/Cushman & Wakefield in Las Vegas.


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