WESTERN SNAPSHOT, MAY 2009

Las Vegas Retail Market

Southern Nevada always seems to find itself at or near the top of “the list.” During the past decade, the area ranked at or near the nation’s highest in terms of population growth, employment growth and personal income growth. It also found itself on the top of the list when it came to investment and expansion. Very few communities added more new rooftops, office buildings, retail centers or industrial complexes per capita than did the Las Vegas metropolitan area.

Today, the area again finds itself at the top of a very different set of lists. The metro’s unemployment rate increased from 5.1 to 10.1 percent between January 2008 and January 2009, and the latest Bureau of Labor Statistics figures place the Las Vegas-Paradise metro area’s job loss rate of 4.2 percent among the nation’s five highest. Southern Nevada also ranks amid the nation’s highest in terms of housing price devaluation. The Office of Federal Housing Enterprise Oversight reports that Nevada’s 22 percent price decline was the most of any state, and the Las Vegas metropolitan area, reporting a 33 percent annual rate of decline, ranked 8th among the 292 major metropolitan areas nationwide. In March, Las Vegas also regained the top spot in the nation in terms of home foreclosures, with RealtyTrac reporting that 1 in every 60 homes was somewhere in the foreclosure process.

Residential market instability has directly impacted the retail market. For better or worse, housing price appreciation between 2004 and 2007 fueled consumers’ confidence and spending. In stark contrast to the past 5 years, homes are now cannibalizing that same consumer spending. By the close of 2008, nearly 60 percent of Las Vegas homeowners were reporting negative equity, and the statewide loan-to-value ratio increased to a daunting 97 percent. Taxable retail spending in southern Nevada fell 4.2 percent during the past 12 months, but declines picked up speed during the fourth quarter reaching 16.7 percent when comparing December 2008 to December 2007.

Even as spending declined, the market has continued to add retail space. Anchored centers grew from an inventory base of 48.5 million square feet to 50.5 million square feet during 2008. This 2 million square foot expansion was met with a mere 156,000 square feet of net absorption, pushing the area’s retail vacancy rate from 4 percent in fourth quarter 2007 to 7.4 percent in fourth quarter 2008. A market geared for growth is finding very little of it. Many planned rooftops have failed to materialize; and, where they did, an unprecedented number of those housing units remain vacant. More compelling than the statistics is the national retailer’s response. Class A tenants located in centers that were once at the intersection of Main & Main simply closed their doors.

Most notable in retail spending declines were the reductions in the two largest sales categories: eating and drinking places, and motor vehicle parts and dealers. Food service and drinking place sales have fallen from $8.1 billion to $6.9 billion during the past 2 years, with an 8.7-percent drop reported in just the past 12 months. Similarly, auto sales fell to $4.5 billion in 2008, well under the $6.1 billion peak reported in 2006. Declines during the past 12 months for auto dealers were a notable 18.6 percent, reflecting local conditions and national instability within the auto sector. Not surprisingly, building-related sectors are also reporting signs of weakening. Other major retail categories, including general merchandise stores and durable goods wholesalers, have fared better, reporting declines in 2008, but at rates significantly less than the overall market average.

Although the overall retail market continues to weaken, caution should be given in painting the entire market with a single brush. Not all centers, much less all submarkets, have been impacted with the same degree of severity. Newer areas, including the southwest and northwest portions of the valley, are reporting lower-than-average vacancy rates, while more mature submarkets, such as the east and north, are reporting higher vacancies and greater downward pressure on pricing. Moreover, significantly lower housing prices, federal incentive programs and record-low interest rates have brought a number of buyers off the sidelines. It is not insignificant that Nevada is one of only a handful of states that has seen an increase in existing home sales during the past 12 months. The closure of some major retailers has also been a boon for others as consumers redirect their spending to remaining competitors.

Southern Nevada’s retail market is arguably facing the most difficult period in recent history. Consumers have less to spend, and many retailers are overleveraged and undercapitalized, with little ability to weather the storm. Like all storms, however, this one too shall pass. Left in its wake will be more business failures, taking the form of shuttered storefronts and a pattern of bank foreclosures not unlike what is currently being witnessed in the residential sector. As painful as this correction will be for many, it will create significant opportunity for others as southern Nevada’s long-run prospects bear little resemblance to the instability anticipated in the near term.  

Jeremy Aguero is a principal analyst at Las Vegas-based Applied Analysis.

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