MARKET HIGHLIGHT, SEPTEMBER 2009

LAS VEGAS
Jayne Cayton, Bret Davis, Kevin Higgins, Spencer Ballif and John Restrepo

While healthy tenants are counting their money and plentiful options, real estate players are counting on Las Vegas’ location, tax advantages and comparisons to California to produce a rebound sooner than later. The truth is that the city is still feeling for the bottom of the real estate cycle.

Office

Whether you are a landlord or tenant, the concept of blend and extend is becoming more prevalent as you work through this tough downturn in the commercial real estate market. Landlords are fighting for the same deals and they work just as hard if not harder to retain existing tenants. With the amount of available space increasing, tenants have multiple options and the ability to create leverage on a renewal.

Historically, a blend-and-extend transaction, where a tenant with term remaining agrees to extend its lease in exchange for a reduced rent structure now, only benefited the tenant. Now, in an effort to stabilize rent rolls, landlords are embracing this technique by working with tenants who have 24, 36 or even 48 months of lease term remaining. Rather than holding tenants to high contract rents, landlords are cutting in-place rents to more manageable levels and are gaining long-term leases in exchange.

Lenders are more involved on the leasing side now by exercising rights in their loan covenants to approve deals. Landlords facing an upcoming loan maturity or refinancing options greatly benefit from a blend and extend, and often initiate the negotiations with tenants. In order to stay competitive in current market conditions, landlords need to make adjustments.

At the end of second quarter 2009, the Las Vegas office market had about 7 million square feet of vacant space, with vacancy rates rising to 21.13 percent. This number doesn’t include the increasing amount of sublease space on the market or what is even harder to track: “shadow” space, the unused space not being marketed. Even with the amount of vacant space on the market, there is still 950,455 square feet under construction, most of which will hit the market in late 2009 early 2010. Based on historical absorption averages, the estimated supply of existing vacant space exceeds 6 years.

The average asking lease rate at the end of second quarter 2009 was $2.41 per square foot, but is expected to decline throughout the rest of 2009. Landlords have tried to maintain their face rates, but will generally bend significantly to make a deal.

— Jayne Cayton is a vice president and Bret Davis is a senior associate at CB Richard Ellis in Las Vegas.

Industrial

The industrial market has been hit hard in the Las Vegas valley. Sales activity is limited to merely a handful of transactions. Lease activity, while greater than sales activity, is also slow, and development has almost ceased with only a few exceptions.

Despite the freeze on finance, there are buyers looking in the marketplace with sufficient cash to acquire property, but they will not be moved to action until sellers lower prices to more opportunistic levels. Only then, when buyers are confident these investment opportunities will hold firm even if the market continues to dip somewhat, will sales activity pick up.

Nonetheless, there are still some sales closing in the $2 million to $5 million range, as smaller investors, who would otherwise have played the stock market or invested elsewhere, have turned to commercial real estate in search of short-term returns through sale/leasebacks with stable companies.

While sales have all but halted, leases continue to be signed; but the majority of this activity is a result of internal movement. Tenants are either downsizing or moving laterally in order to capitalize on the competitive rents and concessions being offered by landlords.

As tenants downsize, vacancy rates are continuing to increase. Las Vegas’ industrial vacancy rate increased by approximately 1.5 percent throughout the second quarter. The current industrial vacancy rate is approximately 12 percent, with no submarkets displaying significant vacancies above or below this average.

As vacancy has risen, demand for development has dropped, and there are no speculative development opportunities planned. There are a few build-to-suit projects currently under construction. An office/warehouse property in excess of 400,000 square feet is being built at the corner of the 215 Freeway and Rainbow Boulevard in the southwest submarket for the Freeman companies, a convention services company. However, developments such as this are extremely rare.

During the rest of 2009, downward pressure on lease rates and sale prices will continue as landlords and owners are forced to compete for fewer tenants and buyers. This downward pressure will be compounded by the wave of land and building foreclosures that will hit in the second half of the year, forcing lenders to lower prices in order to offload their growing inventories of property. As prices drop and sales activity picks up, one may start to see a leveling out of property values beginning at the start of 2010.

— Kevin Higgins is a senior vice president for Voit Commercial Brokerage in Las Vegas.

Multifamily

The Las Vegas apartment market continues to be plagued by job losses, shadow home rentals, new construction and declining single-family home values. As of July 2009, the 11.06 percent apartment vacancy rate is up substantially from 8.44 percent in July 2008. Street rents have also taken a considerable toll, down 7.89 percent in the first two quarters of 2009. The typical concession being offered in the market is a minimum of 1 month free on a 12-month lease, bringing economic occupancies into the mid- to high 70s range.

Despite the markets current soft conditions, slightly less than 6,400 new units will be delivered in 2009. At the time the land was purchased and many of these units were permitted, it was believed that Las Vegas would deliver a minimum of 30,000 hotel rooms during 2008-2010. As it turns out, that number has been cut in half. Locations in Las Vegas that will be hardest hit with new construction are the northwest part of the valley and North Las Vegas. Following this year, new construction for apartments will be extremely limited in the foreseeable future.

Sales of more than 100-unit properties have been anemic so far in 2009. Two transactions have been completed for a total of $30.5 million and 365 units. From 2004 to 2008, the market has averaged $1.55 billion in total sales consisting of an average of 17,173 units. As foreclosures continue to mount in the market, many buyers believe new opportunities will exist in the future. However, to this point, many lenders that have already foreclosed have been either unable or unwilling to meet the market. The spread between the bid and ask prices seems to be narrowing, but so far there are very few data points in the market.

Las Vegas is resilient, and many of the same reasons that made Las Vegas a desirable place to live in the past still exist today: location, weather, tax environment, entertainment, retirement and affordability (now more than ever). Las Vegas will react quickly to diversify its economy and take advantage of California’s misfortunes to lure many of its businesses to Southern Nevada. The gaming industry will recover, and Las Vegas will always be a worldwide destination that cannot be duplicated, attracting tourists from around the globe. The apartment market will recover; history shows the odds are on Las Vegas’s side.

— Spencer Ballif is a senior vice president for CB Richard Ellis in Las Vegas.

Retail

Retailers are finding it challenging to maintain the same sales figures that they were used to seeing prior to the economic maelstrom of 2008.

The Southern Nevada anchored retail vacancy rose 1.2 percentage points to 9 percent in second quarter 2009. Net absorption was about 100,000 square feet during the quarter. Much of this weakening is clearly attributed to the plunge in consumer confidence and spending, which resulted in the closing of several national big box retailer stores in the last several quarters — Circuit City, Mervyn’s, Linens n’ Things, Sharper Image and Levitz. There were also national closings of numerous grocery and drugstore locations by Albertsons, Vons, Rite Aid, Starbucks Coffee and Longs Drugs.

Total anchored retail inventory reached nearly 43 million square feet. The average rent dropped for the fourth straight quarter to $1.85 per square foot NNN. Forward supply totaled 1.5 million square feet at the end of the second quarter.

Deer Springs Town Center was the only retail center completed in Southern Nevada (North Las Vegas) during the second quarter. The project is a 532,000-square-foot power center anchored by PetSmart, Ross Dress For Less, The Home Depot, Party City, Target, Babies “R” Us/Toys “R” Us and Staples. It came online with a 20 percent vacancy rate.

At the end of second quarter, there were two other anchored centers under construction in the Las Vegas metro area: a Target-anchored, 390,000-square-foot center at 6097 N. Decatur Blvd. and the 284,000-square-foot Green Valley Crossing, a 10-building center located at the southwest corner of Green Valley and Horizon Ridge parkways in Henderson.

It is estimated that Southern Nevada has about a 3.5-year supply of anchored retail space, assuming the 16-quarter absorption average of 400,000 square feet holds, which is uncertain considering the economic malaise that is being experienced.

— John Restrepo is the principal at Las Vegas-based Restrepo Consulting Group.

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