Developing commercial real estate is by nature a challenging and risky profession, but the faltering national economy has made it even more important for Nevada’s developers to sharpen their pencils in order to get the absolute best deal on paper. Several leaders in real estate development gathered at the Four Seasons Hotel on August 12 to discuss the challenges and issues they face. The gathering was part of Nevada Business Journal’s monthly Industry Outlook series. Kevin Higgins, president of the Southern Nevada chapter of NAIOP (National Association of Industrial and Office Properties) served as moderator for the meeting. Following is a condensed version of the discussion.
KEVIN HIGGINS: When we asked for agenda suggestions, the number-one topic was land – both price and availability. How have land prices influenced your plans for development? Where do you see land prices in the future? And how are they going to affect you as developers?
BRAD MYERS: It’s kind of scary when we see what homebuilders are paying for land. We like Las Vegas. We want to continue to build here, but at these prices and rental rates, the napkin says you can’t do it. We’re always going to keep our eyes open, but our focus is to look elsewhere right now, to look for other markets within the country that make sense.
KATHLEEN FOLEY (Nevada Business Journal): Brad, since you’re our only representative from Northern Nevada, can you give us an indication of what land prices are like in the Reno/Sparks area?
MYERS: Land prices aren’t the issue up there. The issue there has been vacancies. We’ve lost quite a few tenants recently. The market up there is around 11 percent vacant. There are some big holes coming our way in the next year, and there are not many big tenants looking in the market. They’re seeing [demand for] 20,000 square feet to 40,000 square feet, but not for anything in the 150,000-square-foot to 200,000-square-foot range, which they’re used to. They’re optimistic, but still guarded, I would say.
MICHAEL CARROLL: The biggest wild card I can see in our land situation currently is the Cooperative Management Area (CMA) and the wealth of land available there and the uses it’s restricted to. A lot of that land will be taken down in cooperatives by Thomas & Mack and Majestic. Smaller developers like us probably don’t have the firepower to do those types of deals, and it makes it very hard to purchase property in the Southwest. The fact that there is still so much land down there is really going to drive what happens in this Valley, since it’s primarily restricted to industrial and retail uses. In the other areas of the Valley, there is some land, but it has gone up dramatically in cost. In the Cheyenne Technology Corridor, land that was $3 a foot four or five years ago could absolutely trade at $7 a foot now.
TIM SNOW: The CMA and that corner of the Southern Beltway offer a lot of opportunities. There’s been a tremendous amount of speculation, and one of the difficulties in that area is that it has been split up into so many little 2.5-acre and 5-acre properties, with a variety of different owners. When you start getting up $7, $8 or $9 [per square foot] for these little parcels, it’s ludicrous. Our difficulty is aggregation of big parcels in this Valley, and that’s further hampered by the residential builders being so aggressive today. There are two or three things we need to do. We really need to push not only the county, but the cities, not to allow residential developers to encroach on industrial land and not to allow the rezoning that takes away from our inventory. Secondly, the BLM has to auction off more land, especially in the residential areas, to defuse some of that pressure we’re seeing. It’s also imperative to start looking seriously to other parts of Clark County, possibly south.
JEFF LAPOUR: At BLM auctions, you see an appraised value that started at $100,000 an acre winding up at $300,000 an acre. It seems to be on the housing side, somebody is always going to pay more.
SNOW: One of the reasons is that there’s more demand than there is supply coming into these auctions, and as long as that’s the case, it will drive that price to the level where the demand pushes it.
LAPOUR: We have control over, or ownership of, about 75 acres here in the Southwest part of the Valley, and if we hadn’t been prudent in trying to land-bank and work these deals, 12, 18 or 24 months ago, I’d be hard-pressed to find an opportunity we can develop with our product types. Every deal pushes the absolute maximum, because rents and land prices have such a huge and ever-growing gap. It’s really channeled our focus on the Phoenix market and looking for opportunities elsewhere, because we can’t complete with the larger guys who are able to do these land leases. I’m not that optimistic that development opportunities going forward will approach what we’ve seen in the past, and it’s all about land cost and rent issues. As long we’re less expensive than Southern California, are we going to be successful? I don’t know. I guess Tim’s suggestion that the BLM release more land would be an excellent start.
SNOW: The homebuilders are now trying to stack eight to 10 units per acre, so they can keep paying the higher prices, so as long as we keep building 20,000 units a year, that demand for land will continue. You can say, “We hope the home market goes bad,” but that drives the economy, so we would probably be shooting ourselves in the foot.
RICK SMITH: We’re squeezed from so many directions, and certainly by competition with residential. We’ve sold industrial land to residential developers, shamelessly. Guess what – we’re getting the highest and best use.
HIGGINS: My concern is, at the end of the day, where are all these people going to work? It’s nice they have places to live, but not everyone can work in the hotel-casino industry on the Strip. Where else are they going to be employed but at these business parks? Turning commercial land into residential is happening in Henderson, in the county and in North Las Vegas. The tough part is educating local governments on the concept.
CARROLL: I sympathize with the homebuilders. They have this absolutely phenomenal demand, and they can’t find the land to build on. Some of the new neighborhoods are very pioneering, and the residential developers are becoming very creative. As commercial developers, we’re going to have to get very creative as well. We’re going to have to look at sites we never would have thought of – maybe redevelopment opportunities.
SMITH: Yes, more infill-type things. The days of guys like us looking for 40- and 50-acre parcels are probably past.
HIGGINS: What are your feelings on today’s market place? How is the absorption in your view? Are we getting overbuilt? Are we underbuilt? It’s a changing marketplace, and are we ready for it?
SMITH: I’m always concerned about overbuilding, as long as it’s by my competitors. (General laughter) From my point of view, developers are constantly looking for the next deal. In our business, it’s “develop or die”. You have to find deals, and sometimes almost irrespective of demand. You have to be in the business of creating demand for your development, and if that means taking it away from somebody else, you have to be willing to take that shot. There is just this one pie, and it only slices so thin. Thank God NAIOP and some other really great groups influenced this tax situation, and you guys did great work.
LAPOUR: We’re at an interesting point of equilibrium here. Our vacancies are up, the absorption is down over previous years, but we haven’t had the stress that other markets have seen. I haven’t seen anybody in serious trouble. Other markets certainly have seen it. There still are islands of opportunity, but you have to be very careful and very specific about who your tenant base is going to be. Maybe it’s a situation where you don’t build as much in a certain phase as you might have otherwise, but our properties have done well. It’s all about back to the basics – location, location, location. It used to be that the buildings were filled, and tenants were staying and expanding, but now they are hopping. They are looking for a better deal, for a more efficient space. There’s also been a tapering off of out-of-town people, but there has been growth with local people expanding and relocating. Lenders have cut back, too, and certainly speculative lending has curtailed somewhat, but it’s still available for the right deal. So, are we overbuilt? I don’t think so.
SNOW: In the office area, one of the advantages [in our market] is that we don’t go in and build 300,000 or 400,000 square feet at once, as is done in a number of areas. We’re in a lot more stable position than Denver, Dallas, Chicago and a number of California cities. We weren’t very heavily into technology, and there weren’t a lot of busts and failures, and we have a lower amount of space in a sublease situation. We used to see about 40 percent of our demand coming from out-of-state and 60 percent from companies within the state. It’s now up around 80 percent in-state and 20 percent – maybe even only 15 percent – from out-of-state. In the last 60 days, due to the apparent settling of the Iraq situation, and the fact that we have said “No” to the gross receipts tax, we have seen more out-of-state brokers looking at the marketplace. Now that those two things have occurred, we’re in a pretty good position.
CARROLL: You have to be an optimist to be in this business, or you’re not going to stay in the business, so I’m optimistic. But, if you look at the numbers for 2001, 2002 and half of 2003, we had less absorption than we had in 2000 in industrial product. The last two and a half years have been very slow, but if I look back at the last five years in Southern California, I feel like we’ve been blessed. We still had tenant expansions here and we haven’t had a lot of tenant defaults. We’ve been hearing for a while that our economy is going to ramp up, nationally and regionally. I believe we probably will see some major improvements in 2003 and the first half of 2004. There is some anticipation of new industrial hiring in 2004, but not a lot in the office or technology sector as of yet. We’ve seen dramatic changes, so we’ve had to adapt. Thankfully, interest rates have helped us a lot. We continue to reinvent ourselves here, and try new and exciting things. I believe we will again, but we’re in one of our tougher times right now, as far as supply and demand go.
MYERS: In the submarket for North Las Vegas distribution, there are about a million square feet available, and right now another million square feet are under construction. I wonder, “What did you guys see that I didn’t see?” Those are big numbers – that’s 2 million square feet just sitting right now, and there’s not that much demand. Everybody’s scratching each other’s eyes out, trying to get the deals, putting the pressure on. You have to walk that line. “Does it make sense? Do you do the deal?” So, I hope it gets better. Is there this pent-up demand because of the war? Is everybody holding back, just waiting for the first person to do the deal and then everybody else is going to follow?
SMITH: I certainly hope so.
LAPOUR: With the product type we build, we don’t necessarily have national companies [as tenants]. For the most part, the people we’re dealing with are local operations. They’ve been around a long time, growing very well, have been very successful with the growth of Southern Nevada. We didn’t hear a whole lot about the Iraqi situation from them. We heard a lot about demographic growth, housing growth, how many people are coming in, what’s happening with some of these Strip expansions. Some of our tenants serve the homebuilding industry, too. If you travel to these different markets, like Phoenix and Southern California, it keeps coming back to the same thing. We’re a Sunbelt state with good weather that attracts people. Do you want to compare commute times from your house to your job here in Las Vegas? It’s nothing. In Phoenix, you can drive an hour and a half from one end of the city to the other – if there’s no traffic. For affordability of housing, can you go to Phoenix and buy a house for less than you can buy one here? Probably, but you’re going to really make a sacrifice of location to do that. Is the space cheaper there? Maybe a little bit – big box probably is – but the rest of it isn’t noticeable. Southern California is more expensive, definitely. So, affordability and access are what drive this market, and as long as we can continue to provide that, we’re going to continue to see more residents, and in turn, job growth.
SMITH: We really have a unique economy here, and we’ve been through a very tough time, post-Sept. 11. The national economic situation has certainly not helped us, but it hasn’t been that bad. A great deal of what drives us here continues to drive us even in bad times. As times get better, we’ll see more of the driving forces along the Strip, and Steve Wynn’s new resort on the horizon, and you see cranes in the air building more and more resorts and timeshares and condos. Those things bode very well for our business. I don’t know that I’m going to go out and buy 60 acres or 100 acres and try to complete with DP or Trammel Crow, but in my small business parks, I feel very good about the future. You really have to drive toward a deal that works, and it might be a single building or a two- or three-building combination.
SNOW: Local service that is basically Strip-driven or gaming-driven has continued. Sure, the Strip was off, and employment was down 15 percent, but it has picked back up. Coupled with the other service businesses that are housing-related, it has given us that local market. What we have lacked is the other part of the market we enjoyed in 2000, which is the back office, the financial, the administrative services, where companies were consolidating divisions and bringing groups together in 60,000 square feet to 80,000 square feet at a crack. That element is what we’re missing in the office market today. Corporate America still has not shown a real willingness to open its purse strings and make capital improvement decisions, but we were definitely on the radar screen, and we’ll come back.
LAPOUR: I would agree, and it’s not specific to our market. It’s all over the country.
HIGGINS: I certainly think this town isn’t overdeveloped today. I believe it’s just normal business, which we aren’t used to in this Valley. Our normal business was pre-leasing 50 percent and in three to six months it was all leased. Today, you’d better plan for a year after construction completion for lease-up time, but that’s normal in most markets. The population is still moving this way, and the baby boomers, as they get older, are moving this way. If you believe the prognosticators, that we’re going to double in population in the next dozen years, it bodes well for the residential market and for the commercial market. It’s just a matter of tweaking that niche, looking for redevelopment, finding the smaller deals, and so on.
LAPOUR: We’re finally getting a stock of buildings that are old enough, in some areas, to redevelop. I think that’s going to be a good area going forward, too.
SMITH: I sat the better part of yesterday in the car with an investor from Southern California, introducing him to this market and its opportunities, and at the end of the day, I was absolutely jazzed and enthused again. This is a dynamic market that we’re in. It’s going to require people to be really prudent and really creative and smart to find deals that work.
HIGGINS: I certainly think times have changed, even from the brokerage standpoint. The days of trying to sell 100-acre parcels are gone, and I have to retool what I do. I’d like to talk about what your thoughts are on the government environment – permitting time, rezoning and the processes to get the plans through in different municipalities. How do you see that today versus yesterday, and today versus tomorrow?
LAPOUR: The Building Department and Public Works have done a pretty good job in trying to get their hands around the situation. Public Works is usually where we have the problem and delays on the permitting. That can drag 60 days past your building department approvals. The flood control situation in [Clark County] is also a troublesome area for us. As for permitting times, you’d probably get your architectural designs through the Building Department in 120 days, but it could take you 180 days, or even 200-plus to get it through Public Works. What are they going to do to handle that going forward? That’s my question.
SNOW: I look at this relative to Southern California, and those of us who develop in Southern California have to first go through the EIR (Environmental Impact Report) process. In the Inland Empire right now, there’s a movement afoot to require a full EIR on every project that has a lot of trucking going in and out. That takes a year and a half to complete. In Northern Nevada, it appears their processing is faster than ours here, so long as you don’t have a water issue you have to mitigate.
MYERS: It’s a people problem in North Las Vegas. We can plan for those long lead times on buildings. What is frustrating is the deal that has to happen right now – you need that TI (tenant improvement) done in five weeks or you’re out, and you know you’ll have to wait for the paperwork. I wish for the days when you were able to walk in and pull your permit, be on the road and doing your TI, and making the deal. That’s the one part I wish we could really expedite. I know they’re working on it.
SNOW: Our policy now is that, as soon as we set the footprint of the building – and that’s at the design review level – we start with the drainage process, because that’s the long-lead item. You may have your plans for the building all done, and you’re still going through Public Works, because the drainage study holds everything else up. LAPOUR: I do the same thing.
CARROLL: We were kind of blessed in the past by quick response by some of these agencies, especially related to tenant improvements, and now we’re facing the reality of this housing market gone wild. It’s great for us, but it’s very tough from a tenant-improvement standpoint. You used to be able to get a permit either over the counter or maybe within a week or two, and we’ve had some instances lately where contractors are taking eight weeks to get tenant improvements. It’s a growing pain and probably will be addressed. There’s a huge demand for good plan checkers and good building department officials right now in the Southwest, especially, here. So it’s a supply and demand issue.
HIGGINS: The one thing I’d like to talk about before we wrap up is tax issues. Any parting thoughts on how they might affect your business?
MYERS: I hope the tax increase doesn’t adversely effect what we’re doing here. It’s going to have some bearing on it, but I don’t think overall it’s going to be too bad. California is in a worse situation. Hopefully, they’ll get all the bad press.
CARROLL: I’m concerned about taxes, because one of our major advantages is our tax structure here. I’ve read [the new tax package] is going to cost the average family of four about $1,400 a year. I’m certainly willing to pay that if it improves our education and infrastructure, brings some of our services up to the level we need and improves our quality of life. But for low-income people, that’s a major hit. As developers, we probably pay a little more than our share. If you look at how our fees have gone up recently, we’ve been hit pretty hard. Typically, we pay about $3 per square foot for government fees. We have to pass a lot of these costs on to our tenants, and that makes us a little less competitive. I don’t think we’re in particularly bad shape compared to Arizona or California, but we have to be careful that we don’t lose one of our advantages, whether perceived or real. We re not one of the lowest states in the nation as far as taxation goes, but there is a perception that we have fairly light taxes, and that’s real important to our long-term success in attracting out-of-state companies.
SNOW: This whole legislative situation demonstrated the continuing need to balance taxation – which is one of the few incentives for companies to come here – with education, which is also an element a company looks at [when deciding where to locate]. To that end, I think the state government didn’t do a particularly good job, either in the governor’s office or in the Legislature. They dealt with the issue so late in the session. It was the major issue on the table, but they left it for the last two weeks. It wasn’t beneficial to our state, and this thing isn’t going to go away. We hope in 2005 there is a more positive and proactive balance.
LAPOUR: We’re not in a precarious position today, but we need to be careful, going forward, to preserve that. Nevada is really a much better place to do business when you factor in everything that most business people look for.
SMITH: Perception is very closely related to reality, and we are perceived as being a tax-friendly state. We’re probably a little less friendly today than we were a couple months ago, but if that perception changes, companies are left with a very short list of reasons to move to Nevada. There are a lot of companies across the country who are paying attention to this situation. Right now, they are drawing certain conclusions about the best place for their back-office expansion. If we lose that reputation as a favorable tax environment, we really lose a great advantage in this state.
HIGGINS: Thanks everybody for attending today and giving us your thoughts.
