There are plenty of unknowns when it comes to the future of commercial real estate in Nevada. From fluctuating interest rates, to ever changing markets, brokers are focused on staying on top of the shifting sand. Recently, a group of brokers met at a roundtable sponsored by City National Bank and held in Las Vegas to discuss the status of commercial real estate in Nevada and what changes are expected in the next year.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together different industries to discuss issues and solutions.
Are Interest Rates Expected to Come Down?
Jeff Jacobs: I don’t think anyone at the table is qualified to tell you where interest rates are going. I can show you research reports from Harvard MBAs that will tell you they are going up or they are going down. It seems like every time the Fed speaks, the experts change where the finish line is.
Hayim Mizrachi: If you look back 40 years, 3 percent interest rates are not normal. We are now getting back to “normal interest rates.” What we had before was abnormal.
Cameron Glinton: The higher interest rate environment is difficult.
Mizrachi: Interest rates were last year’s issue. Rising interest rates will [not] be this year’s issue.
Venessa McEvoy: We are all waiting to see what the Fed does. [They] can lower interest rates at any point in time, but in reality that might not happen until December of this year.
Mizrachi: In 2023 there was a change in the velocity of sales. 2021 and 2022 were great years, [but in] 2023, someone moved the cheese, and it was a rising interest rate issue. Nobody can predict it [absolutely], but to think that [the Fed] is going to raise [rates] like they did in 2022 to give us the effect of 2023, is not a likely outcome. There will be fluctuations. But when that actually matters is when someone needs to sell or needs to refinance. If you do not have to [do either], it does not matter to you today. And if nobody is selling because we are not meeting a market with cap rates, there is sticker shock. I predict that 2024 will be a little smoother compared to 2023. There will be a little more velocity.
What Condition Is the Industrial Sector In?
Bret Davis: Land sales in industrial have gone zero and building sales in industrial have gone zero or close to zero. But leasing transactions still have all the velocity that they had previously.
Mizrachi: What has changed is the [market] dynamic between [the landlord and tenant]. A few months ago, a bigger space [would receive] three offers and the landlord would send out [the leasing documents on] Docusign to the tenants and whoever clicked the button first would get the space. That is not true anymore. But there is still demand.
Cassie Catania-Hsu: The velocity is still high. We are still seeing high activity increases and market tours. Now it is a matter of getting that lease signed. There is definitely a lag that we did not see last year. There is also a large amount of supply coming online this year in industrial. If that does not get absorbed right away, we are going to see a big change in vacancy. The activity is high, but it is not turning as fast as it was before to actual bonafide leasing.
Glinton: Compared to most major metro markets, we are undersupplied for industrial and have been for a long time. That is why you see the high level of absorption. Sales velocity was strong in 2023. It was [approximately] over 6% of the stock trade, which was quite a few transactions. [Some] vacancies occur, [but] there is huge demand considering [Nevada] is a tax free state.
McEvoy: The absorption was record breaking last year. [There was] pre-leasing before [there was] even broken ground.
Catania-Hsu: It is not [that industrial is] overbuilt. I just don’t think it will get absorbed as quickly as we have been used to in the last four years.
Davis: [There was] unbelievable absorption and activity [before], but it has slightly tapered off. What is coming online will get absorbed. It is going to take 18 months or two years, instead of a year, which is a little long.
Is There Still a Demand for Retail Considering the Popularity of Online Shopping?
Catania-Hsu: We are still seeing strong demand in retail and super strong demand in QSR (quick service retail). Every inbound [inquiry] I get wants a drive thru pad [but] there is not a lot out there. There is a lack of supply compared to the demand that we are seeing with retail occupiers. There is not a lot of supply coming online to substantiate the requests from tenants, but there are a lot of concepts that want to be here.
McEvoy: Macy’s is closing 30% of their stores, but that represented 10% of their revenue, so it makes sense to close. They probably should have done that years ago, but now is a great time to do that. I do not know if Dillard’s is making headlines with anybody.
Catania-Hsu: Market by Macy’s just rolled out their new concept at the Aurora. It was their first one. It is a new [concept]. You can shop online and get it in the store with limited supply. Retail has reinvented itself and maybe that is [also] the future of office. [If] you go to Downtown Summerlin, there are still people shopping and buying. The retail stats still look pretty good from what we have seen from occupiers.
Mizrachi: Retail is still here. In certain parts of retail, there are also supply constraints. I am not a retail expert, but observing as a member of this community, there has been new construction. It has not been like industrial, but there is new construction where needed and rents are high.
With Remote Work Being So Popular, Is There Still a Demand for Office Space?
Davis: COVID changed how we use office [spaces] forever. It can’t be denied. It made people reevaluate their lives [including] how much time they were spending commuting to and spending at the office. And it has changed how we use office in the sense of amenities. What is great about UnCommons is not just its location, but its amenities. The three towers at Downtown Summerlin [are successful because] they have access to a million square feet of retail [including] 37 restaurants. For law firms or accounting companies that are trying to attract young talent, [that is important because] they want to give new employees a reason to come to the office.
Mizrachi: If you are not in the office and are working remotely, you have to be an absolute superstar. You have to make sure that your KPIs (key performance indicators) are measurable and in the face of the people that it matters to you for upward mobility. If you are [at the office] it goes a long way. We are going to be teaching the next generation the value of being in the office even if you do not want to or do not absolutely have to. There is absolute value there.
Davis: People got used to working from home and for a certain subset of America, they love that now. It is a struggle to get [employees] to come back [to the office]. We are a very personable business, and we need to be in the office, but there are a lot of industries that do not need that.
Glinton: The jobs market in Las Vegas is [expected] to have a 2% employment growth over this next year. We have the third lowest office vacancy [rates] out of any major metro market especially medical office, where we are undersupplied. COVID was a brief glimpse in time where you saw people working more remotely, and [many of] those jobs have now been created or absorbed. There are a ton of people moving to Las Vegas and they need office space.
Mike Young: [COVID] did not really change the medical office [sector]. More offices are doing online visits, but it did not slow the growth at all. COVID created a lot of illnesses and doctors had to see more patients [and we are still] seeing a lot of expansion in medical office [as a result of that]. When a primary care specialist needs a [2,000 to 3,000 square foot] space, it is not available. We do not have class B product available for them right now, especially in the southwest part of town. It has not been built.
Catania-Hsu: Office is far from obsolete. It is just going to serve a different purpose going forward. It is no longer the default setting, especially for the next generation. The office going forward is all about flexibility, collaboration, and hybrid friendly amenities. It is not going away. [The next decade is going to be a] time of reinvention for office.
Mizrachi: I do not think there is any reinvention happening at all. There were remote companies that existed pre-COVID. What COVID did was [place] the terms “flexibility” and “remote capability” at the forefront. And if you are a business that does not have that thought through, you are going to have an issue. I don’t think anything new got invented in this process.
Is the Recruitment and Retention of Talent an Issue in This Business?
Catania-Hsu: Both [are an issue]. Just because you recruit someone [is not a guarantee you will] retain them.
Mizrachi: We have sales agents, [but brokers] are highly technical, specialized, and highly skilled types of people. We have experienced a development boom in southern Nevada and have not kept up with creating new brokers to keep up with all the growth that we have had. Commercial real estate property managers [is another area that is lacking] and so there is a shuffling around and there have been wage increases for all of them because they are in high demand.
Glinton: Finding people that are interested in a 100 percent commission-based industry is difficult. We pull people from major universities and markets like Texas or California or back east.
Mizrachi: Every one of us has a job opening for commercial property management. We need to fix this problem. We need to create a pathway to create more [property managers]. The LVGEA wants to bring a certain level of jobs and the per hour rate that they look to attract is [approximately] $55,000- $60,000 [annually]. For property managers, that is an entry level [salary]. They [earn] up to six figures. This is something we can fix together as a community, but no one is putting the resources towards it.
Glinton: We are rolling out a big internship program this year. We also created a program called Bridge to Brokerage for ex-military that has helped transition some people into the field. We have a huge push for paid internships this year to allow [interns] to get the experience of working in the office and [learn what the] industry is, but it is still 100 percent commission.
McEvoy: [Entering the industry] looks slightly different than when some of us around the table started. The students we are getting from UNLV that have a real estate degree have an idea of what they are stepping into. What is different today is that they are usually looking to join a team, whereas before [you only had access to] a phone book, an ashtray and cigarette, a phone and good luck. It is not quite that [way] anymore. You usually start with a team. I do not know [anyone] who would hire somebody straight out of college [and let them work] without a team.
Catania-Hsu: You need an entrepreneurial mindset [to work in this industry]. We can teach the next generation how to do the business on a team. But I want to see an entrepreneurial mindset, and I have to see fire in their eyes.
Mizrachi: [People who succeed in this industry are not] the 8 to 5ers. We are not looking for the 8 to 5ers or for people who want to work from home two days a week.
Jacobs: You [usually] do not come in [to this industry] with two kids and a family [to support]. You need some runway. We have had good luck with people [entering the industry as a] second career, because they are already bringing life skills, and a lot of contacts and connections [with them]. They are already a professional. It cuts down on the learning curve as opposed to someone straight out of college. We have had people within twelve months [that are] aggressively getting deals done. That is hard when you are 22 [years old].
Mizrachi: Age aside, the person that [we are looking to hire] is an entrepreneur. We have had people right out of UNLV without a real estate license that are now fully functioning, producing, and contributing members of our brokerage community. We have had people that, after 20 years in a different industry, [that were] tired of sleeping under their desk to get the reports out in the morning, and tired of missing [their child’s] dance recital [succeed in this industry]. They had to dip into some savings [in the beginning but] now they are fully functioning and producing. That is who we are looking for.
What Changes Do You Expect in the Next Year for This Industry?
Mizrachi: Everyone is waiting for the looming foreclosures to happen and the wall of loan maturity that is going to send everyone into default. I am saying that in an exaggerated way, because when we sit here this time next year, I don’t think it is going to [happen] like people think it is going to.
Young: Lenders seem to be fine moving that 4.5 percent loan to an 8.25 percent loan. As far as I am seeing, the lender is not defaulting. They are restructuring to help the owners through this period.
Davis: Lenders do not want buildings back. They are not taking them back.
Jacobs: You have to have new skin in the game. If [your loan] is at maturity, [the lender] is going to want some capital. They are not going to [freely] extend it to you. And depending on what your interest rate was and your new one is, they still care about that service coverage ratio. You might have to recapitalize that loan. They are not looking to take these back, but there will be some [adjustments].
Davis: Generally speaking, we [also] do not have the occupancy issue that we had before. We have the third lowest vacancy rate in the market in the US. Other than Hughes Center, there are not properties that are bleeding cash.
Jacobs: It varies by sector. Some of the C-class multifamily products are struggling right now. People that were buying low cap rate deals on variable interest bridge debt and trying to do a value-add play to push rents [are struggling]. That business plan is not working in multifamily right now. I am not as worried about office here as brokers are in San Francisco, Denver, Portland and Chicago, and lot of those major metros. We do not have those type of issues.
Tim Rogers: We don’t have many tall skyscrapers with hundreds of millions of dollars of debt. Our biggest is Hughes, but most of the office [space in Las Vegas] is three to five stories [with] maybe $9 or $10 million in debt. The 2 percent interest rate difference is a lot less than somebody who is holding a couple of hundred million dollars on these large office. It depends on the debt you have. If you have regular bank debt, [such as] CMBS (commercial mortgage backed security) or life company debt, [lenders] may be more aggressive in special servicers and those types of things. But the local banks, with the leverage that we have, we should still be in good shape. And if rates at least stay steady and tick up, and our occupancy and rental rates are there, I do not think we are going to have as big of an issue as some of our other markets.
Mizrachi: That is critical. We are being brushed with national headlines and national stats, but when you look at our data [in Nevada], it is not the same. If people get in trouble, it is because lenders [consider a] product type as wrecked. But it is not necessarily.
