MARKET HIGHLIGHT, OCTOBER 2004

VEGAS VROOM: “IN CITY” ATTRACTS PROSPERITY
Kevin Higgins, Kit Graski and Charlie Blenkhorn

A far cry from the 1700s when Spanish traders discovered a vast valley in southern Nevada that they called Las Vegas or “the meadows,” today Las Vegas’ world-class entertainment, premier hotels and resorts, upscale shopping, steady job growth, strong economy, and less expensive, quality housing attract thousands of new residents and 35.5 million visitors each year.

The rapid population growth and strong tourism sector have fueled the demand for more retail and business services, industrial and distribution facilities, and office and medical space, making the Las Vegas commercial real estate market one of the newest and most dynamic major markets in the country.

However, the demand for single-family housing and the resulting need for developable land are so immense that residential developers are willing to pay high-market prices for commercially zoned land to re-entitle into residential parcels. This trend has caused escalating land prices across all property types as residential and commercial developers compete for available land. Developers have been forced to act fast when an acquisition opportunity appears, using creative development strategies regardless of the property type.

Industrial

The Las Vegas industrial market includes roughly 80 million square feet of inventory in 2,408 buildings. While this is a relatively small market with a limited amount of available product, Las Vegas continues to attract national tenants, significant investment dollars and major development projects. The market’s vacancy is 8.7 percent.

There are approximately 2 million square feet of industrial space under construction and 4.1 million square feet planned for the near future. Fifty-five percent of the product under construction is located in the city’s most active industrial submarket north of The Strip.

The north Las Vegas market is home to distribution businesses that serve the city’s core tourist attractions — casinos, entertainment venues, and hotel and resort properties. More than a third of the valley’s total 29.2 million square feet of distribution space is located in this submarket. The distribution product typically has more than 15,000-square-foot divisibility, 3 to 5 percent office build-out, multiple docks and grade-level loading, and has been built in the last 2 to 7 years.

Tenants in the north submarket include distributors of novelty clothing, souvenirs, cleaning supplies, paper goods, kitchen supplies and other light products. However, regardless of the construction activity planned for the area, large distribution space located in true industrial parks is becoming a rare commodity as the price of land continues to rise rapidly due to the heavy demand from the residential side.

In 2000, commercial real estate developers were able to acquire unimproved land — land without infrastructure — in North Las Vegas for approximately $2 per square foot. Today, the price of such land in the north submarket is $6 per square foot. In the southwest sector, unimproved land that was previously $6 per square foot in 2000 is now between $12 and $16 per square foot.

Given the escalating land prices in the past few years and the competitive nature of the acquisition market, many commercial developers and investors are focusing on mixed-use properties including industrial, retail and office space in order to make the deal pencil. Several mixed-use projects will come online during the next year. These projects will include traditional industrial space, office or medical space, and service retail shops with residential for-sale condos on the second floor.

Retail

The saying that retail follows rooftops holds true in Las Vegas where there are more than 2 million square feet of retail space currently under construction and 4.4 million square feet planned for the future. This current and future development will help support the retail service needs of the thousands of new residents moving to Las Vegas each month for quality single-family housing.

During the month of May alone, 4,501 new home-building permits were issued, the largest amount in Clark County history. With 65 percent of the city’s population owning a home, there is demand for retailers offering home-related goods and services, such as Bed Bath and Beyond, The Home Depot, Wal-Mart, Target and national department stores.

The current retail market in Las Vegas comprises 38.6 million square feet of inventory in 247 anchored centers. The retail vacancy rate is at 3.6 percent, and new small-tenant shops are leasing for $1.85 to $2.50 per square foot. Most of these retail centers are neighborhood centers (30,000-square-foot or larger supermarket anchored centers with in-line shop space) located along the 215 beltway from the northwest to southeast submarkets, where significant residential development is occurring.

Las Vegas is also home to high-end retailers and world-class shopping along the famous Las Vegas Strip. In addition to the upscale boutiques and shops offered in the various hotels such as the Bellagio, Venetian, Paris and Aladdin, there is also the Fashion Show, a nearly 2 million-square-foot luxury retail experience developed by The Rouse Company. Located across from Treasure Island hotel at the heart of The Strip, Fashion Show is anchored by Bloomingdale’s Home, Dillard’s, Macy’s, Neiman Marcus, Nordstrom, Robinsons-May, and Saks Fifth Avenue. Other coveted retailers include Abercrombie & Fitch, Ann Taylor, Ann Taylor Loft, Apple, Banana Republic, Bang & Olufson, BCBG, Bebe Sport, Diesel, Express, The Sharper Image, J. Jill, Paul Frank, Tommy Bahama and Williams-Sonoma Grand Cuisine.

Due to its dynamic nature, Las Vegas is an extremely difficult market for new developers to penetrate. In other commercial real estate markets, the due diligence process may take 90 to 120 days with escrow taking an additional 60-plus days. In Las Vegas, the entire due diligence and escrow process typically takes a total of 120 days. A quick predevelopment period means that if a new developer hesitates when it enters the marketplace, the opportunity will be seized by another firm. Consequently, most of the successful current retail projects in Las Vegas are built by those developers that have been in the market for several decades. For example, Triple 5, a Las Vegas-based developer, developed the Grand Canyon Parkway, a power center in the southwest sector anchored by Target, Mervyn’s and Sears. The firm is also working on The Great Mall, an indoor shopping mall located in the northwest submarket.

Another major player in the market is American Nevada, a firm that is currently developing an outdoor lifestyle shopping center with for-sale condos on top of the retail. American Nevada is best known for developing Green Valley Parkway, a mixed-used development along the 215 beltway that includes retail, dining, commercial office space and residential condos.

Office

The office market is the smallest of Las Vegas’ three major product types, consisting of 32.1 million square feet of inventory in 1,093 buildings. For its size, this market is experiencing heavy construction activity with 1.9 million square feet currently under construction and 4.8 million square feet planned for the future. Office vacancy is at 10.1 percent with lease rates for Class A space ranging from $2.20 to $2.60 per square foot.

The still low interest rates continue to fuel the demand for small for-sale office condo units. Many companies are taking advantage of the attractive SBA financing offered in the marketplace and acquiring buildings with up to 90 percent loan-to-value financing. If not occupying their entire facilities, these companies lease the remainder to separate tenants to create additional income. This scenario also allows the small office owner/user expansion room.

Class B office space comprises 79 percent of all office product in the market. Because a majority of the office market was built during the past 20 years, Las Vegas has experienced little redevelopment. However, some developers are starting to acquire Class B buildings to renovate and redevelop into Class A product, a trend seen in other major markets. The newly renovated Class A product is in great demand by national companies that continue to move to southern Nevada for its business friendly environment and the state’s strong economy, which added approximately 38,100 new jobs in the past 12 months.

The hot new office growth area is along the 215 beltway stretching from the south to west submarkets. Finding adequate development space is becoming increasingly difficult as the available land is either being consumed by residential developers or held in large corporate ownerships. In many cases, desirable land is priced extremely high.

Despite high land prices, the established Las Vegas office players are not shying away from development opportunities. Centra Properties, a southern Nevada-based development company, is currently building a 26-acre master-planned, mixed-use office and business park called CENTRA Point. The project has a premier southwest location near Interstate 215, a short distance from Coronado Medical Campus and three new hospitals — St. Rose San Martin, Sunrise Southern Hills and Spring Valley Hospital. The first two phases of the project are currently under construction and will consist of five Class A office buildings totaling approximately 240,000 square feet. Phase III will include two Class A office buildings, totaling 120,000 square feet, and a restaurant pad.

Hospitality

The hospitality sector is probably Las Vegas’ most famous commercial real estate market, featuring more than 115 grand-scale hotels and casinos, many of which are considered the finest hotels and casinos in the world. That cachet is reflected in the city’s hotel occupancy rate of 89.6 percent, miles above the national average of 59.2 percent. The average room rate for the gaming capital’s 130,482 rooms is $83.

The Las Vegas hospitality market offers a myriad of visual, tactile and auditory experiences — seeing replicas of modern and historic marvels including the Sphinx and the Eiffel Tower, dancing at the famed Studio 54 in the MGM Grand, floating through a Venetian canal in a gondola, viewing an impressionist exhibit at Bellagio, and dining at gourmet restaurants owned by celebrity chefs, including Bobby Flay and Emeril Lagasse.

Despite the ample hospitality product in Las Vegas, several of the premier hotels and casinos are expanding to include more accommodations, entertainment, restaurants and attractions. The $1.6 billion Bellagio Hotel and Casino, which opened in October 1998, currently includes 3,000 rooms and suites, more than 14 restaurants including Picasso’s, and seven additional bar/lounges. Bellagio is known for its water fountain shows choreographed to opera and classical music. The hotel is also home to a fine art gallery that features priceless works of art including Claude Monet and other impressionists. Bellagio’s expansion, which will include 1,000 additional suites, is scheduled to break ground in fourth quarter 2004.

The Venetian, an Italian-themed luxury hotel and casino through which gondolas float, consists of 3,036 rooms, night clubs, lounges and pools. The hotel is also home to arguably the finest gourmet dining selection in all of Las Vegas. The Venetian’s list of top-tier restaurants include Delmanico Steakhouse by celebrity chef Emeril Lagasse, Postrio by Wolfgang Puck, Valentino by Luciano Pellegrini, Bouchon by Thomas Keller and Pinot Brasserie by Joachim Splichal. The Venetian will expand by developing the Palazzo, a 3,000-room addition due to break ground in 2006.

Stephen Wynn, the well-known hotel developer responsible for Bellagio, The Mirage, Treasure Island and Golden Nugget, is busy creating a new $2.4 billion hotel and resort called Wynn Las Vegas. To be located on 197 acres at the site of the former Desert Inn Resort and Casino, Wynn Las Vegas will feature an 111,000-square-foot casino, approximately 2,400 rooms, 19 restaurants, retail shopping, high-tech convention center space and a championship golf course. It is scheduled to open in spring 2005.

Three centuries after Spanish traders explored this undiscovered valley, Las Vegas has become home to one of the most vibrant commercial real estate markets in the country. From national corporations relocating and expanding their operations to the business friendly area to young professionals looking to improve their quality of life with less expensive single-family housing, Las Vegas’ attraction is undeniable.

Senior vice presidents Kevin Higgins and Kit Graski and Charlie Blenkhorn, vice president, work in Voit Commercial Brokerage’s Las Vegas office.

©2004 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.