Industry Focus: Commercial Real Estate

As the economy recovers, commercial real estate is slowly regaining footing in the Silver State. Recently, executives representing the industry met at the Las Vegas offices of Gordon Silver to discuss the challenges of commercial real estate in Nevada.

Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.

What challenges face commercial real estate in Nevada?

Christine Bricker: The biggest challenge I see facing the industry is financing for commercial real estate projects and land loans. The banks and regulators have tightened the underwriting requirements and loan-to-value ratios. I see a difficulty getting projects off the ground with financing.

Kurt Goebel: My biggest challenge is within the redevelopment efforts that are ongoing. There’s a general misconception about some of the funding that’s available.What a lot of people don’t understand, is [some of that funding] is just a redevelopment tool. It’s a real asset that’s out there that people should be looking at.

Kevin Burke: The health of the balance sheet of contractors, in general, is a challenge. I’ve seen that as I have sat on the State Contractor’s Board for a number of years now.

David Dwyer: The approval time it takes to get back through the entities has exploded in the last six months, especially in Clark County. I’m almost at the point of telling people to expect at least three reviews on anything I submit and a minimal of six weeks review time. The civil is always the slowest and now it’s looking like nine months to a year just to get an approval.

Mike Montandon: Another problem is the tentative nature of the market and its participants. We bounced along the bottom for so long and it’s hard to recognize that we’re on the way up. It’s causing some people to want to move forward and others to want to wait a little longer. You still have a mixed market. We’re recovering but we haven’t convinced everybody yet.

John Ramous: We’re very cautious of what we want to build. When you have a much narrower pool of tenants, you’re going to build much smaller buildings.

Dick Rizzo: The slow recovery of Nevada’s economy cannot support the financial investment needed. Add to that the shifting visitor demographics and the ever-increasing competition across much of the country, as well as overseas, in gaming and growth in Internet entertainment. This could be somewhat offset by the success we have in attracting new business to the state but, until then, we are not very positive about our business plan for Nevada.

Is project financing available?

Montandon: I serve on the board of directors for a small, local bank. We have money to lend but not very much. That’s the problem. All the local banks are saying they’re healthy again, but they’re not in the position to lend big money. Bank of America and Wells Fargo, who are in that position, think Las Vegas is still toxic.

Frank Gatski: Until the occupancy starts to rise, we won’t see the rents really rise. That creates challenges in financing because there’s still about three years left of people who put loans on their buildings in the heyday. Those are going to come due and we’re going to see more of those go back to receiverships and special servicing companies, or back to the banks. Then you’ll have people investing in commercial real estate and buying property for less than you can build it for.

Bricker: The gap is also in finding qualified borrowers and qualified projects. I have some bankers as clients and a lot of developers are looking for financing for land loans. They have money but they can’t do it on just dirt.

Larry Monkarsh: I’m on the other end of the scale where I have projects that are too small to try and get financed. For instance, I’ve got a $1 million build on a mature retail center that’s 100 percent occupied. The existing bank on the property will not modify the loan to add a pad. You can’t go anywhere else so you have to get creative and hire a civil engineer to parcel out that land. Then you get a separate loan on that parcel, which means another nine months to get the process done. That hinders the ability of the tenant to make a commitment because you don’t know when you’re going to have the building available.

Mason Gorda: I’m actually finding there’s quite a bit of money sitting on the sidelines. I’ve got, more than ever, private money looking for placement and it’s finding that quality project [that’s challenging].

How popular is commercial real estate as a career option?

Rizzo: I sit on the advisory board for the UNLV School of Engineering. The construction management program and the civil engineering program are both down by about 40 percent on graduates. There’s a huge push right now from industry leaders to encourage people to get into the business and to get involved. It’s a serious problem and I don’t know that the answer is immediate. We have to work on it.

Burke: Brigham Young University (BYU) has a juggernaut of a program. Back in the mid-2000’s they were graduating about 110 students a year; now they’re down to about 50.

Edward Vance: At the height of 2005 through 2006, we had 1,300 of us architect types in the Las Vegas Valley. At the bottom [of the recession], 300. They pretty much all left. I was on the board of the American Institute of Architects for three years and all we talked about was how we lost a complete generation.

Dan Doherty: This recession really showed the volatility of everything that everyone in this room does. Could you imagine having a worse job than an architect when the economy falis? A broker can still sell a building for half price. The architect has nothing to do when the bank takes back two-million square feet in the Valley.

Daniel Adamson: I was expecting a lot of attrition. There were some people who left the brokerage in the retail side of the business, but there were also failed developers who came back and became brokers again.

Monkarsh: The last two summers we took part in the Clark County and UNLV mentoring and intern program. I was the only contractor there. I don’t know if we’re doing our part in going to the high school juniors, soon to be seniors, and inviting them to come into our offices to see what they can do. The opportunities abound.

How Challenging is it to Find quality staff?

Dave Melroy: The labor market, now that it’s time to do the work, has disappeared. Trying to find, not just individuals, but spectacular individuals [is challenging]. Unless you had retained them through the downturn, they’re gone.

Chet Opheikens: Skilled labor is a huge challenge. We’re finding we have to go out of state to bring guys in and, quite frankly, hoping they will stay. We can’t find it here so we’re having to import it and that costs money.

Dwyer: Fifty percent of the people I would’ve talked to three years ago have left the state or have left the profession. The few that are coming out of the colleges, were then faced with the question of how do we hire them at the salary they think they’re worth? I have clients who think the commercial site should still be done for 25 percent less than it was in the middle of the doldrums? You can’t afford to take the new people on. It’s going to take five to eight years for a slow growth to occur until we start getting people coming back out of the professional industry in architecture, engineering or any of those aspects.

Goebel: We were seeing a shortage of engineers during the good days. Now that things have gone south, there’s almost nobody to fill these positions.

Adamson:  It’s not fashionable now for people to do internships for free, but it’s unbelievable how helpful that is, regardless of whether you go in that direction or not. I know people at Arizona State University who work at entitlement companies and brokerages and had a well-rounded education, and they could decide where they wanted to go. That’s a weakness of UNLV, where you have to pay interns.

Gatski: On the property management side, it’s incredibly difficult to find good talent. It’s continually challenging and there is poaching. All of the brokerage companies know they have to have a property management base; they learned that through the recession.

Melroy: I had a young man that came to me out of high school and worked as he got his electrical engineering degree. He went through the ranks and once he graduated, he got plucked out of my employment to go work for a solar company for $85,000 a year. I can’t bring people on with an expectation of $85,000 a year and still be competitive.

How healthy is the commercial real estate market?

John Restrepo: The industrial market’s doing the best at just under nine percent vacant, and retail is right around 11 percent, which is basically a full and stabilized occupancy. Office is at a little over 21 percent for multi-tenant space, not including sublease space. If you include sublease place it’s probably close to 30 percent. It’s all a function of an economy we’re finding out. This recession has exposed a lot of problems with the Las Vegas Valley that were ignored by the fact that the world’s economy was growing. You mitigated the issues whether it was workforce quality, a lack of diversification, wage growth or quality of a job. Until we can see a considerable period of time with good job growth and good paying jobs in the overall economy, you’re not going to see the real estate markets come back. The real estate market’s the stepchild of the economy; it doesn’t drive the economy, it reacts and responds to it.

Ramous: I see diversification as being a cure for some of what ails us here. For our company, seeing cycles or certain industries grow rapidly then fall suddenly has an impact on us. That’s a focus that the state needs to further emphasize. A lot of the issues here work through themselves.

Vance: We’re starting to see a significant increase in business. We’ve quadrupled in the last year. Hospitality, healthcare and commercial have all been coming back in a strong way. That means contractors will be busy soon.

How will the recent election Affect the market?

Brunetti: I personally had two leases out that were signed with contingencies based on Propostion 3. Had the Margin Tax passed those leases would’ve been null and void. These are sizable, good California companies that will create economic development through quality diverse jobs to our area. Expect developments underway more than we’ve seen in the last six or seven years.

Restrepo: The Margin Tax was just one more factor we had to deal with and now that’s off the table. But, we still have to figure out what we want to be when we grow up. Las Vegas is not going back to the heyday of being the mecca of gaming. It’s one of the top three markets in the world, but the casinos have bigger fish to fry in markets both domestically and internationally.

How has Tesla affected Northern Nevada?

Brunetti: It definitely helps, but it’s going to be two to five years until we actually see the true positive benefits to the creation of those jobs. [We need to] let that process live its life to help develop the economy locally in Northern Nevada in its separate stages. By far, it’s been great news and it’s a huge announcement. Everybody is proud of it. It is making a good impact now, and it’s going to have a great impact down the road.

What will the industry look like in a year?

Doherty: My business and my clients’ businesses are going to be in a much better position provided we’re able to solve a small portion of the problems we’ve been talking about. And, I think we will. I think we’re going to have a couple of million feet completed this time next year.