Industry FocusCommercial Brokers

Two years into the pandemic, the commercial real estate (CRE) industry has undergone several changes and leaders in the field are learning that flexibility is key. Although, each submarket was affected differently by COVID the outlook from leaders is positive. Recently, executives representing CRE in Nevada met virtually in a roundtable, sponsored by City National Bank, to discuss the shifts in the market and what the future holds.

Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together industry leaders to discuss relevant issues and solutions.

Did COVID have any Surprising Effects on your Industry?

Melissa Molyneaux: One of the surprises to me was that COVID would actually benefit Reno. Our office market has been extremely busy. One of the biggest challenges I have is understanding the market dynamics. On the one hand, we have multiple offers on properties but, on the other hand, we have some buildings we can’t give away. We have owners sitting on vacant spaces. The market dynamics make It hard. I [also] didn’t realize how many Californians would move here. I was blown away with how much our population has grown, and some of the residential statistics in this market are just astonishing.

Harvey Fennell: It is amazing how many wealthy Californians have decided to relocate. The straw that broke the camel’s back may have been COVID but there is definitely an influx, not only from the Bay Area, but from LA as well. Serious high-wealth individuals who are not retiring but are moving here for a lot of other reasons. They all seem to be very happy [with the market], which is good so I don’t see that trend changing, I think it will continue in 2022.

Christopher Crooks: I think Las Vegas is going to, ultimately, benefit from COVID for several reasons. One is the remote workforce, we realize it can work, and therefore Vegas is going to become a place people want to be based [because of] the cost of living and the quality of life. We might see more diverse companies coming here. With this market, people [are] wanting to be here and Vegas is going to become a Tier I city soon.

How does a Shortage of Available Land Affect CRE Brokers?

Cassie Catania-Hsu: Developable land is really a challenge. A lot of the land we’re seeing [become available] today is not really ripe. People are making a run at it, not even realizing. We’re seeing some crazy land sales in Apex and that blows my mind.

Aaron West: Land is a huge challenge here in regard to inventory and [whether or not] BLM (Bureau of Land Management) will release any of that land. We’re seeing those constraints. We’re seeing land really becoming an issue. Hopefully, there will be an auction here soon.

Fennell: We have the same issues in northern Nevada [with] scarcity of land. The Nevada Lands Bill (H.R. 253) might help, if that gets passed, to open up some lands, particularly outside of Sparks. There are some things afoot that might help us out up here, but we’ve definitely got a shortage.

David Cantwell: I’ve never seen a market like this. I have been privy to seven bidding wars on industrial dirt and/or industrial buildings for sale or lease. [There is] a lack of developable land. Truckee Meadows is running out [of land] at TRIC (Tahoe Reno Industrial Center). The original development has been subdivided and sold.

Is the Lack of Available Inventory a Challenge?

Crooks: From an industrial standpoint, our biggest challenge is inventory. [We] just don’t have enough product for the demand right now. And we are losing to some of our other competitor cities like Phoenix and Salt Lake City

West: For the most part, it’s [a national shortage] on the industrial side. Although, there are specific markets that are way tighter than others. And it’s not just in the US, it’s [happening in] Canada as well. [Here in Nevada], there are certain markets we’re losing out on at a local level because our inventory is more scarce in Las Vegas than it is in Phoenix. There’s still land over there. And, there’s a lot of tenants [looking]. I’m hearing from clients that there’s just nothing [available] and they’re moving to other markets. There are a lot of markets in the whole country that are extremely tight, but there’s also an absolute scarcity of land here in Vegas.

Chris Jackson: If I had to pinpoint my biggest challenge right now, inventories are on the top of the list. If there’s a significant amount of demand, which there is, it makes it very competitive. But, the glass is overflowing for all of us, it’s a good market to be in right now.

Marco Semeraro: On the back end of it, lack of inventory [is also an issue]. Clients who are looking to borrow money, or even if they have the cash, they have nowhere to put it because there’s no inventory.

Does your Industry have Workforce Challenges?

Molyneaux: There’s just not enough hours in the day and [not enough] support. In a hot market. There’s so much more to do. When you get multiple offers, there’s just more work. I feel like I could backfill five positions and it’s really hard to find good talent.

Catania-Hsu: : The future of work and hybrid work has been a lot [to navigate] for the last two years; it’s just been a whirlwind. How do we continue to manage and create culture and serve the needs of brokers and support staff and teams? We’ve had positions open for many months and we’re getting a lack of response. I wouldn’t even say I could pinpoint it to a lack of talent, it’s a lack of response. I don’t know where people are or where the shortage is coming from, but it’s a very tough employer’s market right now to find people. Many of us, in all industries, are trying to ramp back up and it’s challenging to replace and find people.

Crooks: A friend of mine, who is an executive [at] MGM, said they have upwards of 5,000 [open positions], from service people to management and they can’t find anyone. I heard [a statistic] this morning that we were the 14th worst state when trying to find people for employment. I [also heard] that a lot of people took time during COVID to retrain themselves. So, [with a lot] of those lower-level, blue collar jobs there’s not as much supply of those workers.

Catania-Hsu: We have to be creative [when finding people for this industry] and it’s challenging.

Jeff Jacobs: Just trying to find people that already have extensive commercial real estate experience [is an issue]. It’s not how any of us are going to grow our companies, you have to find people that have been disrupted. We’ve made a big focus on bringing in hospitality workers who have been through everything under the sun in the last couple of years and we’ve had some great successes there. It does take some time to find the right people and we’re interviewing all the time. Every week we have jobs posted, and we are trying to get in front of as many people as possible to talk about our company and industry because there are more jobs out there than there are employees.

West: We have a mutual respect for each other but there’s, no doubt, a war on talent. Everyone wants to grow their market, it’s the name of the game. We all still treat each other like human beings. We understand we’re all in the same boat and trying to do what’s best for our brand and office. I think the respect outweighs some of that infighting or poaching.

Give us an Overview of Each Submarket

Industrial

Barton Hyde: The last time I saw vacancy rates this low in industrial was probably about ten years ago, and I don’t think it was below 3 percent, it was maybe below 5. Pushing 2 percent, or getting close to it, is definitely hitting record levels.

Cantwell: I was party to a sale not quite a year ago for 24 acres at $2.65 a square foot. There’s a company [now] that’s got 36 acres in escrow at $6.75 a foot, in less than a year. [There are] no signs of abatement. It’s like bidding wars.

Office

Hyde: When COVID hit, the parking lots were pretty bare. When the demand came back for office space, we saw a demand for more private offices so people [could] have their own space. In the last six to eight months, a lot of that fear has gone away. And we’re seeing the normal, combined use of space with perimeter offices and the bull-pen area coming back. Some of the footprints are coming down a little bit, but mostly everybody wants to get back into the office. We get more done, there’s more synergy, even the bigger companies are getting employees back in the office.

Crooks: Just look at the new developments going up right now, the demand and pre-leasing going on. These new developments are, roughly, reported to be 70 to 80 percent pre-leased, already. A lot of the demand is coming from companies outside of Las Vegas as well. That shows it is a very healthy office market right now and they’re getting hot. Uncommons is up to $4 a square foot right now.

Catania-Hsu: Office was the most affected by the pandemic in 2020. But in 2021, I feel like most firms came back to the table to finish plans that had been halted during the pandemic. So, we saw an uptick in 2021 and it’s even still accelerating right now, into 2022. It’s promising to me that the impact, hopefully, from COVID on the office market was short.

Fennell: My office group was telling that the two issues they’re wrestling with right now are a lack of product for small users, say 5,000 square feet and under. [They’re also challenged by] the price increase in sales. Prices have gone up 41 percent in four years. The price per square foot is now $2.98 per square foot. It’s pretty significant.

Retail

Jacobs: The newest development in retail I find interesting is Area15, an experiencebased retail facility. Everyone has been talking about it for years, but I feel like that’s been the best example we can really point to. People still have a need to congregate, but it doesn’t necessarily need to be at a shopping mall buying goods, [instead they are] sharing experiences. I’ve been really pleased with the success of what Area15 has done. The foot traffic there has been incredible and it sounds like they’re continuing to expand. Experience-based retail should be here to stay. I can’t say the same for traditional retailers that don’t evolve to more of an internet-based business

Hyde: I think, as human beings, we like to touch and feel products we’re going to purchase. I don’t think we’re going to see big box retailers go away by any means. It’s a convenience to be able to order things online we know we like [and] know fits. Our office is in DTS (Downtown Summerlin), and it’s constantly packed up here. The type of setting with office, multifamily and high-end retail, has really been a great mix. The southwest will continue to grow with this type of product. UnCommons is similar to Downtown Summerlin. So, I don’t think [traditional retailers] are going to go away but maybe it’ll downsize a little bit.

West: I [agree], brick and mortar is not going away. People need to touch and feel stuff. Online shopping is a great convenience, but you still need the stores.

Catania-Hsu: You’re just going to see retailers expanding their offerings. They’re going to partner with direct-to-consumer companies and have branded kiosks, even within department stores. We’re seeing promising numbers, even nationally. I definitely don’t think [big-box] is going away. But, we’ve seen expansions more in the junior boxes. The future we’re seeing is in open-air retail centers, that’s the boost we’re seeing in activity. It’s the most sought-after retail asset class within the sector right now.

Multifamily

Fennell: At the moment, there are only about 12 to 14 [multifamily] listings in [Costar and MLS] put together. The demand from California investors has been really significant. There’s a shortage of product. Obviously, investors are a little uncertain about interest rates right now, so it’s causing a little bit of concern. There aren’t that many [multifamily lenders] around anymore, but they’re all underwriting at a 5 percent rate. So, even though they’re loaning out less than that, they’re underwriting them at a higher rate. We don’t think the cap rates are going to move much [from] where they are, they might decline just a little bit up here [in northern Nevada]. Another number that surprised me was Class A [multifamily] properties are approaching $325,000 per door. That’s a major increase. The market is good, it’s strong, [but] there is a lack of inventory. Obviously, it’s tougher to build with construction costs and permitting issues. We don’t see that market backing up at all. It’s going to be strong.

Jacobs: One thing that is interesting about multifamily, as it relates to current market conditions, is we’re in an inflationary environment we haven’t seen since the 1980s. A lot of the other product classes have 5, 10, 15-year terms on their leases. When you start getting 5 and 6 percent inflation readings, you could be stuck in some of the product types. In multifamily you’re able to reset that on an annual basis. Investors like that flexibility in the environment they’re in, where they are able to invest long-term and through some of the HUD (Housing and Urban Development) programs get 30-year financing that’s fixed in the 3 [percent’s]. Then with inflation, they’re able to reset their rents much quicker. That’s helping stimulate additional demand.

How Concerned are you About Rising Interest Rates?

Catania-Hsu: We’re anticipating rates to increase, but we don’t anticipate it will really move the needle much on activity because the inventory is still so low. Even with rising interest rates and the amount of cash we’re seeing, we don’t anticipate it to really change the activity we’re seeing in the market.

Jackson: There’s a lot of demand out there and money on the sidelines. People will feel it because their mortgage is going to change, but they’re not going to feel it in the way the news is outlining. People [will] still acquire but they might put more money down. It might change things a bit but I don’t think it slows acquisitions. Acquisitions will move forward in 2022.

Jacobs: I’m definitely concerned [about interest rates]. The number we’re looking at is the ten year [rate], once it crosses 3 percent, that’s when we’re going to start to feel it. People are still underwriting. There’s so much demand right now. People are very aggressive in their underwriting. Once we see a material shift, things can change, but it’s going to take a little while to get there. Everyone’s taking risks. In a low interest rate environment with high growth, everyone seems brilliant. It covers up a lot of mistakes. We’re happy with where the rates are right now, and everyone is going to have to adapt as they increase.

West: We are starting to see some of those mom-and-pop buyers or investors not stretching as much as they used to. This is very recent, they’re just not stretching like they did six months ago.

What is your Outlook for the Next Year?

Fennell: Unless we have a Black Swan (unpredictable) event, it’s going to be another good year, like 2021. For our area, northern Nevada, I don’t see that changing much at all.

Jacobs: On a micro level, both Vegas and Reno are benefiting from the migration from high tax states. I don’t see that changing anytime soon. At a macro level, war, rising interest rates, Black Swan events, any of those can disrupt predictions. But, the general tailwinds we have in Nevada are very strong, and we’re very bullish.

Hyde: I think Vegas and the surrounding greater Las Vegas market has a positive next three to five years. We’ll see some upward trends. It could go beyond that, but easily three to five years [of growth].

Jackson: Things continue in a positive upward direction for us. Our town is not the same town it was five, ten years back. On a lot of fundamental levels, we’re a different town. Our population has increased. The population level we’re at right now continues with local consumer spending, local demand. Those underlying factors are what drives the healthy economy we all want and need. That is solid and, I think, our velocity stays solid, too, over the next three to five years.

West: It’s always hard with real estate to predict outside of two years. Especially this year, I think it’s sustainable. Land is definitely an issue and something that is on our radar, and we’re worried about. But we still have a good 2022. I’m not convinced it’s the same as 2021. The numbers I saw in 2021 were staggering. I can tell you, from the first months of this year, we beat last year in regard to revenue. I’m just not sure how sustainable that is. There’s a lot of positives about the market. There’s a lot of good things in store, especially for the next two years. But it’s hard to predict outside of that.

Molyneaux: We will continue to have a strong market. My expertise is on the office side, and I do see some challenges with workforce here. We are a smaller population, so I don’t know that we’re going to get any of these large companies to move our needle. We also do have challenges in our housing prices. With the median house price over $500,000, $600,000, it’s going to be hard to have people continue to move here unless they’re ultra-wealthy.

Cantwell: I expect the next twelve months in the industrial market to remain white hot. It probably will have a cooling in 2023, I don’t think it’s sustainable. In some ways, I’d be delighted to be wrong. On a per capita basis, Reno has three times as much distribution space as any other city in the United States. It’s because we’re a small population, but we can reach roughly 35 percent of the entire population in a one-day truck drive. So, Reno is going to continue to win on location. But the biggest developments are probably going to end up, by default being in Fernley, we’re topographically constrained north and south. Fernley will never be built out. Things will continue along the lines they’re on for about the next twelve months and then you’ll have a simmering.