Nevada’s leading commercial real estate brokers gathered at the Four Seasons Hotel in Las Vegas on July 11 for a roundtable discussion of challenges and issues affecting their industry. The roundtable was a part of Nevada Business Journal’s monthly Industry Outlook series. Those in attendance represented specialists in office, industrial, retail, land and apartments from both ends of the state. The group discussed topics ranging from vacancy rates and land prices to interest rates and subleasing.
Connie Brennan: What are some of the biggest challenges facing your firm?
Kevin Higgins: The biggest problem is the continually rising – ad nauseum – land prices in this valley. At the end of the day, that buyer or renter isn’t going to buy or rent because the price will be too high.
Dean Willmore: One of the challenges we’re facing is the lack of good quality investment real estate for sale, and one of the reasons is the consolidation of ownership of industrial real estate by a few major developers and owners. That has created a shortage of good opportunities offered by small owners for sale. The big owners tend not to sell, and that means less is available for everyone else. This trend seems like it will continue.
Michael Newman: I think the things that concern me the most are the availability of land and the cost of land. If you look on a map, it sure looks like there is a lot of land out there, but we all know the challenges of acquiring the land and we all know the challenges of acquiring land for the types of uses that the market is demanding right now.
Rod Martin: I’m concerned about the cost to develop [projects] and potential increases in impact fees as governmental agencies are struggling with their cash situations. Oftentimes they have looked to burden the commercial developers with fee increases. On the demand side, I am concerned with slowing growth.
Judi Woodyard: For the past 11 years, we’ve pretty much been in a landlords’ market. The transition [to a tenants’ market] started occurring about 18 months ago in the Las Vegas marketplace, and it is continuing. There is a psychological change in deal-making that sometimes presents a challenge.
Perry Muscelli: I think one of the challenges we could do something about would be to market ourselves better. I don’t think Las Vegas is doing a good job marketing itself in the national arena as a great opportunity for businesses. We are underselling ourselves. I constantly run into businesses that are surprised at the advantages I can offer them for relocating their company here to Southern Nevada. They are surprised to hear they can ship goods out cheaply and get 24-hour labor.
Chuck Witters: What really has me concerned is our vacancy factor creeping up and more and more sublease space coming on the market. I do think that is starting to soften prices.
John Moran: The challenge that always faces any commercial mortgage banker is the need to continually make adjustments in the marketplace. Las Vegas, fortunately, continues to be perceived as an excellent market for institutional lenders to put their money in. Last year was a tremendous year for all the mortgage bankers in town and 2002 appears to be an even better market than last year.
Eddie Gutzman: We’re running out of land – I wish I had a magical whip for the municipalities to get them to release the land they’re not using, to do trades or whatever, specifically BLM land.
Ron McMenemy: I agree that we need to market ourselves a lot better. We need to accentuate the positives. We are not getting the word out like we should be.
John Pinjuv: One of the biggest challenges as brokers is protecting our owners’ assets during these down times. As for promoting ourselves, Reno has any even bigger problem than Las Vegas. Everybody knows about Las Vegas, but when people from other parts of the country hear about Reno, they thing it’s about half an hour from Las Vegas. It’s tough getting them to agree to move here if they don’t even know where we are.
LAND
Lucinda Stanley: At the last BLM auction of land on Las Vegas Blvd., nobody bid. If [the BLM] is really thinking about Las Vegas, why are they pricing the land so high that nobody wants to bid on it? Where is their mentality as far as helping out the community?
Gutzman: It was the appraisal. I don’t know how they came up with that figure, but governmental agencies are bound by the appraised value.
Newman: Unless you want to pay 25 percent above the appraised value, you have no chance of getting this land. It is not only the cost of the land that is the problem, it is the fact that there is no infrastructure to the land – the cost of improving the land. The government and municipalities haven’t done a very good job of creatively financing the infrastructure cost.
Mack: Part of the BLM problem is also the terms of the purchase – it’s called cash. Higgins: I don’t think it is just the BLM or the government properties – it is the private individuals who have been caught up in this fervor the last five years. The Southern Beltway is a perfect example. You cannot find a five-acre piece of property in the beltway area for under $6 per foot, and you can’t develop on it because the utilities aren’t there, the infrastructure’s not there, and who knows when the power will be there. This is unimproved property, so by the time you have your holding cost and your improvement cost, you are going to be heading towards double digits or high single digits.
John Knott: Markets are cyclical, and if development doesn’t make sense for land at $7 a square foot, it’s not going to be developed. You will have a cycle where there will be a change in land values. Phoenix went through that 10 or 12 years ago, and everybody wanted to participate in the land rush, but people ended up losing money. The prospects are still terrific if you look over a 20- or a 30-year period. However, on a short-term basis, people may lose some money in land, which is going to be a shock.
John Schottenstein: You’re absolutely right. Phoenix saw prices fall as much as 50 percent to allow development to kick back in, but today we are right back where we were. Vegas will probably go through that same correction. People will overpay – there is no question about it. If they have staying power, as some did in Phoenix, they may still do well.
Muscelli: Las Vegas is in a unique situation – we are like an island locked in by the federal government. Unfortunately, I don’t think it is going to be easy to put political pressure on the federal government to sell land. If I own land here, I like the high prices. I don’t want to see the government selling it cheap, so I can’t blame people for wanting to raise their prices. It is an investment – they aren’t buying land because they want to farm it.
Brennan: What about land costs in Reno?
Tim Ruffin: From an office standpoint, in the McCarran loop in the downtown area, prices are effectively at $16 a square foot to build office. Surprisingly, we are selling it. Developers aren’t going to buy it, because they can’t afford to build on it and lease. They can’t compete with the second-generation space in the market. But users will buy it, to own their own land and buildings.
Ken Stark: There is not a lot of land in Reno. We’ve got some physical barriers that stop us, including the Sierras.
Muscelli: The valley may be small, but from an industrial standpoint, you can go out to Fernley or to Stead.
Gary Baker: In town, we are virtually out of land for industrial. Three years ago we were selling industrial land in town for roughly $3.50 a square foot. Now you are hard pressed to find something for $6 or $6.50. Tanamera purchased 140 net acres that was going to be an industrial park and it is now going to be an office park, and that was the last available large parcel of industrial. Our movement is not going to go south anymore – out east is where things are happening. The largest industrial park in the country, Tahoe Reno Industrial Park, is being developed east of town on 4,000 acres, and industrial development leapfrogged five years ago to Fernley.
Doug Roberts: We will be able to build upwards of 2 million feet up in Stead, and the dirt we control will allow us to be reasonably competitive at 30 cents or below. The problem with going east is there are no services. Businesses need places for their employees to go, like restaurants and convenience stores.
Baker: The Tahoe Reno Industrial Park and even places that we are not even aware of right now are going to be huge bases of industrial within 10 years, in my opinion.
OFFICE
Brennan: What is the vacancy rate now in the office market?
Mack: It’s going to be about 15 percent.
Soozi Jones Walker: We’ve got a lot of second and third generation [office] space coming back in the market from large tenants that have been leasing. With these tenants now moving into their own buildings, it’s creating some challenges as well as opportunities to go back in and start breaking up all this large space. There’s a big gap between prices for the new spaces and the second-generation spaces, so it’s a good opportunity for all the leasing agents.
Woodyard: More than half my clients are coming from other markets. There are some significant expansions that are going on here as well. When dealing with potential large out-of-state clients looking at various multi-state locations, most of the time [Las Vegas] makes the short list, but coming in first is the real problem. Technology has a lot to do with that and there are some other things as well.
Witters: Before 9/11, my clients were about 65 percent corporate outside of NV and 35 percent inside. Right now it is more 50/50, but the ones inside are expanding and moving up to better buildings. Our major developers have not overbuilt – they build to meet the market. I am concerned about more subleases – we have to get that space absorbed.
Stark: In Reno, we are a pretty small market – around 7 million square feet. I’ve been talking to people around the country, and I think we are pretty fortunate, but it is becoming a tenants’ market. You are seeing some rents drop – in one case from $1.60 a square foot modified gross down to $1.10. Vacancies are going up to close to 15 percent now.
Jones Walker: A lot of [tenant movement] stems from property management. Good property managers who have treated their tenants well over the last five to seven years of their lease have been able to keep their tenants, but the ones that have continued with CPI increases and that type of thing are losing tenants. The market price of the space they are leasing may be $1.45 a foot modified gross today, and they are paying $2.00 or more, which creates all kinds of opportunities in moving them. I think this has been a big reason for some of the larger vacancies we have seen.
Stanley: Part of the vacancy factor is that there are a lot of new small buildings coming online. With the interest rates so low, it gives the tenant the opportunity to own versus leasing. I have put a lot of tenants into their own buildings, so that also creates vacancies.
RETAIL
Brennan: Let’s move on to retail. I’m excited that Nordstrom is coming – I think that says a lot about Southern Nevada. What else is happening in retail?
Mack: Prices are going up through the roof. Retail rates in the West Charleston and Rampart area are going for upwards of $5 a square foot. It’s not strip center space – it is neighborhood center. The Rampart Commons is a lifestyle center – the first one in Southern Nevada, where we have traditional mall tenants in an outdoor environment.
Janet Goldstein: In the restaurant market, I’m struggling to find sites where it will make financial sense for my clients to do a ground lease. Restaurants don’t pay $25 a foot to buy land – they want a ground lease. There are very few sites available, and prices are just too high.
Brennan: What about Reno?
Pinjuv: Along South Virginia Street, it is very difficult to find anyone who will sell [land for retail.]. Almost every deal that has been done recently has involved ground leases, at $20 to $22 dollars a square foot at a 10 percent interest rate. There’s no land to purchase, so they are all doing land leases.
Ruffin: The market’s been healthy. We’ve dropped over the last four years from 9 percent to 6 percent vacancy, where we’ve held it for the last two years. We’re seeing the buildout of the last two power centers within Reno proper. You won’t see any more power centers in Reno – they’ll be in Sparks or Carson.
INDUSTRIAL
Mack: We’re seeing a lot of subleasing in the industrial side, echoing what’s happening in the office market.
Willmore: The big story in industrial is the drop in rates. We’re seeing rents drop valley-wide by about 15 to 20 percent overall. My feeling is that our vacancy rate is going to continue to trickle up a little bit and maybe by the fourth quarter start to come down. The market will soften some more, but will firm up towards the end of the year.
Higgins: I tend to disagree. I don’t see it as that major a swing.
Martin: As it relates to the product we’re developing in the southwest submarket, I agree more with Kevin (Higgins) than with Dean (Willmore). There is more downward pressure than we’ve seen in recent years, but I haven’t yet seen that equate to an actual reduction in rental rates. Free rent is becoming more prevalent from the tenant rep brokers, so I would say there’s downward pressure, but I have not yet seen a reduction in vacancies in our portfolio, which is about 3 million square feet in the Southwest submarket. We have about 30,000 square feet of vacancy there, which is only about 1 percent.
Moran: From a financing standpoint, the national and institutional lenders still perceive Las Vegas to be a very strong industrial and retail market. There are institutions out there from outside the Las Vegas community that are very interested in Las Vegas on a spec basis.
Baker: In Reno, the average size of a transaction has dropped by about 25 percent, but the average deal is still about 38,000 square feet. We’re on track this year for 4 million square feet gross absorption, which is only a slight drop over the previous year. The vacancy at the end of 2001 was about 8.7 percent and it’s about 9.7 right now. There are very few concessions. Free rent is still not a big deal in our market. The rental rates have held firm.
Roberts: The way the economy has been, we are seeing plenty of interest and a lot of people kicking the tires, but no one is doing anything. The corporate scandals are making people skittish. I think in general, rents are going to get lower and there will be more concessions, because in both Las Vegas and Reno the landlords’ market is not there anymore. I will do whatever I can to get a tenant into a vacant building, because I need to cover my debt service. Interest rates have covered a multitude of sins over the past few years. Developers would be giving buildings back right now if it weren’t for those rates. If you are paying 4 or 5 percent in construction loans, you can afford to sit for a while.
Muscelli: I would like to make some predictions on the industrial market here in Las Vegas. First of all, we have two markets here. We have a market that services our economy and one that services the country. The market that services our economy is going to be owned by Majestic, EJM Development and Thomas & Mack. They have a tremendous advantage because of their ground leases with the Department of Aviation. That is going to have a long-term effect of stifling competition and ultimately raising rents. The distribution market that services the country is what I’d call more of a “value market”. This temporary situation where we have an abundance of space is going to change as the national economy is restored. When the stock market comes back, we will see companies come back in here, and we will be looking at higher rents than ever and a shortage of space again.
APARTMENTS
Christopher LoBello: Apartment vacancy has increased somewhat, and it will be about 6.8 percent at the end of the year. There was a slowdown in construction after Sept. 11. The continued [population] growth in the Valley is a positive sign, but with the land shortage, that growth may come to a slowdown, which will impact all of us here.
Gregson: The cluster housing guys are building on what used to be apartment land, and the residential builders are beating the industrial guys to the punch. In North Las Vegas, you’re going to see a lot of land gobbled up that looks on the map like it would go industrial, but it’s going to be residential because the homebuilders will pay a higher price. And then the homebuyers will be out protesting industrial development in their neighborhood.
Muscelli: I have a question about where all these people coming in are going to work. Housing growth is going full steam, but commercial is way down.
Gregson: Some people are moving up into larger or newer homes because of the interest rates.
Roberts: Also, the square footage per employee has been drastically reduced over the last few years due to cubicles and other things.
Dave Knapper: We have an awful lot of people moving here who are called retirees, but they’re not really retired. They’re working out of their homes. People have their own computers, and they call themselves consultants or representatives, and they’re working from home. They don’t need an office.
