LAS VEGAS – The land market in Southern Nevada continues to recover, as evidenced by the fourth quarterly market report of 2014 from Colliers International – Las Vegas. During the past 12 months, the market witnessed the sale of more than 2,600 acres of industrial, commercial and residential land, accounting for more than $700 million in sales volume. According to experts at the commercial real estate firm, the success of 2014 foreshadows a positive upcoming year for Southern Nevada.
“Land owners have seen the improvement in land sales and are beginning to demand higher prices for their land,” said John Stater, research director for Colliers International – Las Vegas and author of the report. “Developers are increasing speculative construction in 2015, and they may be waiting to see how this new spate of development goes over before they begin their next round of land purchases. Both of those factors could mean a slower 2015, but still a positive year overall.”
In addition to land, Southern Nevada saw positive movement in other commercial real estate sectors, as well. At the end of the third quarter of 2014, industrial vacancy was below 10 percent for the first time since 2008, and this trend continued in 2014’s fourth quarter by decreasing to 8.8 percent. With nearly 820,000 square feet of positive net absorption, the fourth quarter also represented the eighth consecutive quarter of positive net absorption in Southern Nevada’s industrial market.
“If Southern Nevada can maintain current rates of recovery, it will likely return to what we would consider a healthy vacancy rate of approximately 6 percent by mid-2016,” Stater said. “The only blemish on 2014’s industrial performance was via a comparison to 2013’s, which was marginally better. All signs point to 2015 being very much like 2014, if not slightly better.”
As the market continues to return to normal, the retail sector is expected to see trends similar to those before the turn of the millennium. There were more than 90,000 square feet of new retail completions in the fourth quarter, and retail vacancy, despite a slight increase from last quarter, remained below 10 percent. Net absorption exceeded negative 130,000 square feet, and as local Food 4 Less locations close their doors in 2015, negative net absorption in big-box space is expected to continue. However, several retailers are slated to enter or expand in Southern Nevada, including Sprouts, which is looking to open six new stores, Wal-Mart, which has secured land in the Southwest submarket, and IKEA, which is planning a large store in the Southwest submarket.
“It is rather refreshing to see retail return to normalcy. No more epic ups or abysmal downs, just the normal ebb and flow of a free market,” Stater said. “With taxable sales and retail employment moving in a favorable direction, we expect 2015 to continue retail’s gradual recovery from the dark days of the Great Recession.”
Despite gains and a return to normalcy in some markets, the office market, as well as the medical office market, continued to struggle through the recovery process. The office market, which saw a half-point decrease in vacancy compared to one year before, stood at 20 percent vacancy during the fourth quarter. The submarket also saw more than 280,000 square feet of new completions, increasing forward supply.
The medical office market experienced positive net absorption of nearly 35,000 square feet, and while this is still a decrease from one year ago, it represents a significant increase from the third quarter of 2014. With an 18.3 percent vacancy rate in this submarket, the market has responded appropriately, with no recent completions in new space and no new medical office construction slated in the near future.
“In terms of our office market, we think 2015 will see net absorption continue to be positive overall, and vacancy rates will continue to decrease, probably at the same rate they decreased in 2014,” Stater said. “Moving forward, the medical office market specifically needs to see much stronger improvements in job numbers and a willingness by landlords to rehabilitate distressed space.”
The full fourth quarterly report of 2014 can be downloaded at www.Colliers.com/LasVegas. Other key findings of the report, broken down by market segment, include the following:
Industrial
Industrial vacancy stands at 8.8 percent, down from 11 percent from the year before.
The industrial average asking rent stands at 55 cents per square foot. This is 3 cents higher than a quarter ago, and the same as one year ago.
Industrial net absorption was 819,964 square feet, up from 610,147 square feet one year ago. For the eighth consecutive quarter, and second consecutive year, Southern Nevada experienced positive net absorption in its industrial market.
There were 444,520 square feet of new completions this quarter, down from 65,628 square feet one year ago.
The industrial market had a great year in 2013, and 2014 nearly matched it.
Sales volume was down slightly in 2014 compared to 2013, but the average sales price increased dramatically.
If speculative development does lurch forward in 2015, construction employment, still down considerably from the boom days of 2007, should experience a measure of improvement and perhaps further stimulate the industrial recovery.
“2015 will answer the question: did speculative net absorption decline in 2014 because of a lack of available product, or because of a softening of demand?” Stater said. “We believe the answer is the former, and that new projects, as they are completed, will be fairly successful.”
Office
Office vacancy stands at 20 percent. This is a 0.5-percent decrease from one quarter ago.
The average asking rent rose to $1.87 per square foot, up 3 cents from one year ago.
Net absorption was negative 118,066 square feet, down from 309,801 square feet one year ago.
There were 282,420 square feet of new completions in the fourth quarter. This is up from the same quarter in 2013, which saw zero new completions.
Southern Nevada’s office market has improved since the days of the Great Recession, but the recovery has not been particularly stable or powerful despite greatly improved employment numbers.
The fourth quarter bump in asking rates may not be the beginning of a trend, given that is attributable almost entirely to a 12-cent increase in Class A asking rents.
“It is likely that the industrial market’s much stronger recovery compared to office over the past two years is due to its more physical nature – cloud computing and e-commerce have had much less impact on the need for space to manufacture and store physical goods than they do on the need for retail showroom space and office worker space,” Stater said. “We believe changes in the way businesses use their employees, and thus changes in how much office space per employee they use, and competition from flexible non-office product for Class C tenants, is weakening what would otherwise be a stronger recovery. Expect the office market to continue taking two steps forward and one step backward for the near future.”
Retail
Retail vacancy now stands at 9.5 percent. This is a 0.5-percent increase from one quarter ago, and a 0.2-percent increase from the year before.
The average retail asking rent stands at $1.30 per square foot. This is a 1-cent increase from one quarter ago and a 6-cent decrease from the year before.
Net absorption was negative 132,119 square feet. This was an increase from one year ago, which saw negative net absorption of 150,974 square feet.
There were 92,995 square feet of new completions this quarter. This is significantly higher than this quarter one year ago, which saw 8,000 square feet of new completions.
Forward supply in 2015 constitutes a modest 359,000 square feet in anchored suburban retail centers (which are tracked in this report’s statistics), and 494,000 square feet in other retail properties. This is a significant expansion from known forward supply just one quarter ago, and points to renewed confidence in Southern Nevada’s retail market by developers.
From 2001 to 2014, retail vacancy averaged 6.6 percent, giving the market 2.9 percentage points to go before reaching the long-term average vacancy. At the current rate of net absorption, it could take the market as long as three years to reach this long-term average.
“If 2014 was the test for speculative retail development in Southern Nevada, it remains hard to say whether we passed or failed,” Stater said. “Nevertheless, more construction is on the way in 2015.”
Hotel
Southern Nevada’s hospitality market continued to improve in 2014 in some measures, and go a bit flat in others.
Average annual room occupancy jumped from 84.3 percent in 2013 to 88.3 percent in 2014, and the average daily room rate increased from $110.64 in 2013 to $118.45 in 2014, but gaming revenue has not quite kept pace with its performance in 2013, or indeed with its performance in the first half of 2014.
Las Vegas’s major gaming operators appear to have solid pricing power, with MGM Resorts International absorbing increases in resort fees in 2014 without difficulty.
The hospitality industry’s improvement in 2013 took place during a period when only 166 rooms were added to inventory. Hospitality growth in 2014 has been better in many respects, and has needed to be, as room inventory grew by 1,955 rooms.
Approximately $4.7 billion is expected to be spent on Southern Nevada’s hospitality market between 2014 and 2016, before another $4 billion is spent developing the first phase of Resorts World Las Vegas in 2017.
Limited service sales have improved so far in 2014, with 1,181 units in eight properties trading at an average of $55,172 per room. This represents a sales volume of $65.2 million.
Southern Nevada’s hospitality market is expected to continue to be in fine shape in 2015, and during the run-up to the completion of Resorts World Las Vegas in 2017.
“The Great Recession is effectively over for Southern Nevada’s hospitality industry, just in time for new expansion,” Stater said. “The hospitality industry is the engine of growth in Southern Nevada, and right now that engine is purring.”
Medical Office
Medical office vacancy now stands at 18.3 percent. This is a 0.4-percent decrease from one quarter ago and a 1.4-percent increase from the year before.
The average medical office asking rent was $2.13 per square foot. This is a 2-cent decrease from one quarter ago and a 4-cent increase from one year ago.
Medical office net absorption was 34,798 square feet. This is a decrease from one year ago, which saw net absorption of 74,681 square feet, but an increase from one quarter ago, which saw negative net absorption of 104,034 square feet.
There were no new medical office completions in the fourth quarter. This is the same as one quarter ago and one year ago.
A return to job growth outside of hospitals bodes well for the medical office market, but only if it can capture the new medical practices and the expanding medical practices that these job gains represent.
The fourth quarter’s positive net absorption was only the fifth quarter in the past three years to post positive net absorption, despite a significant drop in quarterly gross absorption, suggesting that it was fueled more by fewer returns of space to the market than by an increase in demand.
While distressed professional office space has worked its way through the system, distressed medical space continues to pile up.
More demand for medical office space must be generated, and medical office buildings need to capture the lion’s share of that demand. Without these developments, 2015 will likely look a great deal like 2014.
“The addition of approximately 450 jobs to replace with this base over the past 12 months is not enough to spark a broad-based recovery in the medical office market,” Stater said.
Multifamily
According to statistics provided by REIS, multifamily vacancy in Southern Nevada decreased in the third quarter of 2014 (the most recent quarter of available data), extending a three-year streak.
Six of the eight submarkets showed positive net absorption in the third quarter of 2014.
Asking rents for multifamily stood at $866 per unit in the third quarter of 2014, showing no movement from the second quarter.
Southern Nevada’s multifamily market has done very well over the past six years, spurred on in part by economic recovery, and in part by restrained demand for single-family residential properties.
Multifamily sales decreased in 2014 compared to 2013, with 13,203 units selling at an average price per unit of $69,053.
If population growth remains steady and single-family home sales remain constrained, the multifamily market should remain attractive to investors.
“There is some danger; new rules in Washington, D.C. are poised to bring back the easy financing days that helped get us into the Great Recession in the first place,” Stater said. “In the short term, this could increase sales of single-family residential at the expense of demand for multifamily residential. Keep your eyes on the numbers in 2015, and be prepared.”
Land
Southern Nevada’s land market continued to recover in 2014.
During 2014, 112.46 acres of industrial land were sold, with total industrial land sales volume of $26.5 million. The average sales price of industrial land in 2014 was $5.42 per square foot.
During 2014, 635.42 acres of commercial land were sold. The total commercial land sales volume was $214.2 million. The average sales price of commercial land in 2014 was $7.74 per square foot.
During 2014, 1,856.4 acres of residential land were sold. The total residential land sales volume was $467.6 million. The average sales price of residential land was $5.78 per square foot, an increase from a year ago, and a sign that the market is improving.
A total of 650,880 square feet of industrial product was completed in the first three quarters of 2014 on 93.87 acres of land. An additional 1,653,781 square feet of industrial space is either under construction or planned on 184.21 acres of industrial-zoned land.
“Developers and investors remained bullish on Southern Nevada in 2014,” Stater said.
About Colliers International
Colliers International is a global leader in commercial real estate services, with over 15,800 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world.
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