Nevada’s leading commercial real estate developers gathered at the Four Seasons Hotel in Las Vegas on September 19 for a roundtable discussion of issues affecting their industry. The roundtable was a part of Nevada Business Journal’s monthly Industry Outlook series. Those in attendance have developed millions of square feet of commercial projects in both ends of the state.
The group discussed topics ranging from market conditions, permitting and fees to predictions about the immediate future of Nevada’s commercial real estate market.
Rick Smith: My company has several projects scattered throughout the Las Vegas Valley, and the biggest challenge for me is developing in an environment of incredible uncertainty. There is a lack of confidence on the part of consumers and a real difficulty in bringing deals to a final signature.
Rod Martin: As far as the challenges I see out there, I tend to agree with Rick, but I see it on more of a macro scale. I’ve got more concerns about the national economy than about what’s happening locally.
Jim Stuart: I think the biggest complication we face is trying to separate fact from reality. At the macro level, you are going to get people from out-of-state – bankers, tenants and others – who are making regional and national decisions. They are in a state of flux and indecision. However, the companies in Las Vegas are as aggressive and optimistic and expanding as they have ever been. So, to the extent that we market our product to local companies, everything goes very well, but trying to seek out national or regional tenants, particularly in industrial, we’re having a tough time with that. Our neighboring states and competitive markets – Phoenix, Salt Lake and other places with 20 percent vacancy – I don’t know how you compete against those guys on a going-forward basis. We’re optimistically frightened down to our shoes.
Michael Panciro: Most of our money comes in from out-of-state. They are looking at Nevada with even a larger magnifying glass than they had before. They just don’t understand the market, no matter how much data you give them or how much support. However, they’ve been doing the deals, so I’ve been fortunate.
Terri Sturm: As a retail developer, we face a lot of local challenges with the local municipalities and the permitting of our projects. When it takes 12 weeks to get a building permit and another 12 weeks to get the tenant improvement (TI) permit to do the inside, and then a third 12 weeks for the tenant to get his TI permit, it is starting to get a little difficult to turn over space. I’d love to see if there was something we could do to help improve that.
Kirt Klaholz: Probably our biggest challenge locally is keeping leased what we have. We’ve got 2.1 million square feet, so if our average lease is four or five years, we are rolling or renewing probably 350,000 to 450,000 feet a year. If you start to calculate how much you’ve got to knock down the leases every week or every month or every year, it is challenging. That is number one. Number two, we do have about half a million feet of land which we would like to build up, lease or sell in the next four or five years.
Mike Carroll: Our biggest challenge in this past year has been losing some of our high-profile tenants. For newer tenants – kind of mid-level guys – it is a challenge to get good financials and good credit from them. It seems to be more and more of a problem lately.
David Frank: Our biggest hurdle is entitlements in the city. The other is, in Las Vegas, because of the amount of land available, tenants can name their terms. Building in Southern California, there is a higher density and less land available. So, it is much easier when you negotiate with retail tenants to name your terms and not have to sell the pad. In Las Vegas, we are really at their mercy, because they’ve got four corners to pick from, or they can go down the street. You have to really work with them to bring them to your center.
Melody Powell: I am new with ProLogis here in Las Vegas and just moved here from n=Northern California. I’m senior property manager and manage about 2.3 million square feet of industrial space. My biggest challenge is learning the market and understanding how different it is from Northern California.
Ralph Murphy: My biggest challenge is trying to keep track of all our properties. I think we are up to 5.3 million feet in Southern Nevada, roughly $300 million dollars in value and it is all pretty much industrial property. In the next few years we will be diversifying and getting into some retail. Most of what we have is small management-intensive, multi-tenant business parks. I’ve signed something like 220 leases this year, totaling over a million feet, so we churn through a lot of little tenants. We are also doing some significant renovation projects.
Tom Thorn: Laurich Properties currently has 777,000 square feet under development in Las Vegas and a little bit in California. We manage just over 2.1 million square feet. Our lenders have been wonderful but, as we saw last September, they sort of withdrew and had to stop and see what our tourism economy here would do, so hopefully we won’t have any further problems here with that.
Jeff LaPour: We build all of our products speculatively, so we rely heavily on local or regional companies to lease space from us. So, we’ve been pretty fortunate that we haven’t been affected too much by the national picture. One of the challenges we are seeing now is tenant credits. They want shorter lease terms and more flexibility. They are looking for maybe two-year or three-year terms rather than four or five or longer. Besides the age-old issue of land costs, there is also permitting. We build only in Clark County and we build primarily only in the southwest sub-market, and public works has been a big stumbling block for us. We just hope that maybe sometime, if the county is going to continue to raise fees, they’ll maybe put some of it back into public works.
Steven Gilmore: Ninety percent of all the office space in the Las Vegas Valley was built on very inexpensive land. We face a challenge now of rising land costs, where floor-area ratios are reaching $60 a foot. What incentive does anybody have to develop anything? I would rather give my money to a hard-money lender. I think we need to start educating brokers about floor-area ratios. We’re challenged at finding reasonable deals on things. There are a lot of people getting in the market who don’t know what they are doing. We see every homebuilder in Las Vegas getting into the commercial business. They don’t bother to really understand the market – they have the capacity to get financing, so they do it.
Sturm: They are buying commercial land and turning it to residential.
Gilmore: Yes, that is another factor. So, where the next deal is, I don’t know – it is a challenge.
Par Tolles: The main reason we are coming to Southern Nevada is because we have a union pension fund that’s been chomping at the bit to come down to Las Vegas. They view the market as having similar dynamics to Reno, in that it’s a West Coast distribution hub. We are mainly focusing now on the southwest corridor. We interviewed six union contractors [for a current project], and right now seems like a very good time to lock in construction pricing. We heard across the board that four or five months from now we will get much less attractive pricing for construction than we will right now.
Tim Snow: Steve, I understand what you are saying about land pricing. It has skyrocketed, with a lot of inflationary speculative activity throughout the Las Vegas Valley. I think our biggest challenge is the lack of diversity in Nevada’s economy. We have to be very careful in diversification as relating to the gaming industry. I think we have some really important milestones coming up. The first one is the fact that there is a proposed gross receipts tax, which could drive existing companies doing business in Nevada out of Nevada, such as CitiBank, Ford Motor Credit and others. It could also slow down the in-migration of firms that have found this a great place to relocate. The second part of that is the sophistication of the skills of our labor force. We have a long way to go in providing the labor force for the future. We do need to think of our long-range picture.
Connie Brennan, Nevada Business Journal: I know a number of you are doing projects regionally. Would someone care to comment how the Nevada market relates to others? Are we in a soft market here? What do you see for the next 18 months looking ahead?
Gilmore: I’d rather be here than in a lot of other markets. We haven’t suffered the same thing that others have. A lot of people were much more dependent upon the tech industry than we were and when that bubble burst, it affected a lot of other cities worse than it did us.
Carroll: We are driven by gaming and tourism. I think if this Mandalay Bay Convention Center is even mildly successful, it is going to have an unbelievable effect [on the southwest Las Vegas submarket] from the audio-visual people, the convention services companies and the people who do the shows. A year from now, we are going to have a much higher demand in this area.
La Pour: I think Las Vegas has been very fortunate here during the downturn, especially compared to Phoenix. We don’t have the size and scale of speculative projects happening here simultaneously that they do. You might have an office market that is 20 percent vacant in Phoenix, while the office market here is 12 percent or 13 percent. I went to an economic forecast in Phoenix recently and all the developers and brokers there were crossing their fingers and hoping for new development in 2004. Overall, we have very little space here that is available or under construction, and we have steady demand. There are still pockets of opportunity here. You just have to be a lot more careful than maybe two or three years ago, when you could build practically anything and lease it out. The banks are helping by shutting off some of the money supply to the less well-thought-out projects. Land prices are rising, again and again, which probably stops some people. That dynamic is not happening in other markets, where land is so readily available.
Snow: I think from an office standpoint we are off about 40 percent to 45 percent from the peak in 2000. One of the keys is the uncertainty in the national market. We look at about 35 percent to 45 percent of office space demand coming from outside this market. With the slowdown of the economy, that portion of the demand has diminished measurably. However, on the positive side, our office vacancy rate is very workable and we don’t have the degree of subleased space that other markets have. Because we hadn’t drawn those high-tekkies to this area, we’ve been fortunate that our downslide has been more controlled.
Rod Martin: From an industrial perspective, on a comparative basis Las Vegas is holding up better than anywhere else in the country. I can’t think of another market that is currently healthier than Las Vegas’ is today. Southern California, surprisingly, has held up pretty well too, as far as existing product. Here in Las Vegas, I see it down relative to what we were enjoying in the ’90s and 2000, but it’s still a pretty darn good market here. The phones are still ringing and we are still doing deals.
Brennan: Terri, I know that you do a lot of retail development. How does that market look?
Sturm: Retail tends to follow what is going on in the homebuilding community. As those new subdivisions grow out on the outskirts, residents need places to shop. The homebuilders are having another stellar year this year. I think that new-home permits are going to be up to about 25,000 or 26,000 this year. Resale is going to be about another 30,000. The market is very strong. They just opened a community in Southern Highlands three weeks ago and had people camping out overnight. They sold 30 homes in the first hour. It’s hard to argue with that.
Brennan: My husband is a developer, so I understand the frustration that we all go through during the permitting entitlement process. Does anybody have suggestions on how to make that move a little bit faster? Time is money.
Sturm: It would be nice if we could educate the people who are down there looking at plans about how it really affects us from a cost standpoint. At one of my buildings, I’ve been waiting for three months to pull the permit. They held me up over one parking space, and I’ve got 4,000 parking spaces out there.
Frank: I think the system is too fragmented. You’ve got public works, traffic, planning, building and safety, each with its own plan reviewers. I would suggest there be a coordinator who takes the plans and coordinates between the agencies and sub-layers of agencies, who coordinates the whole project and makes it move along like an outside expediter.
Carroll: If the agencies really understood the point of an expediter and you could pay a fee for that, I think it would be well worth it for all of us. Kirt, how long did you wait earlier this year for plans in North Las Vegas on tenant improvements?
Klaholz: It took about three months for approval on TI’s on existing space, which essentially was a remodel. It should have been a no-brainer, a two-week over-the-counter thing. I waited four months.
La Pour: North Las Vegas is probably the one municipality in the Valley that has been caught off guard, so to speak. If you go visit their offices and talk to them, everyone is real helpful and personable, but you can just see that their resources and capacity are not even close to what it takes [to accommodate the growing demand].
Kirt: I’ve talked to the mayor out there about it. They know they have a big problem and they are trying to see how they can resolve it with resources they have right now. It is a problem.
Smith: I think everyone agrees that North Las Vegas is really on the threshold of a tremendous growth spurt that really put it on the map, but they are very poorly equipped to handle what is about to happen. A few years ago, when I was with American Nevada, we were really gearing up on our commercial development at the same time Sunset Station was starting up, so there was a giant sucking sound where all of the resources in the city of Henderson just went away. Everyone was too busy to help us do anything. It was an extraordinary period for trying to get things done. I’m afraid we are in for the same situation with North Las Vegas. Henderson is a doing a little better job now.
Martin: In defense of these municipalities and jurisdictions, they are facing the same problem they have had for the last 15 years. Las Vegas is the fastest-growing community in the country – year after year after year – and these darn cities are saying they will not bite the bullet and hire the necessary staff. They are afraid of what will happen if growth stops – all the sudden they will be overstaffed, and they will encounter all kinds of problems with trying to lay off public employees. They’ve got to believe that the Las Vegas economy is going to continue to grow, and increase their budgets to put in those people to develop the plans in a reasonable fashion. They need to use those outside consultants or hire more staff.
La Pour: We developers are willing to pay our fair share of expedited fees to get projects processed and out the door, but, if they are going to up the fees and lower the service you get, that is where the rub comes in. If you could pay the fees and speed up the time, there is a correlation there. I don’t think the county recognizes that, or if they do, it’s not their top concern.
Brennan: Are you experiencing the same thing in the Reno area?
Tolles: A little bit, but not the extent that you are. We haven’t experienced the same kind of growth up north as you have here. We are typically a four-week [permitting] process –maybe it will stretch out to six weeks, particularly in Sparks. On the whole, it has been pretty efficient.
Panciro: You really need to take a look at it from the point of view of the city and county staff. A lot of planning and management people go to seminars and meetings, regionally and nationally. The other cities talk about their two-year or three-year processes and the people from Las Vegas are saying, “Hey, we do that in six months.” So, they come back with the attitude that they’re doing a good job. The people at the counter may say, “Sorry, we’re doing the best we can,” but the upper-level management thinks, “If you compare us to other cities and other places, we are doing very well.” That attitude needs to be addressed.
Gilmore: I have a problem with paying more. I think if you have a system where it is possible to be expedited, everybody is going to be expedited. Everybody will opt to pay an expedition fee, and eventually it will just bog down again.
Frank: It may not be the cost. Maybe there is enough money now and the system is just not organized.
Brennan: How concerned are you about the proposed business tax going through? If it does go through, how will it impact those of us here today?
Smith: One of our greatest selling tools to companies coming to Nevada is that we are considered a tax haven. Nevada is a pretty good place to live and it is a great place for businesses to locate. The fact is, gaming refuses to pay the way. They own the system, they own the state, and yet they say, “We’ve paid our share, we won’t pay anymore.” That’s inconsistent with the benefit they derive from the system that has been set up around them. I think it’s very short-sighted to say, “Let the other businesses pay.” It’s one of those flip comments that sounds very good, but it doesn’t have a relationship in fact and in practice.
Gilmore: The way they are planning that [gross receipts] tax, you could make no profit at all and still be required to pay the tax, because it’s on the gross. That is unfair. In other states, gaming companies are paying a 20 percent tax and what is the gaming tax in Nevada – 6 percent? I totally agree with Rick [Smith].
Murphy: Our company is in the middle of doing its annual budgeting process and we’re facing increased property taxes. There could be a split [property tax] roll, which could make matters worse for us. I’ve just been told property insurance rates are going to go up something like 40 percent next year. There is going to be a significant increase in utility rates as well. Hopefully, these same things are happening in other states as well, so we can maintain our competitive advantage, but rising costs are a concern.
Snow: We realize that the state needs more revenue, but it has very limited economic development items in its quiver. We really have nothing to give a company that comes here, with the exception of some education monies and so forth.
Panciro: If they qualify.
Snow: Yes, and so this tax could be very deleterious to the welfare of the entire state.
