Post on 06-Apr-2018
8/3/2019 Commercial Real Estate Spring 2011
1/15
MARKETIQ
Las Vegas NV
CommercialRealEstate
April 2011
Commercial Real Estate - Las Vegas, NV
Putting Commercial Real Estate Trends in Context
ColdwellBankerP
remierRealty
SUMMARY
Commercial real estate, like residential real estate, has experienced a
precipitous decline in values. The decline is based on a combination of
weakened fundamentals in the face of excessive debt and a retreat from
values that became detached from fundamentals during the bubble pe-
riod.
Distressed properties, reflect weakened fundamentals and deleveraging,
leading prices downward.
Industrial buildings are approaching the same price-per-square foot that
they were near the beginning of the decade.
Many office sector businesses have downsized or gone out of business
and the existing demand seems to be coming from building users al-
ready in the market place.
Retail vacancies have yet to show any sign of moderation and absorp-
tion has largely been negative for an extended period.
Visitor volume, a key gauge of the health of the local economy, has re-
gained some footing although gaming revenues have yet to demon-
strate a perceivable recovery.
The office using employment sectors have been declining since 2007.
Retail sales do appear to be showing signs of bottoming out. We are
measuring year-over-year increases.
Vacant buildings, many of which are in grey shell, must be bought with
deep discounts as the lease-up period is going to be prolonged.
Like residential, commercial real estate values are being driven to dec-
ade lows. As a result, national reports are listing Las Vegas as one of the
best places to purchase real estate.
TABLE OF CONTENTS
I.
II.
III.
IV.
V.
VI.
VII
VIII
AUTHORS
Brian Krueger, Senior Vice Preside
Strategic Services
John McClelland, Vice President,
search
Ron Opfer CCIM, Director of Comcial Real Estate
CONTACT
Coldwell Banker Premier Rea
Strategic Services
Phone: 702-939-5128
Email: info@cbprds.com
Web. www.cbvegas.com
8290 W. Sahara Ave, Suite 200
Las Vegas, NV 89117
Introduction
Sales and Pricing
Leasing
Distressed Real Estate
Economic Fundamentals
Risks, Benefits and Returns
Development
Sources and Disclaimer
See copyright and disclaimer in section VIII. Reflects Q4, 2010 data and Q1, 2011 data if available.
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pril 2011 Coldwell Banker Premier Realty Market IQ
. Introduction
n 2010, we noted that commercial real estate, like resi-
dential real estate, had experienced a precipitous de-
line in values. This has continued into 2011. The decline
ontinues to be based on a combination of weakened
undamentals in the face of excessive debt and a retreatrom values that became detached from fundamentals
during the bubble period.
There have been some indicators that a bottom in trans-
ction volume has been achieved, however we state this
enuously as lending continues to be weak and fuel
prices, geopolitical strife and other issues could offset
our expectations.
We believe that it is far too premature to declare a bot-om in pricing. National economic fundamentals are in
n apparent but tenuous recovery. Local economic
rends are mixed. None of the important economic sta-
istics impart a lot of courage, hence, investors as bullish
s they are on obtaining assets, are cautious in develop-
ng their strategies.
Overall, we believe the economic trough represents a
reat opportunity to purchase assets for buyers with a
ong view of money. We cannot expect that everything
purchased in this era is a good deal. We find that sev-
eral projects built during the boom were poorly designed
or located. Conversely, we have viewed several assets
hat are a great opportunity. Greater due diligence is
necessary to formulate these conclusions and we hope
o provide some intelligence in this report.
n this report we discuss the three main property sec-
ors: industrial, office and retail. We examine pricing,
acancy rates and the underlying trends that affect
hese factors. In addition, we offer a broad-based viewof the marketplace from high-level influences to the
treet level.
I. Sale Prices and Transaction Volume
ales prices in the Las Vegas Valley continue to decline
nd transaction volume remains historically low but is
ncreasing. Distressed properties, reflecting weakened
undamentals and deleveraging continue to lead prices
downward.
Owners appear to be becoming more realistic. Weak
rents have implied that lower prices are necessary in
der to encourage a buyer to make an offer. Owners a
not harkening back to the days of 2006 and 2007 wh
they cite their belief in what a property is worth.
On the buyer side, some investors continue to seedistressed as the only operative word in a statemen
regarding a property. While psychologically more stim
lating, this attitude has often lead to an overlooking o
well priced performing properties and there are fund
investors acquiring performing assets in greater quan
ties both nationally and locally. There are some reaso
able equity sellers out there, yet we do believe that d
tressed purchases will remain the key component of
sales even if we see some economic stabilization. The
are simply too many distressed assets in the pipelineOur message is simply that strategies of buying only d
tressed assets may not be the only strategy.
For investors searching for distressed properties nati
wide, we know it has often been hard. We expect mo
investors to flock to Las Vegas simply because we do
have distressed assets.
Since pricing is being led by distressed sales, it is wor
noting that many of the bank owned properties are o
ten considered to be poorer examples of the Las Veg
Valleys commercial property stock. This also may be
contributing to sharp declines in prices. A sample of
properties with high occupancy will necessarily produ
a higher figure.
The majority of end-users, whom we consider high-v
buyers, have appeared to possess a willingness to pa
prices that exceed that of most investors. This is due
narrow criteria-matching, such as location, size, visib
et cetera. In addition, many owner-users have signifi-cantly reduced their occupancy costs by purchasing a
building, while jointly expecting that the property wi
appreciate in years to come. They attempt to acquire
property while it is available and are often in a better
position financially than they were before.
We have noted some, but proportionately low busine
expansion, mostly in the office market and often by l
firms.
I-1
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Accounting firms and family doctors have also either
purchased buildings or in some cases leased larger
pace. Conversely, professional and business services
ppear to be continuing their contraction. Counts of ac-
ive business licenses continue to decline.
We still find little evidence that end-users are new arri-
als to the Las Vegas office market, rather there is ten-
nt and owner-user churning occurring within the Las
Vegas Valley. A large example of this is Zappos. It is wellnown that Zappos intends to occupy space downtown
but Zappos is vacating space in Henderson to do so. For
Zappos this is being done for several reasons including
ultural ones. For others, this movement is often done in
order to lower costs by finding cheaper equivalent space
or smaller spaces, since regional trade, retail sales and
employment has declined in the past several years.
We have noticed expansion interest by firms such as
Carl's Jr., Fresh and Easy, a large expanding firm in the
past couple of years, has recently applied the brakes.Recently, Winco Foods, a grocer, has purchased land in
order to enter the Las Vegas Market.
A. Industrial
The overall industrial sector is experiencing increased
acancies, diminished absorption, and downward pres-
ure on lease rates. This translates into a downward
rend in pricing.
Industrial buildings are approaching the same price-p
square foot that they were near the beginning of the
decade.
The construction industry and tourism industry were
hard in this recession, and much of the industrial de-
mand of the past was driven by these industries. Con
sumer spending and the service type businesses that
provided support services to these industries provide
the rest. When consumers don't demand goods, busnesses reduce their warehouse needs.
Investors have been slow to rush into this sector of c
mercial real estate. Industrial remains low on the pri
ity list for distressed fund managers. In addition, inv
tors are not comfortable that the Industrial sector ha
bottomed out. When they try to work up a pro-form
that makes sense, they take into account a longer ho
period and a lengthy ramp up period to reach stabiliz
tion. The result is a price that is much lower than wha
buildings are currently selling for.
There is, however, end user movement in this mar-
ket. Tenants that survived the recession thus far are
desperately working on reducing their occupancy
costs. As the five year leases approach their end, te
ants are looking to either buy or lease for much less t
what they were paying just years ago.
Source: Clark County, Coldwell Banker Premier Realty.Note 1: The trendline is meant to smooth out the volatility in the series due to the heterogeneous nature of realtyransactions and does not represent a forecast and merely shows the shape of the boom/decline.
Large buildings (100,000 sq.ft.+) are restricted from the price series as they are infrequently transacted and do
$0
$50
$100
$150
$200
$250
$300
$/Sq.f
t
Transactions $/Sq.ft $/Sq.ft Inflation Adjusted (1982 dollars)
Source: Clark County, Coldwell Banker Premier Realty.Note 1: The trendline is meant to smooth out the volatility in the series due to the heterogeneous nature of rtransactions and does not represent a forecast and merely shows the shape of the boom/decline.Large buildings (25,000 sq.ft.+) are restricted from the price series as they are infrequently transacted and d
mirror the most common types of office buildings within the Valley.
0
10
20
30
40
50
60
70
80
90
$0
$50
$100
$150
$200
$250
#oftransactio
ns
$/Sq.f
t
Transactions $/Sq.ft $/Sq.ft Inflation Adjusted (1982 dollars)
Figure 2. Office $/Sq.ft. & Number of TransactionsFigure 1. Industrial $/Sq.ft. & Number of Transactions
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B. Office
The Office sector is one of the hardest hit sectors of
ommercial real estate in Las Vegas. Many office sector
businesses have downsized or gone out of business and
he existing demand seems to be coming from building
users already in the market place. Active businesses li-
enses are declining and unemployment remains ele-
ated. Absent a real demand for office space, the funda-
mentals in this sector will remain weak.
The office market began to crash as Las Vegas was peak-
ng in new product delivery. As a result, there are sev-
eral hundred thousand square feet of unfinished office
product. These buildings are the least popular for inves-
ors and distressed asset fund managers because they
equire a high capital investment in a property typehere is excess supply. It just doesn't make sense to fin-
sh a product only to add inventory to an office sector
where the prices have already fallen below construction
osts.
ike industrial, the current demand for office space is
oming from users already occupying buildings. So when
move is made, it is a lateral move that does not absorb
product. The end users are motivated by occupancy
osts savings and that can vary from business to busi-ness.
nvestors are attracted to already finished office build-
ngs and they are targeting a price roughly 50% to 60%
below construction costs for office product located in
reas where other office buildings exist. To make the
nvestment pro-formas work, they need to generate in-
ome soon as possible.
We expect the investors in this market to remain ex-
remely cautious until the office fundamentals begin toeverse their trends.
C. Retail
Retailers are struggling with consumer spending and de-
mand. In order to get the consumers to spend money,
etailers are having to cut their margins and offer more
discounts.
Taxable sales have dropped approximately 40 percen
from the peak and with unemployment at an all timehigh, the market for retail products are much smaller
than they were before.
All this translates into retailers not able to spend the
same amount of money on retail space, thus causing
downward pressure on lease rates and building val-
ues. Nearly all sectors of retail are affected, including
restaurants, enclosed malls, pads, and grocery ancho
centers. While the vacancy in the grocery anchored c
ters remain far better than other segments of this maket, the re-tenant rates are much lower than they we
before.
In retail, its all about consumer spending. Until the f
damentals of the economy improve thereby increasin
consumer demand, consumer spending, and consum
confidence, retail will continue to struggle and will co
tinue to make concessions to tenants to keep them in
place.
Sales of retail buildings have been sparse and very heerogeneous, so we have not constructed a price inde
for this sector. Figure 3 shows the differences betwee
prices realized during several of the bubble years to a
tual closing prices today.
The commercial market has mirrored the residential
market in several ways; prices on commercial buildin
also escalated to levels that can be considered a bub
Once realized, transaction volume declined.
-49%
-68%
-37%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%1/1/ 1900 1/ 2/1900 1/3/1900
9-2004 7-2005 3-2006
Prior Sale Date
Big Box Retail
Retail Pad
Retail Pad
Source: Clark County Assessor, Coldwell Banker Premier Realty.
Figure 3. Sample Differences from Prior Sale PricesRetai
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67.1%
3.8%
18.1%
1.2%
1.2%
0.2%
2.4%
0.1%
2.2%
3.6%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Vacant
Dup/Tri/Quad
Apartments
Mobile/Manufactured
Industrial
Hotel/Motel/Casino
Professional
Golf Resort
Commercial/Retail
Other
pril 2011 Coldwell Banker Premier Realty Market IQ
At the same time, owners had either failed to realize
where the market was going (and their tenants) or were
n a state of denial about further, harsh declines in
prices. This occurred in the residential market in 2007,
which was a low-point in sales.
The residential market has largely capitulated to current
prices and possible further declines. This is the one area
where the commercial market still has to catch up. This
has been made more difficult by extend and pre-
end (giving borrowers more time to repay loans) and
he lack of mark-to-market. While specific accounting
nd banking regulatory policies may have a goal beyond
llowing the commercial market to clear, the result for
he local commercial market has been weak sales, large
disparities between bid/ask prices and indecisive market
participants.
Overall, the probability of further declines in pricing ex-
sts in each sector of the commercial market. We believe
his will yield opportunities for both end-users and inves-
ors.
Figure 4. 2010 Clark County Property Transfers by Type
Source: First American Title.
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II. Leasing
A. Industrial
Net absorption continues to be negative in the industrial
property sector, registering declines in 10 of the past 11
quarters.
As a result of business shrinkage and recently delivered
pace, for-lease vacancy rates are at their highest point
n the time series. The rate, while slowing, continues toexpand.
Asking rents are not a reliable guide as to what effective
ents are since there are a lot of months of free rent of-
erings, low introductory rates and other incentives. We
have noted Industrial lease rates in the mid twenty cent
per foot (monthly,NNN) for light industrial and light dis-
ribution. A few have been observed in the $.50 to $.60
ange and in the rarest of cases up to $1.50 for flex
pace.
B. Office
n terms of vacant space, this segment has suffered the
most. This environment has produced an upside for ten-
nts, many of which have significantly lowered their
osts. Negative absorption continues but at somewhat
of a lower pace than before. We are hesitant to call this
trend since fundamentals have not yet pointed to-
wards a recovery.
For the Valley, Class A properties have had the highe
direct vacancy rate, followed by C and B with medica
offices fairing the best overall.
Office asking rents remain above $2.00 per-square-fo
on a full service gross (FSG) basis, however we have
noted lease rates between $0.85 and $1.50 on triple
and modified leases. We have also recorded introduc
tory rates as low as $0.25.
C. Retail
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
-$1,500,000
-$1,000,000
-$500,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Absorption Completions Vacancy
Source: Restrepo Consulting Group LLC. -$1,000,000
-$500,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Absorption Completions Vacancy
0
2
4
6
8
1
1
-$600,000
-$400,000
-$200,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Absorption Completions Vacancy
Source: Restrepo Consulting Group LLC.
Source: Restrepo Consulting Group LLC.
Figure 5. Industrial Absorption, Completions & Vacancy
Figure 6. Office Absorption, Completions & Vacancy
Figure 7. Anchored Retail Absorption, Completions & Vacan
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Retail vacancies have yet to show any sign of modera-
ion and absorption has been negative for three of the
ast four quarters.
n the mid-2000s, retail vacancies hovered around very
ow levels, falling to a minimum of 2.7%. Even some of
he poorly located and nearly obsolete spaces were be-
ng absorbed. Builders naturally responded to this but
were ultimately caught by dwindling retail sales and
lowing population growth.
Observed lease rates have fallen to around $1.50 (NNN)
or neighborhood centers (usually supermarket an-
hored) and $1.00 to $1.59 for community centers.
As illustrated in figures 3 thru 5, net absorption has re-
ently been negative or extremely weak in each sectornd has largely been negative for an extended period.
This is where we can see the largest impact on valua-
ions and the struggle by investors to come up with a
eliable guide to where values should be. Buildings sold
with a cap rate are actually quite rare as recent sales
have had zero or few tenants.
ike the office and industrial sectors, the movement in
etail is mostly due to retail survivors looking to lower
occupancy costs. Most retail businesses have felt thepending decline and have already cut other ex-
penses. A few are taking advantage of the lower rates
nd expanding their Las Vegas presence, however, a
quick look at the active business licenses and the retail
ector employment show contraction in the retail sector.
Movement/relocation/expansion in the Las Vegas retail
ector is coming from the following businesses: tutor-
ng/education businesses, restaurant space, health and
beauty, pet care, tavern/bar, gas station/convenience
tores, and art/paintings. When asked what is drivinghe movement/relocation/expansion, most describe a
truggle that led to cutting cost of goods, labor, and now
occupancy. They describe doing more with less employ-
ees and discover that they can open one or two more
tores without adding more management.
The advantage of retail is that it benefits from uptick
consumer spending immediately. Restaurants are cu
rently experiencing improved spending, but, those im
provements are from 2000 level spending and have
much more growth ahead before the economy retur
to the robust days of the recent past.
Map 1. Vacant Office Space
Source: Costar, Coldwell Banker Premier Realty.
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V. Distressed Real Estate
he search continues for distressed real estate. We
re seeing more of these transactions, though they are
till relatively difficult to obtain and many buildings con-
nue to be off the market. As we noted earlier, extend
nd pretend has also tended to be standard operating
rocedure.1
This has served to keep some assets out of
each to investors but we believe this condition is mod-
rating.
oan restructuring, or workouts have been popular in
ecent months as lenders have often been willing to do
nything except foreclose on an asset. Extending a loan
ertainly may be beneficial for some lenders rather than
aving to sell the property and take the hit now. Never-
heless, the economic recovery in the region looks like it beyond the viewable horizon. Ultimately, lenders will
nd up owning a large number of assets and significant
write-offs will occur. Notices of default continue to be
ery elevated and most will eventually come to market.
While perhaps holding up banks balance sheets, which
as significant repercussions within the economy, in or-
er for the commercial real estate market to begin cor-
ecting, a perceived bottom in pricing must be obtained.
he continued low transaction volume, combined with aarge variance in closed prices and the amount of bank
wned but un-marketed inventory, indicates a bottom
as yet to manifest.
nvestors hope that the charge offs accelerate and more
properties become marketable. Recent anecdotal ev
dence suggests that banks are re-evaluating their
assets more consistently with market observations a
this should help to generate transactions by incentiv
banks to liquidate.
Observers of the economy would also like to see the
linvestment (poorly allocated capital) of the past dec
work through the system. However, this depends on
multitude of factors including FDIC supervision, othe
regulations, accounting changes and individual bank
board of directors.
Map 2. Before & After - Lender Owned Commercial in the Las Vegas Valley
Q2, 2009 Q4, 2009
Source: Clark County, Coldwell Banker Premier.
1. An FDIC policy statement can be found at http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf. It states: As a general principle, examiners should not adversely classify or re-
quire the recognition of a partial charge-off on a performing commercial loan solely because the value of the underlying collateral has declined to an amount that is less than the loan bal-
ance.
0
10
20
30
40
50
60
70
80
90
100
Q1 Q2 Q3 Q4Industrial Office Retail
Source: Clark County, Ticor Title.
Figure 8. Notices of Default by Property Type2010
Q4, 2010
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We have seen an increase in the amount of properties
held by lenders with 145 projects in Q2, 2009
approx. 2 million sq.ft.). In Q2, 2010, we found 249 pro-
ects held by banks (approx. 3 million sq.ft). By Q4 2010,
we found 252 properties totaling nearly 4 million square
eet.
While the Valleys commercial space is estimated to be
nearly 300 million square feet, having nearly one per-
ent of that space held by banks is very significant (and
even more significant in some building types). Similarly,
banks currently hold about 1.5 percent of the Valleys
housing stock and most people are keenly aware of the
oreclosure problem within the Valley.
Bank sales are on the increase, especially in office, which
has been a sector highly impacted by the recession. As aesult, many of these have been foreclosed on earlier in
he cycle and are currently being liquidated.
As a result of increasing sales by banks, pricing in the
overall market will tend to gravitate towards the prices
ccepted by banks. Traditional sellers will have to matchhe prices accepted by banks or have very prolonged
marketing times.
Today, there is increased pressure on banks to take ac-
ion. As recently as the beginning of 2010, there were
only a few comps out on the market and appraisers were
hard pressed to come up with values that truly reflected
he buyers mindset.
Added inventory is helping price discovery. Today, th
are comparable sales in nearly all asset categories, an
as a result, the appraisals are much more reflective o
the transactions in the marketplace. As such, the ba
are forced to deal with their distressed assets and ba
on the Notice of Defaults, a wave of commercial fore
sures are coming.
These bank owned sales will keep downward pressu
on the market and negatively affect absorption and v
cancies.
Soon, the end users will have absorbed most of the
properties they intend on absorbing, and the investo
will be the predominant buyers of commercial real e
tate. When this happens, the investment fundamen
will once again have a greater influence on commercreal estate values than the current wave of end user
chases.
A search for yield does appear to be pushing larger fu
into heavily distressed areas such as Las Vegas. Dis-
tressed assets have been difficult to find in several of
major markets. 3.5% 10-year treasuries and other low
yielding investments are necessarily causing interest
gravitate towards commercial real estate. We expect
see continued interest in some of the higher-quality tressed assets by larger investors. They may find that
they must take down smaller properties because tha
what is typically available. Some of this activity is like
to be in triple net investments.
Overall, given the level of non-performing properties
lender records, there is likely to be more opportunity
2011 than there was in 2010.
0
2
4
6
8
10
12
14
16
Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009 Q1, 2010 Q2, 2010 Q3, 2010 Q4, 2010
Industrial Office Retail
urce: Clark County. Coldwell Banker Premier Realty.
Figure 9. Sales of Commercial Buildings by Banks
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V. Economic fundamentals driving commercial real es-
ate.
Obviously, the Las Vegas Valley is highly dependent on
ts core industry, gaming. But to what extent and how
does this affect commercial real estate?
Assane et al (2000), have found that approximately sixty
percent of the Valleys employment is either directly or
ndirectly related to the leisure and hospitality supersec-
or. This figure has likely changed but remains high nev-
ertheless.
Given this dependency, we monitor changes in gross
aming revenues, visitor volume, retail sales and several
other variables in order to inform us on the ultimate
health of the commercial property market.
After a harsh period of weakness in 2008 and 2009, visi-
or volume has been on the mend and has posted year-
over-year increases since September of 2009. However,
olume has not yet returned to pre-recession levels. Ho-
els, gaming floors and associated buildings that feed theaming and hospitality industry have added significant
apacity since the pre-recession highs. This has resulted
n lower occupancy and strains on gaming operators
whom have had to reduce room rates.
While visitor volume has regained some footing, gaming
evenues have not demonstrated the same shape of re-
overy. Next to actually getting visitors to Las Vegas, the
mount of gaming win by casinos is one of the single
most important factors for the area economy and ulti-mately for every sector of real estate.
Several year-over-year gains have been posted since
major 2008-2009 declines but some of these have befound to be anomalous. The February 2010 spike is
thought to be driven partially by the large amount of
Asian play during the Chinese New Year and the Supe
Bowl1. Table games have done extremely well in seve
months, yet we prefer to see gains in slot machine re
nue since it is more predictable and easier to budget
against. Until we see a lengthy increasing series, we
dont expect a lot of hiring or other investments by g
ing firms.
The decline in average room rates has appeared to h
despite added room inventory. We have observed se
eral year-over-year gains in occupancy, but not nearl
a level we can describe as healthy.
-15%
-10%
-5%
0%
5%
10%
15%
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
Jan-03
Jun-03
Nov-03
Apr-04
Sep-04
Feb-05
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
Year-over-Year Visitor Volume
Source: Las Vegas Convention and Visitors Authority.
$0
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
Jan-03
Jun-03
Nov-03
Apr-04
Sep-04
Feb-05
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
Year-Over-Year Gaming Revenue
Figure 11. Clark County, NV Gaming Revenue
1. http://www.lvbusinesspress.com/articles/2010/04/19/opinion/columnists/schwartz/iq_35329737.txt2. http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aMSF1QSrT4Rk
Source: Las Vegas Convention and Visitors Authority.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-03
Jun-03
Nov-03
Apr-04
Sep-04
Feb-05
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
Year-over-Year Occupancy
Source: Las Vegas Convention and Visitors Authority.
Figure 10. Clark County, NV Visitor Volume
Figure 12. Clark County, NV Hotel Occupancy
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A full recovery in commercial real estate is unlikely to be
isible until each of these main economic data series
ontinues upward long enough to establish a trend.
or industrial property, Las Vegas differs greatly from
he port markets like Los Angeles-Long Beach and Oak-
and. These are largely driven by containerized freight
olume, with Los Angeles being largely import driven.
as Vegas is linked to the Los Angeles market, occasion-
lly finding use as a spillover area for imported goods.
However, much of the demand for space in the Las Ve-as industrial market is driven by firms supporting the
eisure and hospitality industry, housing food & bever-
ge, linens and various other related goods along with
ght manufacturing for slot machines.
Warehouse demand is shown to be related to the Path
of Goods Movement (Mueller and Laposa, 1994) where
demand for warehouse space is correlated with the path
of goods.
as Vegas is also on the path of a major freight corridornd benefits from this. However, weakened consumer
demand for goods continues to affect the local market.
n addition, much of the industrial space was occupied
by construction and construction material supply firms
engaged in both residential and commercial develop-
ment. Our research indicates a closer correlation be-
ween residential construction and space usage than
does import-export activity or industrial production.
Following the housing decline and the subsequent co
pletion of large projects such as CityCenter, The Cosm
politan, the Hard Rock expansion and other major pr
jects, demand for contractors and materials has decli
significantly.
A rebound in visitor volume to Las Vegas, a return to
velopment and the addition or expansion of new ma
facturing firms is necessary for a rebound in industria
space demand. Increased imports would also be help
although it is difficult for Las Vegas to compete with t
Los Angeles market for warehouse space. Until we serespectable gains in these areas, we will expect a re-
bound in the price of industrial assets to be very tem
pered and distant.
Figure 13. Major Freight Corridors
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
#ofPermits
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2005 2006 2007 2008 2009 2010
OfficeUsingEmployment
Office Completions Office Using Employment
Source: Nevada Department of Workforce, Training and Rehabilitation, Restrepo Consulting Group LLC.
The industries information, financial activities, finance and insurance, credit intermediation, real estate renand leasing, professional and business services , management of companies, administrative support and wamanagement, telecommunications, administrative and support services, other support services are used to aproximate office using employment. We do recognize that there are some issues with this since all of the Nsectors have an office using component, however we believe these industries capture a substantial and infotive portion.
Source: U.S Census.
Figure 14. Residential Permits
Figure 15. Office Using Employment & Office Completions
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110,000
112,000
114,000
116,000
118,000
120,000
122,000
124,000
4Q
2007
1Q
2008
2Q
2008
3Q
2008
4Q
2008
1Q
2009
2Q
2009
3Q
2009
4Q
2009
1Q
2010
2Q
2010
3Q
2010 2
pril 2011 Coldwell Banker Premier Realty Market IQ
Office demand is known to be driven largely by office
using employment (Clapp, 1989), a proxy being informa-
ion, financial activities, finance and insurance, credit
ntermediation, real estate rental and leasing, profes-
ional and business services and several other industries
noted below Figure 14).
The office-using employment sectors have been declin-
ng since 2007. New office building deliveries overshot
he peak of office-using employment and completions
occurred despite significant declines in employment
11.7% decline from 2008 to 2009). This has further ex-
cerbated the vacancy rate for office. We are still await-
ng signs of a recovery in these employment series. This
mplies that office demand should remain weak for an
extended period. As we mentioned earlier, deals in of-
ice are obtainable; however, we are cautious of largerpaces since few firms are expanding.
Retail experienced intense demand during the mid-
2000s, squeezing into 2.7% vacancy in 2006, often into
ome space that was normally considered obsolete. Af-
erward, we entered an apparently overbuilt situation.
nstead of the old adage, retail follows rooftops, retail
nticipated rooftops. Many of these homes were never
delivered and tenants had little interest in occupying
hese retail spaces.
3
n addition to this stressor, retail sales have fallen sub-
tantially, reaching year-over-year declines of over 20%.
Notably, the number of active business licenses indicates
arge declines in overall business activity. Hence, there
has been less of a need for retail space.
Retail sales do appear to be showing signs of bottom
out, yet this is a tenuous recovery at best, and until e
ployment and visitor volume show repeated gains an
establish an upward trend, we should not expect reta
sales to increase substantially.
Another important factor is the overall increase in po
lation. Several estimates of population exist including
the State of Nevada demographer estimates, the U.S
Census (with a significant lag in reporting) and those
sented by the local municipalities and Clark County. R
cent estimates indicate a balance between in-migrat
and out-migration as well as some organic increases
(births minus deaths rather than workforce related).
As a result of even population growth, we do not exp
a recovery in prices anytime soon. Further, a broader
national economic recovery is necessary for a full rec
ery in the region. However, as banks foreclose on mo
properties and prices are reset to fundamental value
increased opportunities for investors should be re-
vealed. Consequently, we are identifying some buildi
that appear to be realistic targets for investors.
-30%
-20%
-10%
0%
10%
20%
30%
$0
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
$1,400,000,000
$1,600,000,000
$1,800,000,000
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Year-over-Year Change Taxable Sales
Figure 17. Business Licenses
Source: Nevada Department of Taxation. Seasonally Adjusted.
Source: City of Las Vegas, City of North Las Vegas, City of Henderson, Clark County.
date we know of over 16,000 finished/partially finished residential lots. Interestingly, the FDIC published a document in 1999 that noted Las Vegas at the top for risk of overbuilding. http://www.fdic.gov/bank/analytical/bank/bt9
Figure 16. Retail Sales
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VI. Risks, Benefits and Returns
The picture of the commercial real estate market in Las
Vegas remains murky, with a mix of pricing due to dis-
ressed asset sales and an unclear picture as to any na-
ional and regional economic recovery. Analysis and in-
estment in distressed commercial real estate is a fron-
ier for the Las Vegas Valley so these activities must be
performed with caution. Nevertheless, we expect this
ycle to yield large gains on the exit from the trough of
he recession.1
Prudent investors will build more risk into their bids and
ince the deals are typically in distressed assets, the mar-
et must wait for banks to liquidate them at prices that
better reflect both near term fundamentals and the ex-
pectations of a slow recovery.
nvestors are driven by real estate fundamentals. They
want a cash flow that will at least cover the debt ser-
ice. While most of them are satisfied not earning a
profit from day one, they just don't want to bleed out
nvestment dollars each month.
What movement can we expect in commercial real es-
ate?
What we hope will occur is that investors can purchase
n asset at a deep enough discount to ride out weak fun-
damentals and that we do not see buildings re-trade sev-
eral times as we head out of the trough in this cycle. We
expect that bank pricing will gravitate toward fundamen-
als, although there will be a lot of rigidities and mis-
tarts heading into that direction.
Returns?
Vacant buildings, many of which are grey shell, must bebought with deep discounts as the lease-up period is go-
ng to be prolonged. We have observed some buildings
eflecting this condition sell at or below replacement
ost. This is one metric employed as a basis for value
when income streams are not present, yet a long-term
upside is expected.
Many of the buildings being sold recently are not sold
with a cap rate. Many listings also do not post a cap
rate because there isn't any income on the property
is very low. We have seen some cap rates for single t
ant retail within the 6-7% range and we have observe
some cap rate compression occurring in multi-family
well. When an asset class lacks investment activity it
often due to a lack of supply of quality product.
The level of due diligence and sensitivity analysis by i
vestors has necessarily increased. Investors pro-form
slow recovery and a long ramp up period. They targe
15 to 25 % return on their money and they prefer dea
that do not require a lot of capital expenditures to ge
the property to perform. Finishing a grey shell produ
does not make sense to these investors as the existin
finished buildings will have to be sold before there w
be a demand for grey shell.
Benefits to buying in commercial real estate in the L
Vegas Valley.
When adjusting for inflation, rents are typically flat2,
Therefore, for buyers a winning strategy cannot be ex
pected from rent growth to add value in a normalma
ket. The benefit of buying in a distressedcycle is that
can leverage this cyclical pattern and expect some re
growth when the economy rebounds. Further, value
be added to a project by prudently buying buildings wvacant space and leasing them up. Again, this must b
done with caution and is typically reserved for those
requiring a cash flow position.
Like residential, commercial real estate values are be
driven to decade lows. National reports are listing La
Vegas as one of the best places to purchase real es-
tate. Each month, more and more investors arrive lo
ing to place their investment dollars. Eventually, the
users will be placed in the market and investors will r
resent the greatest demand for commercial real esta
1. Refers to a local recession, not the NBER dates.2. Serguei Chervachidze of CBRE Econometric Advisors finds evidence that long-run real rents are flat. Chervachidze, Serguei. The Myth of Long-Term Rent Growth. About Real Estate Volume
11, Number 33. August 23, 2010. Investors can either time cycles, find areas with restrictive land-use or a lack of available land or other factors that would lead to increased demand or restric
tive su l .
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pril 2011 Coldwell Banker Premier Realty Market IQ
VII. Development
There is some, however marginal, space still under con-
truction within the Las Vegas area. We estimate that
here is less than 80,000 square feet of industrial under
onstruction. This pales in comparison to previous quar-
ers but given the poor demand for industrial space, this
s not surprising.
Construction of office space largely stalled, although we
have recorded approximately 80,000 square feet of un-der construction office. Tivoli Village at Queensridge
Phase I (310,000 sq.ft) is now open and includes 725,000
quare feet of retail, restaurants and office space.
There are a number of stalled buildings throughout the
alley, largely in office and retail, along with some nota-
ble casino-hotels and residential such as Fontainebleau,
he St. Regis Condominiums and Boyd Gaming's Echelon.
n December 2010, the Cosmopolitan made its debut on
he strip. Completed by Deutsche Bank who took theproperty back when the original developer defaulted, it
will likely be the last mega casino opening we will see for
n extended period.
Currently most of the development is concentrated in
downtown Las Vegas where construction continues on
he new City Hall, street improvement projects, the
the Smith Center for Performing Arts and the Mob M
seum (originally a courthouse and post office). The R
gional Transportation Center has been completed an
active.
Overall activity remains low as we work through exce
sive inventory already in the market. Other than for s
cialized projects, we do not anticipate any significant
construction for a number of years.
On the horizon, Newland Communities Symphony Pa
and the Cleveland Clinics planned entry into Las Veg
appears to be the most realistic large scale project th
will be developed in the years ahead.
Figure 17. Commercial Building Permits and Valuation
Source: Center for Business and Economic Research.
Nearing Phase 1 Completion: Tivoli Village at Queensridge
Under Construction: The City of Las Vegas City Hall.
0
10
20
30
40
50
60
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
#ofPermits
Valuation
# of Permits Valuation
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pril 2011 Coldwell Banker Premier Realty Market IQ
ources:
Chervachidze, Serguei of CBRE Econometric Advisors
inds evidence that long-run real rents are flat. The Myth
of Long-Term Rent Growth. About Real Estate Volume
11, Number 33. August 23, 2010.
Clapp, J.M. Handbook for Real Estate Market Analysis.
nglewood Cliffs, NJ: Prentice Hall,
1987.
. Absorption Forecasts Using Employment and Popu-
ation Growth. In J.M. White (ed.).
orecasting: Market Determinants Affecting Cash Flows
nd Reversions. AIREA Research
eries Research Report 4. Chicago, IL: American Institute
of Real Estate Appraisers, 1989, 1428.
. Dynamics of Office Markets. AREUEA Monograph
eries No. 1. Washington, DC: Urban
nstitute Press, 1993.
Corcoran, P.J. Searching for the Bottom of the Office
Market. Real Estate Review, 1993, 23:1,
1521.
evitzky, Ina, Djeto Assane and William Robinson. Deter-minants of Gaming Revenue: extent of changing atti-
udes in the gaming industry. Applied Economics Let-
ers, 2000,7,155-158.
Rabianski ,Joseph S. and Karen M. Gibler**
Abstract: Office Market Demand Analysis and Estimation
Techniques: A Literature Review, Synthesis and Com-
mentary Journal of Real Estate Literature.
Terms:
Capitalization Rate: Annual net operating income di-
vided by the cost or value of a building. Used as an in
cator of the value and the rate at which investors are
willing to invest their capital.
Distressed Real Estate: Properties that have either b
issued a notice of default or has been taken back by t
lender.
Grey Shell: Building or unit that has no flooring or wa
coverings.
Gross Gaming Revenue: The net win from gaming ac
ties.
Notice of Default: A public notice of election to sell a
late payments. The borrower may restate the loan by
making up payments after the legally allotted period
our research, this has served as an indicator of bank
owned properties to come.
Quick Facts:
Property Type
Direct
Vacant Sq.ft.
Direct
Vacant % Total Sq.ft
# o
PropeOffice 11,021,743 19.3% 58,626,788
Industrial 16,138,746 15.2% 111,073,393
Retail 10,937,904 10.2% 115,994,583
Las Vegas Valley 2007 2008 2009 201
Population* 1,996,542 1,986,145 2,006,347 2,03
Housing Units 769,875 784,688 796,255 81
Employment** 916,807 916,286 841,212 79
Source: Costar.
**The third quarter of 2010 is the most rece nt reported.
*Source: Clark County. The 2010 figure may not match the 2010 census figure.
he information and opinions in this report are believed to be reliable and has been obtained from sources believed to be reliable. Coldwell Banker Prem
ealty makes no representation as to the accuracy or completeness of such information.
he opinions expressed in the report constitute the judgment of the authors only and may not reflect the opinion of Coldwell Banker Premier Realty. Thi
eport is provided for informational purposes only and does not constitute investment advice.
his report not be circulated or copied without our prior written consent.