Recently, industry experts sat down at Cili in Las Vegas to discuss the challenges facing Nevada’s commercial development industry, such as land scarcity, workforce issues, government fees and working with different municipalities. Connie Brennan, publisher of Nevada Business Journal, served as the moderator for the event as part of the magazine’s monthly Industry Focus series, which brings industry leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.
Market Challenges
Connie Brennan (Nevada Business Journal): What challenges are you facing in the commercial real estate industry?
Jim Riggs: Our biggest challenge for this market is finding affordable land where we can build, whether it’s industrial, retail or office. We have had a difficult time trying to find land and haven’t completed a deal for seven or eight months now.
John Ramous: I agree – finding land at the right price for us to continue development is one of the biggest challenges in the industry.
Stephen Schmidt: Finding land at an affordable price, at this point in time, has proved to be a challenge we haven’t been able to overcome yet. It’s probably more challenging than the construction costs.
George Garcia: Another challenge is the time it takes to process and the cost of going through the process including entitlements.
Tim Snow: I think the biggest issue is the rate of return. It’s based on the time and money to process the cost of the land. The Strip is sucking up a lot of labor in these mega projects which is decreasing the available labor pool for mid-sized contractors, and, therefore, increasing construction costs. Add all these things up and it creates higher costs to do business. As a result, to offset increasing costs we are compelled to raise lease rates on commercial property which knocks Southern Nevada out of sync with other competitive cities. We’ve got a huge problem.
Mike Young: I don’t know what we’re going to do with all these empty buildings – some areas of the Valley are substantially overbuilt. The users, tenants or purchasers, are difficult to find in this market right now.
Roland Sansone: Another challenge is the design entitlement process. We used to get through this process in six months. Today, it takes almost one year.
Land Scarcity
Brennan: Let’s talk about land inventory.
Schmidt: Nevada still has plenty of undeveloped land, unfortunately, the vast majority is controlled by the Bureau of Land Management and the remainder is split among private landowners. As long as the federal government restricts the release of federal land, prices are going to get even higher. I think the only thing that would have a dramatic affect would be if they let up and cut some land loose.
Garcia: Some of the undeveloped land that you see is in inconvenient locations or may not be appropriately suited for office or industrial buildings.
Riggs: If the BLM releases land, only a few entities can place bids at current prices. The prices are high and the parcels are so big, that it’s really limited to who can bid on it. If they ever package it down and had it in a much more deliverable fashion, where mid-size companies could bid, it would increase the field of potential bidders.
Snow: One of the differences created by the Southern Nevada Land Act is that Congress now demands that land be auctioned at the highest value. Because the highest land prices are usually generated by residential development – up to $1 million per acre – most released land is purchased at top dollar by residential developers. At those prices the land is unfeasible for office space development.
Changing Market
Brennan: Is the commercial market slowing down?
Riggs: The commercial sales market, in Nevada, has definitely been slow in absorption. Three to four years ago, we were pre-selling 80 percent to 90 percent of it. Now, we are probably pre-selling about 8 or 10 percent of it. I’m a believer that a large portion of that small market is already purchased. To further complicate the issue, we must compete with the resale of projects coming into the market.
Ramous: Some of these buyers bought into prices that are 30 percent or 40 percent lower than resales. That’s going to hurt the inventory as well. They can sell for much less than our replacement costs are. My first four projects here, I was 100 percent sold-out before I put the shovel down. There was a time we were praying that people would fall out because the prices we were getting were much higher.
Riggs: It’s not all bad, but the market is not tainted by investors buying new properties like the residential market. So, there’s not the issue of reselling and playing the flip game. Most of the commercial communities that were developed were service-planned communities. There’s an entrepreneurial mentality there that will keep the market strong, no matter what.
Ralph Murphy: I think all of us are experiencing a slow down. Three years ago, a lot of the local businesses were waiting to expand – leasing and buying much more significant space than they were using. That will pretty much come to an end soon. In fact, some of them are sorry they did and it will take a couple of years to correct. There are a lot of developers who still own land at a reasonable cost basis. In the next few quarters, we’re going see continued development with less demand and it will probably go up.
Ramous: The cost and demand is dictated in capital markets. Let’s see what happens and where the interest rates are – that’s something we can’t control. That is the million dollar question.
Kevin Higgins: I think its market settlement, too. You can’t just throw industrial in with medical and office condominium projects because the industrial market is much healthier than the office market. I’m not saying the medical market is falling off the earth. Even with the amount of product coming online, which is fairly limited for the next 12 to 18 months, it looks fairly good. Also, if you have an office condo in the airport area, it probably bodes better there than in the Beltway office area. Quite frankly, a number of us were spoiled with absorption. In the Valley, we have 80 percent to 90 percent pre-sales. Five years ago, you put in 12 to 18 months of absorption and still perform. We’re doing some projects with Venture Commerce Center now. Out of 38 properties, 12 of them are sold. That’s fairly good. And, I think its 25 to 30 percent pre-sold, not a bad deal. It’s a more realistic approach instead of looking at it as 60 percent pre-leased and 75 percent pre-sold. All products – industrial, medical or office products – have been somewhat spoiled in the last few years because of timing. No matter where you built, sold or leased. I think there is going to be a flight quality in some of these markets. Buyers are coming back into the market. If there’s quality out there – as far as location of product – people are going to be attracted to it.
Ramous: Well, I think quality is somewhat priced, too. There is strong demand for our new product in the southwest because of its location. Other submarkets, like Henderson are a little softer than some of the other conservative product types. It just depends on the market and the pricing.
Workforce Issues
Brennan: Are you benefitting from the residential slowdown by gaining qualified workers?
Schmidt: We are benefiting from the slowdown of residential. The small commercial subcontractors are calling us for work. It’s systematic and goes in cycles. I have been in Las Vegas for 30 years now and it has always been a transitory town. There has always been an issue with the balance of quality workers here. The problem is that there is no margin for error. The margin for protection increases the interest rates and cap rates follow after a period of time. The margins of availability and error are getting a little uncomfortable to deal with.
Snow: As developers, we aren’t immune from this because we’re the buyers of the services. This is more of an Associated General Contractors (AGC) type situation. The general contractors, if they’re self-performing such as concrete, can better control that element. Many of the general contractors are aggressively recruiting people from out of town because other areas have lower rates, even in Southern California. We found certain subcontractors from out of state who have proved that they could provide services. Some of them work 10 hours a day, for four days. They come to Las Vegas to work for four days and leave Friday to go back home. It’s worked pretty well. As long as the other markets are doing well, it’s difficult to draw labor subcontractors out of those areas to work here. The Strip is going to continue to suck up the labor pool. It’s a tough area.
Riggs: Small general contractors really aren’t in the game anymore to do small projects. You would think they could go there for pricing and nimble transactions, but we can’t contract with them anymore because there’s no confidence they can control the subs and keep the schedule. You might get a better price from them, but you might be five or six months longer. You’re better off going with a mid-size company who at least claims to have control of the trades and with the manager to get the project built on time. If you want to get the projects, you have to go with someone who is bigger and in charge of the subcontractors.
Working with Municipalities
Brennan: Do you find the municipalities in Nevada easy to work with?
Sansone: Well, Nevada is sure better than California.
Murphy: Henderson is a model for the others to learn from – they set standards and reviews. They turn things around in three weeks instead of three months.
Schmidt: Henderson makes a concerted effort to really push everybody which helps us to be more successful.
Snow: One of the things that helped Henderson is the mayor really weighed in. He used his political power and said, “We have to do better.” I think the councilpersons, mayors and commissions in other municipalities should really look at this example and learn from it. Mayor Gibson certainly mandated better service and it occurred.
Sansone: I agree. We just finished a project in Henderson with a couple hundred thousand square feet, and we were challenged with Nevada Power moving some telephone poles. We lost about a year of interest with that property. The city of Henderson, as a team effort with public works and the building department, allowed us to start early. They didn’t have to. I think that cooperative effort saved us more than a half million dollars. Everyone from the city council gets involved and it’s a good thing.
Brennan: Why aren’t other municipalities doing as well?
Garcia: I think it’s a combination of staffing and keeping up with growth. Having the mayor and city council mandate certain things really helped Henderson operate more like a business. Looking at some of the other jurisdictions, it seems more difficult because of the high growth. The Strip is still going strong but the revenues are going down which makes it more difficult to grandstand. Those are all kinds of challenges that they need to deal with it. It needs to start at the top and funnel all the way down.
Snow: In all fairness, North Las Vegas has been studying the Henderson model. The staff wants to improve service. Having the staff and manpower to do it is the other problem. There’s been a lot of pirating around town that keeps increasing the wages of a Planner III or Planner IV or Planner I.
Murphy: The challenge for everyone is trying to find qualified people to do the job and fill positions.
Schmidt: Henderson’s approach was not just to allocate some money and hire more staff. Instead it was to track it. They actually cared about structure and the plan’s cost efficiency. It was influenced by the private sector. That’s really what triggered a lot of it. They’re going to change the fees and process things as they see fit. One of the things that always impressed me is the can-do-attitude about this area, unlike L.A. I had the unfortunate experience of dealing with west L.A. once in my life, and I left them and don’t want to do anything again in that area. Certain entities like Henderson really put together the right ingredients.
Ramous: As the level of service increases, it’s a balancing act. I mean, I think it’s reasonable to assume that the cost will go up, but is the service getting better?
Higgins: The option to pay more money for faster service seems to have fallen through the cracks in the municipalities.
Schmidt: With the interdepartmental process, you might have to redraft your plans three or four times over, lengthening the process. It would be easy and cost effective – for us and the government – to implement a process so that the same people don’t have to work with plans three times over.
Snow: Some plans are just bad plans.
Murphy: There are some bad plans. But, Clark County has to quickly identify these major works and still process the plans that are improperly submitted.
Ramous: Also working with consistent people as opposed to working with three or four people in the process is extremely important.
Snow: I don’t think we’re one of the first places in the United States to go from UBC to IBC, international building code. California has yet to do that. In the conversion, while there was some confusion because there is interpretation of the code, I don’t think it has been bad. We are not paying near the amount of fees that California pays. So overall, we have growing pains. I think the biggest problem with all of the agencies has been they just can’t handle the workload, especially when they are pirating each other. If you get consistent with a plan checker, well, that plan checker left. That plan checker got pregnant. That plan checker got more money from another city. And in the end, if you get another plan checker, this may very well delay it. It’s dealing with growing pains. And, again, Henderson has addressed the issue in a superior manner to try to rectify some of those issues.
Garcia: If you talked to all of the elected officials, none of them are trying to slow things down or stop development. They all respond positively to growth. Whether they know how to do what Henderson has done, and implement it – that is a different story. The mentality to see developers keep developing is still here. It is critical to the survival and the entrepreneurial growth of the community. Implementing it in terms of action, Henderson has done that. That’s why it is important. It’s not for lack of will in many cases. It’s a lack of human resources training, systemizing and communicating from the top. I think North Las Vegas is working on it and I know Clark County is working on it. Everybody is committed to doing these things.
Higgins: The grass isn’t greener on the other side. A majority of us would rather be doing business here versus other jurisdictions. Even though we’re talking about growing pains and how it takes longer than it used to because we’re spoiled here, isn’t it somewhat of a Shangri-La from looking outside in?
Sansone: My thought is that if you don’t have the staff within yourself to help you get through the system and are relying on them, then shame on you. We have a policy to get our civils through the system, you don’t want to have to go through three rounds of comments. You avoid those three rounds of comments. So after the first round, we set up a meeting to make sure we are all on the same kind of meeting of the minds of what we are going to do because we don’t want to go back to a second or third round. As you know, it can take another two or three weeks to get back in. That has helped us to get the projects. You are always looking for techniques to get you through the system a little quicker. That is one thing. They actually appreciate it because they are able to get through their system as long as their civil gets their job done. That’s a tough thing.
The commercial developers industry is facing challenges due to market changes. Land scarcity is a major issue because many developers struggle getting land in the right location for the right price. Although working in the state of Nevada is much better than working in other states, there is still some improvement needed to approve and expedite the process.
