High-View LandscapesCommercial Real Estate Developments in Nevada

 

The economic climate in the United State, and the globe, is leaving many professionals scratching their heads. A lot of indicators suggest the economy might be slowing and could even be entering a recession. Those indicators, however, are telling a different story than a lot of previous economic downturns. Companies for instance are in desperate need of employees, but can’t find them instead of getting ready to shed them. Likewise, consumers seemingly want to buy, but struggle with supply chain issues.

And the economic climate can vary state-by-state, and by many accounts, Nevada is surviving just fine right now, particularly the commercial real estate sector. The combination of facts and circumstances in the U.S. economy has not occurred before, which leaves a lot of real estate professionals without any real idea of what is going to happen next.

“I don’t know how else to say it, what we learned in macroeconomics 101, it doesn’t seem to be playing out and it could very well be that the U.S. government pumping in several trillion dollars to keep things going is actually keeping things going,” said John Blackmon, manager and broker at NV Capital Corp.

“What gives me some comfort is that we’re in the lending business and we have not seen an uptick in delinquency in our commercial portfolio. I was really prepared and concerned about that. I spent 35 years as a banker and that’s one of your leading indicators. The signals don’t show we’re heading into anything of a slowdown. But everybody is cognizant of what’s going on.”

The real estate sector is still in flux because of the COVID-19 pandemic. Because consumer shifts happened so aggressively and abruptly during shutdowns, post-pandemic consumer behavior is still figuring out where it ends up.

“The trajectory coming off COVID has played a role in commercial markets, particularly the industrial sector,” Applied Analysis Principal Brian Gordon said. “The Amazon effect was in full effect at the height of the pandemic as people were hunkered down and shopping online at a greater rate than ever. Those circumstances fueled substantial demand for industrial product.

“The question remains how sustainable is that trend line moving forward.”

Industrial Still Hot

While consumers might resume behaviors a little more similar to pre-pandemic times, industrial real estate vacancies remain sub-5 percent and rental rates continue to rise. Those two factors, however, might start to settle into a more normalized pace of expansion and overall demand soon, Gordon said.

The white-hot industrial market was great as a safe haven for institutional capital, said Tom van Betten, the vice president of development at Matter Real Estate Group. That status was because demand was outpacing supply, complete with major companies like Amazon “gobbling up 20% of every warehouse.”

The market, however, is slowing down. Van Betten said at the height, buildings might receive 20 to 30 offers. Now, those opportunities are attracting two to five offers.

John Ramous, a partner at Dermody Properties, agreed with the sentiment that things might be normalizing and cooling off a bit, but that it’s not a bad thing because it was getting to an unsustainable level. While the changing of consumer behavior created opportunities for companies, the growth was rapid and perhaps a temporary flash in a pan with little future behind it.

Ramous said approximately 20 percent of the industrial inventory in southern Nevada was built over the past couple of years, a very substantial amount. “We’ve definitely been in a whirlwind,” Ramous said. “Even prior to COVID, from a logistics standpoint, the markets were very strong. But the pandemic impacted the industry 5, 10-fold. What we’re seeing now is the reality check from the standpoint that things have started to adjust more back to normal conditions. Which is nice, it is still a strong market and demand seems to be strong.”

Ramous conceded at the height of the industrial fervor, Dermody was chasing deals that were likely never going to happen because the companies never actually had planned for the growth.

With seemingly every conceivable company wanting to expand industrial space, Ramous said Dermody was competing with up to 10 to 15 developers for the same projects. Now, there might be three or four developers chasing a client, creating plenty more opportunities.

Now, the focus is on strong companies that are ready for expansion. Roughly 80 percent of the projects in both northern and southern Nevada are released, but Ramous said customer demand is still so strong much of that preleasing is done up to 14 months before the buildings are built.

Along with the bizarre global economic factors, even the white-hot industrial market is leaving some head scratching situations for the Nevada real estate executives.

“It’s an interesting time, there’s not a lot of standing inventory, not a lot of new warehouses being developed waiting for leases and everything delivered so far has been absorbed so we’re at less than 1 percent vacancy rate,” van Betten said. “Fundamentally, you’d say, ‘Man, that’s a really unbelievable market to be less than 1 percent,’ that’s lower than I’ve seen. However, we don’t know, until the next wave of buildings that we will have a good measuring stick on if there’s been any decrease in demand.”

Lengthy Construction

Ramous said construction times continue to be an issue because of supply chain constraints.

The bottlenecks on material changes month-by-month, he said, using a recent example of a 12-to-15-month delay for joists.Other aspects like dock equipment might be out nine months to a year.

“Certainly you have to plan certain product and material costs as early as possible to time completion of the building,” he said.

Costs have also risen about 18 percent, which puts pressure on how companies underwrite projects. Ramous said thankfully Dermody and other established developers have the longstanding reputation to help weather those challenges better than newer entities.

Dermody is finishing up several massive projects, including a 1.3 million-square-foot project in Reno called The Park at McCarran. That project is already 92 percent leased and should be ready by the end of November. There are another five to six in the pipeline, Ramous said.

In the Las Vegas area, Dermody continues building out a large complex near I-15 in West Henderson, with a current building under construction about 50% preleased and another 500,000 square feet expected within a few months.

For Matter Real Estate, executives plan to deliver a million square feet of industrial space to the southern Nevada market next year. That delay was because the company could not get the steel fast enough.

“We didn’t think there was a lot of market risk, but now there’s a flood of supply and unclear demand, everyone is a little more nervous,” van Betten said. “But, in industrial, most developers are sleeping well through the night still.”

The real concern, van Betten said, are the development companies that started to get exploratory in their land purchases. He said developers started to make bold moves in Boulder City and Primm.

“That was when the market was hot, but now we’ve seen a notable decrease in demand, I don’t know that someone will show up to buy,” he said. “The proximity to labor wins the battle. If you’re a 30-minute commute and I’m 3 minutes away, but my rent is a dime higher, [it matters]. Everyone is struggling to get labor, so any convenience is a factor for employers. The commute is a bigger challenge than rent.”

Office Rebound

During much of 2020, offices were all but completely empty. Many companies across the U.S. have transitioned to some form of remote work, if not hybrid, situation for employees. That has led to a transformation of what businesses need from their office space.

As those businesses reconfigured their office spaces, Gordon said office vacancy in the Valley is approximately 15 percent, down from the high of 2 percent at the peak of the pandemic lockdowns — at one point, he said there was approximately a million square feet of office space vacant.

“It was simply a different dynamic unfolding between industrial and office,” Gordon said. “We’re starting to see industrial come off those highs and office coming off its lows, but at the end of the day, the performance will largely be tied to the broader changes in the national and regional economies.”

Matter Real Estate might be in a supremely unique position to understand the current office climate in Southern Nevada. The developer completed the first phase of its UnCommons project at the Durango Drive and I-215, a 40-acre mixed-use development. The first building is fully leased, including tenants like Morgan Stanley, CBRE, BDO and the new North American headquarters for DraftKings – many of which opened their offices by August.

Now, there are two more 180,000- square-foot buildings under construction, expected to be delivered by the middle of next year. Those buildings have decent pre-leasing activity, van Betten said, with about 20% of the footprints in negotiations.

“Recessions aren’t the best time to be leasing office space,” van Betten said. “We’ve had a lot of luck with global companies that understand where the costs are and the budgets need to be for an approved expansion, but the local companies don’t come to those conclusions until they’ve put themselves in a bind.”

While office is not moving at the pace industrial is, there could be a potential issue on the horizon. Van Betten said looking out to 2026, there’s very little office space planned. That could hamper potential industry growth in Las Vegas as companies looking to come to town might now have available offices to find a new home.

“There’s not many places for companies to move into new projects and so what does that mean?” he said. “It means that many companies are forced to renew, which might not be perfect but without competition of new buildings, even renewing a lease will have a surprising economic rent increase.It’s pretty scary for the size of the southern Nevada office market to have this kind of a halt on new construction.”

California Effect

Land prices are holding well in Nevada, according to Jeff Pori, CEO from Kingsbarn Realty Capital. A lot of that has to do with continued investment from California.

The California economy was hit harder from pandemic restrictions than much of the rest of the country, including Nevada, according to Pori. A great migration out of California was already occurring before the pandemic, but COVID-19 accelerated the trend.

“You’re seeing a exodus and they want to buy in red states,” Pori said. “Nevada is purple and right next door, they’re comfortable because they come here a lot. That helps our market.”

Ramous said companies are still making their way to both Reno and Las Vegas from across the California border. He said it does not take much, maybe 10 to 20 large businesses, to move the needle and it’s still happening.

Van Betten said buyers are still looking for value in Nevada, as the area still offers products at about half the price of the top California markets.

The migration from the coast is helping the residential market stay hot in Nevada, Gordon said.

“The market experienced strong demand throughout this cycle as people continue to exit higher priced markets,” he said. “Las Vegas has proven its ability to continue to expand. The migration has not only generated demand for housing, but incremental demand for goods and services, which ultimately benefit retailers, office users, entertainment offerings and the resort industry.”