Commercial real estate (CRE) has seen many interesting shifts in recent years. From reduced office usage to rising industrial rates, brokers have had to become quick to adapt to changing market conditions. Recently, brokerage executives met to discuss their industry and the outlook for CRE in Nevada.
Shannon Scholten-Adams, vice president of Nevada Business Magazine, served as moderator for the event. These monthly roundtables, sponsored by City National Bank, bring together industry leaders to discuss relevant issues and solutions.
How did the pandemic affect the labor force?
Carol Cline-Ong: COVID came, we all shifted and everything is different. We’re not going back. However, I believe we have employees that are just now coming out of the “fight or flight” and are still very fragile. We have clients that are saying, “We’ve got to go. I don’t care that it takes time to get things done.” And we have employees saying, “I can’t breathe.” They are exiting or [deciding] whatever their new career is going to be. As employers, we’re trying to bridge that gap. It’s real and clients are saying, “If you can’t do it, I’ll go over here and maybe they’ll do it, maybe not.” Meanwhile, you’ve invested a great deal and you’re losing a valuable resource because of something that is just in the air. It really is a big deal. And the fragile nature of our workforce, we really cannot underestimate.
Cathy Jones: As an employer, you have to be a lot more flexible with providing time off and being respectful of things they want to do on a personal level. I have a lot different attitude about it than [previously]. You need to take that time? Of course you can take that time.
Cline-Ong: But then the client calls and says, “I can’t get a hold of Cathy because she’s taking time off.” Where’s the balance? That’s what’s happening. You can be flexible and supportive, and the client still wants [their representative] to answer the phone.
Jeff Jacobs: It’s kind of wild if you look at the stats, we’re first or second in the nation in unemployment – in the bad way. All of us are hurting for qualified candidates and talent. Meanwhile, there’s more candidates out here than in any other state in the country. There are able bodies out there looking for work.
How do you recruit and retain new brokers?
Brad Elgin: Fundamentally, communication is the most important thing, but everybody would say that. So, practically, what we’ve done in our office [for] new people coming on board, is taken a different approach. We say, “You’re going to have some ownership in the deal. We need you to have ownership in the deal.” That ownership comes with being challenged and having expectations and standards placed upon you. If they can’t handle that, then get out because I don’t want to work with that person anyway. And when we say ownership, [they are] getting a piece of the deal. [They then] understand that [their] work [brings] results.
Cassie Catania-Hsu: All of us are all struggling to retain the same talent. That’s why you see so much movement in our industry, we all know who the good ones are and we’re all trying to hold onto them. If you find somebody good and they leverage you for more, you’re probably going to do it because if you don’t, the next company will. We’ve all been in situations where somebody’s asked for something. We’re not really sure if they’re ready or not, but if you don’t give it to them, I’m going to. How do we get to the point of retaining the talent you have, but also finding talent? They’re two very important separate issues, really.
Jacobs: The general business environment is so different than the one that I came up in, when I started in the workforce. They were doing me a favor by hiring. They sat in their office, smoked cigars, counted their money and [sent you] out there to make money. That was the mentality. That has come full circle where now we’re spending a lot more employers catering to the needs, overall happiness and well-being of the employees. It was probably a lot more fun as an employer back then.
Jeff Mitchell: We’ll have to adopt those “Mad Men” days – cocktails at noon, taps in the office.
Aaron West: Pre-COVID, if you took a survey of everyone in your office and said, “I’ve got great news, we’re going to a four-day work week.” People would go nuts. Now when you’re trying to hire someone it’s, “You’ve got to come in at mandatory three days a week.” It’s such a complete shift. With our industry, it’s a little different because we have employees and then we have independent contractors. For independent contractors, especially, going back to a work in office model [is a challenge]. Everyone in real estate understands the benefit of organic collaboration. That just doesn’t happen [in a remote environment]. Retaining top talent is about communication, it’s about relationships. It’s a tough market because we’re all competing against each other to retain and attract the best in the business. We have to start looking at growing organically through junior brokers now through the UNLV real estate school or some other factor. As Brad [Eglin] was saying earlier, there were solo brokers back in the day, but it’s more and more a team thing [these days]. I’m not really bringing on juniors and saying, “Go get ‘em.” [Today I say,] “This is your senior broker, and this is who I’m pairing you up with.” There needs to be that mentorship and leadership now versus back in the day where you survive, or you don’t.
What is happening with Nevada’s CRE market sectors?
West: From an overview high level standpoint, the fundamentals here in Vegas are very strong. Gavin Newsom will continue to be the gift that keeps on giving from California. A lot of people over there are still struggling. In leasing, in retail, industrial and office, [there is] more of a flight to safety than a flight to quality. Our research reports are showing [industrial will] always be strong from a leasing fundamentals [standpoint]. Retail is the same way; we’re showing 4 percent vacancy there. From a capital market standpoint, that’s where we’re all probably hurting. There’s so much uncertainty, you can’t cancel the exit cap rate until the Fed says they are done raising interest rates. I don’t think that valve is going to turn on anytime soon. That’s where we’re missing some revenue from the prior year, which was a record year.
Mike Young: The primary focus of my brokerage is healthcare and healthcare numbers mirror education. We’re at the very bottom, especially with the number of doctors per capita. As long as reimbursement rates stay as low as they are, we have a hard time bringing in doctors. I’m hoping the medical school will help make improvements towards that, but we’ve got a long way to go. You hear too many times that people get their healthcare through the airport, and it shouldn’t be that way.
Jones: On the industrial side, one of the things I hear a lot about are the land prices which have gone up significantly since COVID. Industrial [developers] out there are buying up the bigger chunks of land. They’re paying prices now that were only retail or office pricing in the past, which has really driven the lease rates for industrial buildings up. We’re working with a couple groups that are coming into the market, industrial tenants, and they’re getting sticker shock. They cannot believe how high our lease rates are. They’re not coming from California, obviously, because if they were, they would be happy with lease rates. But it’s tough to compete with a Phoenix or Dallas market when our land is so expensive.
West: For the first time ever, two of our brokers told me that their tenants decided to stay in California, which is odd to me. It just penciled that way.
Jacobs: The capital markets are definitely slightly frozen. It’s just really hard when you’re buying an income stream to have any sort of confidence of where the world’s going. With the lack of clarity and interest rates, the volatility just this week has been insane. It’s hard for investors to have confidence in that. We are seeing a real strong owner user market on the office space. As long as we’re a business-friendly economy, we’re going to be fine both in northern and southern Nevada. And we’re going to be off to the races as soon as there’s clarity on where interest rates are. We don’t need them to cut, we just need to know they’re not going up anymore. Then capital will start to find its home in commercial real estate again. Right now it’s in this limbo period where buyers and sellers can’t agree on cap rate and we’re all stuck in the middle of that.
Cline-Ong: From a tenant perspective, people are saying, “Well, I’m not going to relocate because of the cost.” It’s certainly challenging and they want more and more. Then you still have the same problem, what pencils and what doesn’t. As the rental rate goes up it’s a different dance than we did two years ago.
How are costs affecting this industry?
Mitchell: We have a scenario right now where we’re working with Burlington Stores and they’re working on relocating a store. The cost to relocate that store 24 to 36 months ago would have been about $1.5 million. Bids from construction companies today are putting that at about $3 million to relocate into a second-generation space. The landlord is still moving forward with the deal, but that tenant isn’t necessarily going to pay twice the amount of rent to justify that. That’s been a challenge. Industrial versus retail in some cases [is another challenge]. We’re working with REI and they’re looking for warehouse space. They’re now having to reconcile paying as much for that warehouse space as they would for their typical retail store in a shopping center. That never has been the case in the 20 years I’ve been in this business. Industrial was always cheaper. And now these boxes are almost on par with a retail shopping center.
Dan Adamson: With retail it’s the same thing. We’re looking for equilibrium. We’re going in a positive direction and the retail experience, with Internet [shopping], has settled. That’s kind of an equilibrium. Consumer expenditures are 70 percent of GDP, people are still spending money and retail is going to go somewhere. I don’t think brick and mortar is dead by any stretch of the imagination. Rental rates are going to go up. There’s going to be more conversions and demolitions repurposing. It’s very healthy; I talked to our other affiliates around the country and I feel fortunate to be here.
Is financing becoming an issue?
Cameron Glinton: We’ve seen the slowest sales velocity for multifamily properties in the past decade. There are only three deals that have transacted over ten units. We’ve still seen a lot of cash buyers come in, especially on smaller deals where you don’t have to borrow capital, but you can tell that’s affecting larger size deals where you’re looking for positive cash on cash return. Sellers aren’t really in a position where they have to sell, so they don’t want to meet buyers’ expectations. It’s definitely affecting the market. Our brokers have been fortunate to work with our capital corporation but it’s been a big challenge this year.
Catania-Hsu: The first quarter was basically the consequences of rapidly rising interest rates. The only way that a buyer can offset that is to get a reduction in price and the seller isn’t there yet. What we’ve seen in first quarter is a slowdown in sales. Buyer’s and seller’s expectations just haven’t reset because interest rates [rose] really fast and cap rates haven’t caught up. Seller’s expectation, cost of construction, cost to rebuild, all these factors came up to the surface at once and the market hasn’t had a chance to correct. It all came out really fast after three years of expansion and growth.
Jacobs: There’s a couple of things going on. One is volatility in interest rates, which is a widening spread. We’ve had almost 75 basis points down in the last couple of weeks that hasn’t flowed all the way through to interest rates. Lenders are being very cautious with their spreads. The second thing we’re really paying attention to is regional banks. The amount of deposits that have been placed into big banks [and] treasuries are going to cause a pause with the regional banks, which are the bread and butter of commercial real estate. Those are the creative lenders. Those are the ones that you can get some favorable terms with when you’re working through some complicated transactions. Are they as eager to lend when they’re trying to keep a little bit more cash reserves based on what’s happening? I don’t know, it’s too early to say what’s going to happen with the regional banks.
Do you see more failures?
Jacobs: I don’t know. Interest rates going down really helps their balance sheet. As interest rates come down, their balance sheet starts to look better, but if interest rates shoot up another 75 basis points, we could start getting right back into that problem. It all comes back to interest rates, the volatility and the lack of clarity.
Davis: The other issue there is, Wells Fargo has gone pencils down on all office lending nationally. They will not lend on any office anywhere. This was before interest rates started their exponential rise. You just mentioned you’re having an issue with local banks who, because of yield issues, don’t have good balance sheets. They’re not lending. Now the largest lender in the US is not lending anymore. I don’t know who’s going to start filling that gap. A lot of that comes back to the very first thing we talked about, which is return to work. They’re not lending on office. [I recently saw] a report that said they think as much as up to 50 percent of office space could become obsolete. You see a report like that and ask what is going to happen with affordable housing?
Isabel Alvarado: Indent coverage ratios are a problem too. Now, because of interest rates and the returns on the properties they’re looking to buy, they can’t get the same amount of debt. A lot of times it’s killing deals because they can’t get that amount of loan that they originally wanted.
Mitchell: A challenge unique to Nevada is that we are not a heavy office market. Our market is very spread out in terms of office product and it’s surprising to me that there is new office product being built in our market. That would be craziness in a market like New York where density is so concentrated and also vacant. We’re insulated to some extent.
Mike Young: The bulk of Las Vegas is smaller tenants. And our group does a lot of owner/user stuff and rates haven’t moved that much. We can still do owner/user deals between 5.5 and 6 percent. That market is strong. We just don’t have the inventory to fill the gap.
Alvarado: We are still doing a lot of prudent lending. We’re getting very creative as well, utilizing SBA programs. All rates have gone up, [we need to help people understand that] historically the rates were at this. Getting [people] over that hump in the pandemic where the rates came down so low and letting them see the savings and a lot of restructuring [is important]. Having a conversation with our brokers, understanding their expectations and then letting them know what we’re able to do and really vetting our clients and understanding what their needs are [is important]. Sometimes we have to bring them back to reality and educate them.
What’s the outlook for this industry?
Brad Elgin: Northern Nevada is healthy and will remain [that way]. We may have a lapse of the demand, but people are [still] talking about coming from California.
West: Vegas is incredibly strong. It’s an incredibly different place than it was in 2008. I don’t think we’re overbuilt, from a housing perspective. You have the health of a Raiders and possibly Oakland As and now F1 (Formula One) which could produce $1.2 billion for one event. It’s crazy how healthy Nevada is. I think we’re in a good position. We just need to ride out the next few months of uncertainty.
Catania-Hsu: [The outlook is] positive, but [we need to] hunker down and get back to basics. And I’m telling my team, sharpen your pencils and your fundamentals in a time like this. It’s time to sharpen the tools that we all have in our toolbox and get ready because I think it looks good for the long haul.
