MARKET HIGHLIGHT, MARCH 2009

LAS VEGAS
John Knott, Zack Hussain, Spence Ballif, Jeff Swinger, Karolina Janik, Jayne Cayton and Bret Davis

Las Vegas commercial real estate seems to be on a good run of bad luck. Healthy companies looking for space do have it better though, as they hold all the cards in a tenant’s market.

Hospitality

The main factors contributing to the Las Vegas Strip’s 2008 struggles were the housing market, high oil prices and general economic weakness. Housing woes and the economic malaise will likely continue throughout 2009 and perhaps longer.

The large number of attractions on the Strip and its capacity for large conventions has made Las Vegas one of the strongest and most resilient hotel markets in the country. Despite the 52.9 percent increase in room supply since 1995, Las Vegas’ average hotel occupancy exceeded 91.4 percent during the same period. The city has consistently demonstrated excellent absorption rates for new hotel room product.

The Strip’s primary visitor feeder markets of Los Angeles, San Diego, the San Francisco Bay Area and Phoenix have each experienced year-over-year home price declines in the 30 percent range, according to the Case-Shiller Home Price Index. Given the amount of downward pressure the housing market has put on Las Vegas Strip leisure demand, a rebound in the housing market, particularly in California and Arizona, should be the catalyst for improved visitor demand on the Strip.

In December 2008, seat capacity at McCarran Airport was down 13.5 percent from December 2007. In addition, higher oil prices during summer 2008 made it more expensive for people to drive to Las Vegas. Auto traffic at the California/Nevada border was down 5.7 percent through November 2008 year-to-date. Hotel bookings by convention and meeting attendees fell 13 percent through October 2008 year-to-date, according to the Las Vegas Convention & Visitors Authority. It should be noted, however, that Las Vegas remains the world’s preeminent convention destination.

Transaction volume in 2008 was adversely affected by lack of liquidity in the capital markets and declining casino revenues. Anticipate 2009 prices for resort corridor land to decline in value as the continued result of the credit crunch; it is difficult to value land in the resort corridor because of currently low transaction volume. Expect to eventually see land prices revert to their values of 2000 to 2003.

MGM MIRAGE’s $8.6 billion CityCenter project has the opportunity to become an iconic development that may recharge leisure demand in Las Vegas. CityCenter will open in phases beginning in late 2009, and visitor interest and the amount of media buzz surrounding the property should go a long way in sparking Las Vegas’ turnaround.

— John Knott is executive vice president for CB Richard Ellis.

Retail

Las Vegas’ retail market is now clearly showing the strain of the recession. Decreased consumer spending has directly impacted local retailers, as unemployment climbs and shoppers find themselves with less discretionary income. Holiday season revenues were the weakest on record, and luxury stores, apparel chains and department stores all reported declining sales. Meanwhile, developers continue to experience difficulties securing financing for planned projects. As a result, several planned projects are on hold, and few of the currently planned and under construction projects should open in 2009 and 2010.

Underperformance, the liquidity crunch and tighter credit terms with vendors, combined with the recession, made it impossible for many large box retailers to remain in business, thus bringing on the vast amount of power center vacancies. Small local retailers relied on SBA loans and equity from residential properties and saw both of these sources vanish, thus preventing many from opening new stores and leaving many strip centers with higher vacancies. Retailers that are performing well are very cautious regarding expansion.

With already close to 3 million square feet of vacant large box retail space in the Las Vegas market, expect to see vacancies continue to rise this year. However, increased vacancies provide other retailers an opportunity to penetrate the market. Hispanic grocers are showing aggressive expansion plans, and new entertainment users are evaluating the market as well.

Las Vegas’ higher land values in recent years moved the trend toward mixed-use developments. With the correction in land values, the focus will be back to basic developments, redevelopment and in-fill locations.

The view here is that the slide will continue through 2009. Toward the end of 2009 and into 2010, the market should see increasing absorption, reduced unemployment and stabilization in the residential market. With CityCenter, Fountain Bleu and Cosmopolitan completing in 2009-2010, the future looks very promising.

Many out-of-town developers and investors still consider Las Vegas to be a great market. Many are strategizing to take advantage of the down market and acquire developable land and centers that are in default, positioning themselves for a market turnaround. If Las Vegas’ growth factors stay true to form, it will rebound much faster than the rest of the country.

— Zack Hussain is a senior associate for CB Richard Ellis.

Multifamily

The Las Vegas multi-housing market continued to decline in 2008, falling from its occupancy peak in 2005. The sector’s biggest challenges are job losses, home rentals and new construction. Investors, developers and existing owners look forward to a brighter 2010 as CityCenter, Cosmopolitan, Fountain Bleau and the M-Resort open an additional 14,000 hotel rooms by fourth quarter 2009 and bring in new employment opportunities.

Average vacancy increased from 7.68 percent in 2007 to 8.76 percent in 2008. In the first three quarters of 2009, expect the market to continue to deteriorate, but should show signs of stabilization by the fourth quarter. The Las Vegas apartment market experienced a decline in street rents of 1 percent from fourth quarter 2007 through fourth quarter 2008, as the average rent went from $932 to $925 per month. Concessions in the market also increased from 2007 through 2008.

New construction for 2008 was approximately 4,200 units, down slightly from the 4,500 units completed in 2007. In 2009, the initial projection here is for 6,000 units to be completed, an increase of 43 percent. In the past 12 years, Las Vegas has averaged 5,300 units completed annually. Beyond 2009, market conditions and limited construction lending availability will constrict new construction, with the view here that deliveries will fall below 3,000 units in 2010.

2008 sales volume was down dramatically compared to 2007. There were 13 transactions of more than 100-unit properties that were completed in 2008, versus 40 in 2007, down 67.5 percent. In 2009, expect transaction volume to be similar to 2008. Bank foreclosures will be the No. 1 source for sellers in 2009, and buyers will be looking to take advantage of distress. Owners who are not forced to sell will wait for better market conditions and more liquidity in the lending market. Of the transactions that are completed in 2009, expect that cap rates will rise significantly from 2008 levels, due to the increasing cost of debt and equity.

— Spence Ballif and Jeff Swinger are senior vice presidents in CB Richard Ellis’s Las Vegas office.

Industrial

The Las Vegas industrial market slowed during the second half of 2008 compared to previous years, but remains fairly active. With almost 4.8 million square feet of new product completed throughout the year, coupled with the difficult economic situation, overall vacancy recorded at year-end was 7.63 percent, an increase of 0.82 percentage points from the previous quarter and a 1.68 point increase from year-end 2007.

New completions of industrial space have declined significantly with only 744,000 square feet currently under construction and 1.5 million square feet planned for the next 24 months. This figure has dropped steadily in the past year and should continue to do so. The planned construction pipeline at year-end 2008 stands at 35 percent of its year-end 2007 level. Developers and landlords are reacting to the sluggish demand by putting new projects on hold, reducing rental rates and offering concessions not seen in the market in a long time.

The central submarket maintained the lowest vacancy rate of 3.06 percent while the northwest recorded the highest rate of 20.32 percent. The next highest vacancy rate is in North Las Vegas (10.37 percent) where most of the valley’s distribution product is located. The southwest is the only submarket where the vacancy rate actually went down from 5.36 to 4.88 percent year-end 2007 to 2008.

In spite of the significant drop in speculative construction, vacancy will likely rise through 2009 and asking lease rates will continue to fall. Lease renewals are becoming more popular as the cost of relocating is too high for most tenants. Companies with a need to expand are expected to make their move this year to take advantage of the deals. 

Total industrial net absorption at year-end 2008 just exceeded 2.3 million square feet, slightly above the 2007 level, but still well below the average net absorption of 3 million to 4 million square feet in prior years. Significant deals include a 282,000-square-foot lease to Amazon at Prologis’ Park North and a 134,000-square-foot lease to Ausra Manufacturing in the southwest submarket.

Expect at least one significant project to complete construction in first half 2009: EJM Development’s Arroyo South in the southwest with more than 379,000 square feet of mid-bay and flex space.

— Karolina Janik is a vice president at CB Richard Ellis.

Office

Odds are that Las Vegas developers, landlords and brokers did not mind putting 2008 in the rear-view mirror. Unfortunately, odds are also good that 2009 will be even more challenging. Commercial real estate certainly finds itself in unprecedented times.

At the end of 2008, the Las Vegas office market had about 5.5 million square feet of vacant space, with the vacancy rate rising to 17.24 percent. This number doesn’t include the increasing amount of sublease space on the market or what is even harder to track, shadow space — unused space not being marketed. Even with the amount of vacant space on the market, there is roughly 2.2 million square feet under construction, most of which will hit the market in 2009. Based on historical absorption averages, the estimated supply of existing vacant space now would take about 5 years to absorb.

The average asking lease rate ended 2008 at $2.40 per square foot, but is expected to decrease during first quarter 2009. Landlords have tried to maintain their face rates, but will generally bend significantly to make a deal.

Available shell space on the market has more leasing challenges than second-generation space. With the cost of construction exceeding the allowance, landlords are faced with offering allowances higher than previously offered or even providing a turn-key build-out. For companies looking at every possible way to cut costs and run lean, second-generation space becomes very appealing because companies are able to find space that will work with little to no out-of-pocket improvement expenses.

Tenants are also attracted to sublease space, but all too often they’re seeking a steal, not just a deal. Given current market conditions, they can get into a space quickly, utilize the improvements in place and negotiate a below-market rental rate. The only drawback to sublease space is determining in advance what the market rent will be at the end of the sublease term.

Landlords aren’t the only ones feeling the pinch. Tenants are having a hard time determining their exact space needs. Forecasting has become more difficult. They have to make decisions on retracting, expanding or relocating. Some tenants would rather do a shorter-term lease to ride out the down economy. Others want to take advantage of the rents today and lock in long term.

In today’s market, landlords are chasing the same deals. Brokers are grinding out deals, which seem to get harder to make with each passing day. Tenants are holding all the cards these days. And they know it.

— Jayne Cayton, vice president, and Bret Davis, senior associate, are based in CB Richard Ellis’ Las Vegas office.

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