Commercial real estate agents from the Las Vegas and Reno areas gathered at The Stirling Club recently to discuss the real estate market in Nevada and how it is affecting their profession. The gathering was part of Nevada Business Journal’s Industry Outlook series. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the roundtable, which included topics such as: rising costs and shrinking availability of land; prospects for the office, industrial and retail markets; and the recent trend towards high-rise condo construction. Following is a condensed version of the discussion, which began with introductions.
Chuck Witters: I’m an office broker with Lee & Associates in Las Vegas. I’ve been here for 12 years. I got preliminary second-quarter office data numbers today [for Southern Nevada], and they greatly encouraged me. First of all, we have a little over 900,000 square feet of net absorption year-to-date. Last year, we ended up about 1.6 million for the whole year. So if we could continue on this trend, absorption would be tremendous this year compared to previous years. Another thing was that the weighted average lease rate on vacant space went from $1.95 at the end of the first quarter up to $1.99 at the end of the second quarter on a full-service-gross basis. That shows a firming up of lease rates.
Tami Lord: Territory Incorporated primarily does big-box development and retail brokerage. From a retail standpoint, Las Vegas has always been relatively low on vacancies. But the issue we’re running into now is, between rising land prices and rising construction costs, can national retailers sustain the risk? The developer needs to make the transaction happen, so that’s probably our biggest obstacle today and moving forward.
Suzette LaGrange: I’m the vice-president of Colliers International’s industrial division. Certainly land prices are the biggest challenge for us, but in industrial real estate, we need to get the rents up if we’re going to keep up with the rising land prices and construction costs. Another issue is that there are so many delays in the construction permitting process.
Donna Alderson: I’ve been with CB Richard Ellis for 19 years, and I agree with what Suzette said regarding rents. Industrial big-box rents have been relatively flat for a number of years, and the rising cost of land and the availability of land are big issues for us. Residential developers can pay more for land than industrial developers, so a lot of rezoning is taking place, and that is a big sore spot.
Daniel Byron: At Sperry Van Ness, my partner and I specialize in apartments and anything commercial. I can honestly say that right now we don’t have one listing in the office. Everything comes in and goes out the door the same day. For land in Southern Nevada, the prices have doubled and tripled and quadrupled, and there’s a waiting list for it. I think we have another three to five good years ahead of us. But we have to keep in mind that if there’s another major terrorist attack, it could cause a recession that would change our cash flow and our needs and demands.
Perry Muscelli: I’m with Cushman & Wakefield and have been in Las Vegas on and off for 49 years. The biggest challenge for the brokerage community is to change the way they do business, because it’s not the Las Vegas we’ve known for many years. We’re basically out of land, so those of us who have been working with developers who used to have their pick of land are not going to be making money that way anymore. The other risk is that we’re in a very speculative market because of some of the things that have happened in the last year.
Randy Broadhead: I have been with CB Richard Ellis for 22 years, specializing in the office market, which is very healthy, with vacancy rates down around 10.5 percent. However, land prices are now so high that they are a barrier of entry to office developers. Another big impact on our market right now is tenant improvement costs. There’s also the demand for ownership. With interest rates being low, that has really eaten into the lease market.
Ron Cobb: I run the land services group in Northern Nevada for CB Richard Ellis. I like to tell everybody from Las Vegas there is no more land left in Northern Nevada, but there actually is. We are still in pretty good shape and are experiencing some great growth. I am also the city chairman of the Planning Commission.
Barry Brown: I’m the managing partner for Colliers International in Reno. This is my 33rd year in commercial real estate, and 29 of those years were in senior sales all over the country. As Ron said, the market’s still very healthy, but we are running into some of the obstacles Randy mentioned. Tenant improvement prices have caused some deals to fall through. Of course, our real concern is that business is moving out of town. The office market is moving to south Reno and industrial is going north and east. Of course, retail has been the dominant thing, following the construction upswing in residential.
Lucinda Stanley: Shea Commercial is going to construct about 750,000 square feet of office projects this year. Our biggest challenge is getting qualified help. Many of the problems people are talking about today are caused by a lack of affordable housing. People cannot afford to live in Southern Nevada, so it’s very difficult for us to pull people in from other marketplaces to provide the labor we’re definitely lacking. That includes our own employees, subcontractors and also people to staff the planning and building departments at government offices.
Soozi Jones Walker: I’m the broker at Commercial Executives, specializing in office investment sales. We look at the vacancy factors and they all look really healthy, but there’s a lot of space that goes under the radar screen. Most of the large brokerage firms keep track of numbers for office spaces of 5,000 to 10,000 square feet or larger, but Shea and many other developers like them are bringing on hundreds of thousands of square feet that are not owner-occupied spaces. In many cases, people plan on occupying only 50 percent of their building and leasing out the rest. Permitting delays are also a problem. If someone doesn’t get on track and find some additional employees to help process all of these things, our city will be hurt and people might start going to a different market.
Pat Marsh: I specialize in industrial at Colliers International. To go back to what Soozi said about office tenants moving to other markets, I think other markets are seeing the same high prices of land and rents going up, so I’m not sure we’re going to lose. We just need to be more creative. Our job is just going to change. We’re losing industrial land to homebuilders, as Donna said, and to high-rise developers. But there are locations in Sloan or at Apex Industrial Park, where there are 10,000 acres of industrial land, which are going to be viable options soon. We’ll have to start exploring those options.
Paul Perkins: Alliance Commercial Real Estate is a new company in Reno, but I’ve been in the business 36 years. In Reno, after years and years of work, all the efforts to revitalize downtown are finally beginning to come to fruition. We’re seeing high- and mid-rise condominium developments along the river and the train trench corridor is well along – it will be completed next spring. There’s a vibrancy and an enthusiasm downtown we’ve never seen. On the negative side, we have water problems, which recur every few years, and I think this time it may actually result in the completion of an aqueduct from valleys north of Reno. The resources from the Truckee River and Lake Tahoe just aren’t sufficient to handle the growth we’re seeing.
Judi Woodyard: I’m the owner and broker for Commercial Associates, and we specialize only in the tenant and user side of the business. So we don’t have some of the development obstacles you others have.
Dean Willmore: I’m with IPG Commercial Real Estate Services, and I have never seen the market this busy. We have all been seeing cap rates getting close to 6 percent. We went back and tried to study cap rates 20 years back, and these are lowest rates we’ve ever seen. Small industrial buildings are priced at $145 to $150 a square foot. That’s within 10 or 15 fifteen percent of the prices for shell office buildings, which are priced at $165 to $200. Usually office buildings are twice as much as industrial, but no more.
Witters: They probably should be, right?
Willmore: Yes. As far as Las Vegas losing tenants to other markets because of rental rates, my opinion is that Las Vegas industrial rental rates have always been higher than Phoenix, Salt Lake and Reno. They have been comparable to Ontario, Calif. They’re usually a little lower than Irvine. The businesses that have come into Las Vegas have moved here because they have to be in Las Vegas, and I think that will continue.
Ron McMenemy: I own NAI Horizon in Las Vegas. Building permits and construction costs can be a gun to our heads in a lot of different scenarios. You think you have a deal and it changes. We’re also going to face a lot of transportation challenges, which will get worse as we pack in more mixed-use development projects that empty onto a street that has been there for 20 or 30 years. But I think that, given the talent that’s in this room, we’ve been very good at adapting to change, and the velocity of Las Vegas has been unparalleled in the United States. I’m very confident about what the future holds because we’ve been through it before and we’ll get through it again.
Ken Stark: I am owner and broker for Stark Associates Commercial Real Estate in Reno. My experience and expertise has been in the office market. Our vacancy is up, at just under 16 percent, but this year pretty significant transactions are going to drive vacancy down. Skyrocketing housing costs are an issue in Northern Nevada. However, a report came out recently that said home prices for the under-$300,000 market have finally cooled off and are going down.
Perkins: Reno is on track for a record year of net absorption in the industrial market, which isn’t great by Las Vegas standards, but we’ll probably do over 3 million feet of net absorption this year. One of the problems we face on the industrial side is that we’re down to less than a 6.5 percent vacancy rate in the second quarter, and that’s dangerously low. We lose opportunities when it’s that low. We lost a sizable opportunity not too long ago; a major retail distribution center elected to go to Phoenix because they were concerned over our lack of population and low unemployment rate, and they didn’t want to risk not being able to hire employees for a million-square-foot facility.
Scarce Land Causes Problems
Connie Brennan (Nevada Business Journal): The first item on the agenda is land availability. Is anyone aware of new property to be released by the BLM or is this a problem we’ll be struggling with for awhile?
LaGrange: Another parcel in Aliante in North Las Vegas will be released in November. That doesn’t help the industrial market at all, but hopefully it will help satiate the homebuilders a little bit. Homebuilders are getting much more creative. I talked to an engineer who said she’s doing really small lots with three-story homes on them, so hopefully that will contribute to affordable housing.
Muscelli: In our market today, to make a sale, you have to be risky and overly aggressive to succeed. I’m not sure how prudent it is. To be a good brokerage firm, we have to advise our clients to take big risks. You have to gamble, because every other buyer is doing that to succeed and there is little property left. Very soon we’re going to be virtually out of the land that is feasible for most businesses that want to service the local economy, especially in the industrial market. I disagree with some of the panelists here, because I think we are, in fact, losing companies to other cities. I’ve seen what’s happened in my own company. I also say the rents in industrial, especially bulk industrial, are going to go up dramatically. So we may not be making money doing industrial deals and we’re not going to make money selling land to developers like we used to, and the investment market is extremely challenging. When the interest rates go up I think there are going to be a lot more sellers than there are buyers, so I don’t think the investment market makes sense very much longer. When the interest rates go up, we’re going to have a challenge for the next three years selling investment properties as people think, “I thought my price was this, why did it go down?”
Brennan: Do you think there’s a trend for brokers to get more involved in the investing end of it? And if so, do you see a conflict of interest in representing the seller and then buying the property? Is that a common practice?
Muscelli: It happens, but I don’t think it’s a common practice.
Brennan: Do you think it’s a trend for more and more brokers representing the seller to turn around and buy the property?
Muscelli: No.
Multiple Voices: No.
Lord: You hear a lot about brokers getting a piece of the deal, a little sliver of ownership, and that’s another gravy factor for them. They’re not the out-and-out owner, but they’re in there.
McMenemy: A lot of brokers who’ve been in this marketplace for a long time have a financial statement that’s strong enough to allow them to get into deals. But, no, they’re not vying for listings. You heard everyone chime in on that.
Byron: I think if everyone sitting at this table – and I see a lot of power here – is not investing in Las Vegas real estate, shame on you. By investing when the opportunities come up, the buys we’re making as principals are offered to our clients first. For a variety of reasons they may not buy: they have cash flow problems; they can’t move quickly enough; or corporate at that time says no; there could be a lot of reasons. If it’s a good deal, we may buy it ourselves, knowing they’re going to buy it in six months or a year to use as an investment themselves, and they’re happy we do this. We always offer it to our clients first, and I find it hard to believe the people sitting in this room are not doing it, too. Does that conflict with your clients? Maybe yes and maybe no.
Role of Brokers Changing
McMenemy: In order for the brokers in Las Vegas to continue to prosper and to be effective, we’ve gone through a transition, a sort of a renaissance. It happened in Phoenix, and it’s come over here. As the market matures and as it gets larger, brokers have become more specialized and more focused; there’s more market segmentation. Also, they’re looking back into the marketplace and looking at redevelopment. Whatever the building is now, you’ve got to visualize something else, and it’s not just mixed-use. It’s taking an office building and turning it into a medical office building or an office condo development.
Broadhead: I agree with Perry that we have to change our way of thinking. As brokers we look backward and try to project forward from historical data. You’re trying to predict the future for your client in a certain area: “Will this project lease out? Will it sell? What’s going to happen with this piece of land?” It’s really hard for us right now, because you’ve got people coming from out of the market, from places like Miami and New York, who have a totally different view of Las Vegas than we do. I have a piece of office land along the Beltway with topography problems, drainage problems and all sorts of issues. It would have sold two years ago for $9 a foot, but the guy’s now listing it for $30 a foot. He’s had people from Miami come in and say, “$30 a foot? That’s a great deal.” So maybe we have to stop looking backward. You need to have a vision of Las Vegas as a unique market, different from any other in the country, and be creative, while at the same time keeping some fundamentals.
Jones Walker: It got to a point where brokers were almost order-takers, because in this market in the last couple of years, you put a sign up and “They will come,” like in Field of Dreams. But realistically, the brokers who are going to survive and generate the dollars are the ones who give really great service to their clients, and a lot of brokers in the marketplace don’t know how to do it or have forgotten how to do it. That involves helping clients do the correct pro formas, making sure they’re not just buying a piece of dirt, but that it will be something they can afford to develop. You’re going to have to project the rents, but what are they going to be when you’re done building in 24 to 36 months? For the brokerage community as a whole, service is going to be the No. 1 thing. Successful brokers have to make sure their clients do well in this market.
Brown: We have the responsibility as brokers to our clients to make sure we don’t just turn a property into a higher use because it looks good on paper. It actually has to have some serious forethought. If we just advise them to go ahead so we make some money, it’s not a good thing to do. We have to be careful what we advise them to do. We use the resources we have at our disposal in order to advise them as to whether the higher use is really in demand in this particular market.
Woodyard: The biggest obstacles to helping the tenant make the right decision are the time it takes to do tenant improvements and also the cost. About 60 percent of my business is with companies whose corporate offices are not located in Las Vegas, and I’m working with one person right now who’s doing an office in Denver. It’s almost the same size as the office they’re doing here, and they are building out second-generation Class A space in both markets. The tenant improvement allowance in Denver is $50 and here it’s $5. So there’s a huge education process when you’re working with people from other places.
Broadhead: Tenants come into our market from outside, and they’re used to being able to obtain office space for $30 to $40 a foot. Costs to build out the space are now coming in at $50 and even higher, and for smaller tenants, they can’t even build it for $60 a foot. It’s becoming a big problem. We need more tenant-improvement contractors who are hungry, and right now supply and demand is against us, because they’re all busy.
Jones Walker: Tenant improvements are just a nightmare right now. I am building out three buildings myself, but I’ve been waiting 90 days just getting space planning done and sitting dead in the planning department waiting to have my plans checked.
Broadhead: Delays with permitting mean it’s taking tenants too long to get into their space. It used to take 60 or 90 days, now it’s 120 days.
Jones Walker: Or six months.
Stanley: It’s taking us four to six months now to get a building permit. It’s just getting insane. All of a sudden the margins are getting very thin because of the time it takes to finally complete a project. If we could get in and out like we used to, the profit margins would be where they should be. Again, if we had more affordable housing, many it would make it easier to find the staff we need at the municipal departments.
Broadhead: We need to encourage landlords to build out spec space so people can move in on time. It will be better for our market than the old traditional way, waiting for the tenant to come, space-plan it, and then build it. Plus, you can save money by building it out at the same time you’re building out the other spaces in the building.
High-Rises on the Horizon?
Brennan: There’s one item on the agenda I really wanted to touch on, and that’s high-rise construction. Our magazine has been tracking these projects, and they number 125 and counting, but some of them have already pulled back. Does anybody believe all these high-rises will be built?
Multiple Voices: No.
Cobb: I met with officials at the City of Henderson and Clark County three or four months ago. They said they anticipate somewhere between 40 and 45 percent will actually be built. Who knows what the percentage would be today, because of interest rates and construction costs? I know of about 10 high-rises planned for Reno, and probably half of them will be built. We have a lot of closed casinos downtown, and people are converting them into condos. Some of them are doing well and some of them aren’t.
Willmore: It will have a huge effect on the industrial market if these Las Vegas projects get built. The Ferttita family controls at least a couple million square feet of industrial now between Industrial Road and Procyon north of Tropicana, and if that whole section from Tropicana to Flamingo and Industrial Road to Arville or Wynn goes high-rise condo, which is what’s being talked about, that could take 4 or 5 million square feet of industrial out of our inventory. That would have a huge effect.
Muscelli: You’re talking about a huge amount of displacement with these high-rise projects. Businesses that are currently serving local customers will have nowhere to go.
McMenemy: My prediction is that all these projects will be built eventually by somebody, but it’s not going to be by the folks who are proposing them now. Hard money will eventually come in and take over the failed projects. A lot of architects are making money putting together renderings and plans for projects, and I think, because of the affordable housing issue, we’re going to have to go vertical. It’s just inevitable. It happened in Miami. It happened in L.A. It’s happening in Phoenix now.
Stanley: Let’s talk about the developers who collect a deposit from buyers. Now they can’t get the product out of the ground. Buyers cancel and have to get the bank to refund their deposit.
Muscelli: I’m doing a market survey. How many of you know people who are planning to live in one of these condos?
(No hands are raised.)
McMenemy: I don’t know any.
Muscelli: How many know people who bought them to speculate?
(Several hands are raised.)
Jones Walker: They don’t even have a clue how they’re going to close [escrow] on them.
Muscelli: When it comes time to close, and they see a $1,500-a-month association fee and a higher-interest-rate mortgage, they’ll think, “Maybe I don’t want to do this after all.” And then what happens?
Stark: They’re all expecting to flip the property.
Muscelli: That’s right. They’ll risk $25,000 and take a shot that they’ll catch an appreciation jump of $100,000 dollars for the next two years. After all, Las Vegas had the fastest-growing real estate prices in the country last year. Why not take a shot? If I’m an investor, I’ll put some money down on condos – maybe three or four of them, and that’s going on all over town.
LaGrange: Another fundamental concern is construction. Where are all the construction workers going to come from when we start building all these high-rise condos? And are we going to have the concrete to build concrete industrial buildings if it’s all used for high-rises? And what will all that demand do to prices, both for labor and for materials?
Jones Walker: Another thing to consider is that they still have not completely taken care of construction defect laws in Nevada to protect developers and contractors, so once high-rises get built and the lawsuits come, what are they going to do? And where are we going to get our contractors if insurance costs go up again and they can’t afford insurance?
Lord: From a retail standpoint, the bigger-box retailers are having a hard enough time paying what we’re asking them in this market right now. Somebody’s doing a sales job on these tenants, because they’re telling them that all these condos are high-density, which the big-box retailers need to justify the higher prices. They look to you as their agent, and they say, “Are these units going to be owner-occupied and how many are going to get built?” There’s just no way, at this point in time, to quantify what’s going on with this because so much of it is pie-in-the-sky marketing.
