Commercial real estate brokers gathered at the Four Seasons Hotel on July 10 to discuss challenges and issues affecting their market. The gathering was part of Nevada Business Journal’s monthly Industry Outlook series. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the roundtable discussion, which included issues such as market trends, vacancy rates, competition with other locations and dealing with local governmental agencies. Following is a condensed version of the discussion.
Attendees were first asked to introduce themselves and state what they believed to be the biggest challenge they are experiencing in the real estate market.
Dan Doherty: I have two main issues: number one, the lack of large regional tenant activity, new companies coming to town wanting big chunks of space. Most of that went away after Sept. 11. To compound that is the continued high levels of new construction, especially in the big distribution buildings, especially in North Las Vegas. If you take away the big tenants that occupy those large buildings, but yet you don’t decrease the number of those large buildings being built, you have a continual increase in vacancy. Perry Muscelli: I agree with Dan that the large tenant activity has gone away. There is a lot of hype that we theoretically should be attracting a lot of business from out-of-state, but it hasn’t been materializing in the last 24 months. The other concern is the price of land, which is getting outrageous, and it’s going to hurt our long-term growth.
Kristi Owens: I specialize in land sales, and other than the high price of land, a concern of mine is our zoning and entitlement process right now. It’s expensive and it’s slow. We need to work on streamlining that process to enable developers to develop some of the smaller infill parcels in the Las Vegas Valley, and especially do redevelopment.
Shawn Barashy: Fees and taxes have increased substantially in the past few years, and some of the companies coming here find that, although we don’t have some of the taxes other areas have, we do have quite a few fees and regulations, and the cost of doing business here is not as inexpensive as they thought it would be. Combined with high prices for land, I think that it does slow growth.
Scott Marker: The biggest challenge in commercial real estate for retail developers is finding the land that’s going to be an A-plus site and then attracting quality tenants that would be successful in that area. The developer needs to make a great purchase in land value, develop all these variables and then provide an affordable rent for the tenant.
Mike DeLew: One of the biggest things affecting my business is alternate uses for large industrial sites. If you have a 200-acre or 300-acre tract with a master plan for an industrial park, residential developers are coming in and outbidding what an industrial developer can pay [so they can use the site for housing]. There’s going to be a severe impact, long-term, on our ability to continue to grow our industries.
Scott Gragson: We do land in the southwest [Las Vegas Valley], and our biggest challenge is assembling land, because it’s all 2.5-acre to 5-acre parcels. Also, the new zoning ordinances now in place present a problem. You can assemble 40 acres and still be non-conforming. It’s making it difficult to assemble land and to justify changing the zoning and bringing infrastructure in.
Paul Perkins: I guess the greatest challenge we’ve faced in the last couple of years is a complete disappearance of tenant activity. (general laughter) Fortunately, the developers made a concomitant decision to stop building, so while the activity slowed down, we didn’t see any particular spike in vacancy. I think the challenge that faces us now is getting over whatever the Legislature throws at us in the way of taxes. There’s a pent-up demand, a lot of companies waiting to see what our tax package will be.
Mark Bouchard: One of the greater concerns is the ever-changing tax environment. However it’s resolved in the Legislature, we’re going to have increased taxes. As a result, we are going to have to adopt new policies and practices for attracting business. The other thing affecting our real estate business is education. We are still viewed as a service-based marketplace, and our education system hasn’t attracted the higher tech-type companies, because we don’t have the education base in place for that the way some other markets have. Southern Nevada is going to have to increase its level of education to service those types of companies.
Dean Willmore: The biggest issue I think facing commercial real estate and Las Vegas is the issue of water. As a broker, one of the questions I’m almost always asked by clients is, “What is the availability of water in Las Vegas?” My answer has always been that the issue is more of an allocation problem than an availability problem, but what I’ve learned recently is that Lake Mead is now at about 60 percent of its capacity. If the lake drops another 20 feet, we will be declared in a drought emergency. Phoenix and Tucson figured out 20 years ago that they are located in a desert. They’ve always limited the amount of sod and mandated drought-tolerant landscaping in all their commercial projects. If we go into a drought emergency, that will definitely affect our growth. I’d like to see all city governments start eliminating sod from commercial projects and start requiring drought-tolerant plants in all commercial projects.
Chuck Witters: What I’ve been seeing in the last two years is that corporate America does not have confidence, due to the national economy. For my first eight years here, we office brokers got a lot of national tenants coming in – not putting in a headquarters, but a district office or a regional office. I have not seen that in the last two years, because of Sept. 11 and the national economy. Ninety percent of leases in the first eight years were five-year leases. Now people are asking, “Can I do a two- or three-year lease?” They just don’t want to commit themselves to a full five-year lease. Another big challenge is land prices. They’re getting so high, deals are just not going to pencil. The final thing is that I’m seeing concessions given now in the last year or year and a half that we never gave in the first eight or nine years, such as free rent, free parking and things of that nature.
Patrick Marsh: I believe the biggest challenge I face is the difficulty of making transactions happen. You always have the landlord and the tenant, and a gap between the two. The broker tries to build a bridge between the two sides, but now the gap is very broad. Tenants want short-term deals – six-month or one-year leases. Landlords say they need to get a five-year lease or a three-year lease. It’s making it real difficult for transactions to happen.
Suzette Lagrange: It seems to me the biggest challenge facing the industrial real estate market right now is overbuilding, I don’t think we’ve had it as bad as many other markets, but the out-of-state tenants are certainly not as plentiful as they once were. They’re definitely sitting back and waiting. On the bright side, those tenants have a lot of different choices. I remember a few years ago, we were lucky if we had three spaces to show them. Now they’ve got quite a broad scope of options to look at. Once our tax climate turns around and the national economy turns around, I think we’ll see absorption really increase and the market turn around – hopefully, in the next year or two.
Brad Peterson: There’s been very much of a slowdown in out-of-state companies coming into the Las Vegas Valley, and we need to look at how we can attract those kinds of companies again. The other challenge would be the rising cost developers have to incur to build an office building –land cost, infrastructure cost and tenant improvement allowances.
Tom Grant: One of my concerns is the infrastructure of Las Vegas. I don’t think anybody anticipated this explosive growth in population here. Dean [Willmore] talked about the water issue, and I think you can include all the utility issues and also the highway system. Everything is going to be challenged to keep up with the population growth. In order for us to be an attractive market, we have to be able to provide an infrastructure that can handle the people.
Lucinda Stanley: In the office market, we’ve got older buildings that are really obsolete. Those challenged buildings need to be addressed, and that’s why we’re seeing a lot of free rent, lower rates, concessions and 5 percent to 10 percent commissions. The older buildings are really hurting our office market, combined with overbuilding. As brokers, we need to be educating developers and getting them to start thinking more proactively, and not building what worked two years ago or three years ago. They all want to build the same product that just does not fit what the economy and what our clients want now. Then they look to us to create the miracle of leasing or selling that product. The biggest challenge I have is developers not doing their homework, not looking at the market, and not listening when I say, “Here are the statistics, here’s what’s going on in the marketplace. We need to diversify. Do something different, don’t do what everybody else is doing.”
Kevin Higgins: The new tax structure will affect a lot of industries coming in here, and that means it will affect commercial real estate, too. The water issue is a sleeping giant that no one really is waking up to, and infrastructure is certainly a concern. But, if I look at where I am going to be three to five years from now, it’s the cost of land that will make it very difficult to develop property. When you sell 100 acres to an industrial box developer for $2.50 or $3 a square foot, and within five months, he’s offered over $7 a foot to turn that into residential land, the choices are very easy. He thinks, “Why develop when I can flip my land?” That parcel is taken out of the industrial market and becomes residential. It’s up to the local municipalities to take a hard look at some of these zone changes that are requested and not change those over to residential. We have to have places to work here in town, not just live.
John Schottenstein: What I’ve seen in our office in Las Vegas and our office in Phoenix is an outflow of investor groups from Las Vegas into Phoenix because of land cost. The other thing I’ve found interesting here in Las Vegas is that your vacancies are higher in virtually every category of building, and yet your prices are going up. I can’t understand that.
Lisa Callahan: Unlike some of what I’ve heard today in industrial and in office, [retail brokers] don’t have to worry as much about the tenants. We’ve seen a lot of new tenants come into our marketplace. On the flip side, it becomes problematic because the land is so expensive. In a lot of the growth areas I’ve been working in, the land speculators who held the land are asking user prices and asking developers to pay them today, even though they can’t develop the land for two or three years. That pricing pressure ends up in a problem for tenants. They want to be here, but they’re getting sticker shock and asking, “Is this something I can afford, and do my margins provide for this at the rent structure?”
Mike Schnabel: I think the opportunity in Reno is its proximity to California. We seem to be drawing a lot of clients from Northern California. One of the challenges is, obviously, Indian gaming and how it’s going to affect the casinos in Northern Nevada.
Connie Brennan (Nevada Business Journal): Many of you are concerned about the lack of corporations moving here. We have economic development authorities in both ends of the state whose primary role is to bring new companies in. Are they doing a good job?
Stanley: The NDA (Nevada Development Authority) is doing what it can do, based on what the state is allowing it to offer for incentives. We can’t compete with Utah and Arizona on the type of incentives the state will provide to attract the companies. NDA’s hands are tied. The water situation, the utilities, transportation and education – these are out of its control. The NDA can’t fix the educational system – only we can.
Witters: My experience has been that corporate America has done their own studies. They’ll look at Nevada, California, Utah, Arizona. When I get a referral from another broker [out of state], I take the company officials to the NDA, not the other way around. We take them to the NDA to try and see what they can do to help them.
Muscelli: NDA would be better off focusing more of its budget on targeting corporate consultants and entertaining them and bringing them to Las Vegas. It shouldn’t be hard to at least get their attention to come here, and to Reno as well, and then sell them hard on the benefits. Let them see what the community is all about, because very often they don’t understand.
Doherty: We’ve talked to a number of companies that never seriously considered Las Vegas as an option. I hear all the time, “I hadn’t thought about that (locating in Las Vegas).” In two years, I’ve never seen an ad in Site Selection for Southern Nevada, and there are communities placing full- and two-page ads every single month in that magazine. So I agree with what Chuck and Perry said. [NDA’s] job is to provide information, but almost anybody can do that. Its job is to open people’s eyes so they see Nevada as a whole, as a viable option. Where this community is falling short is really getting out there and marketing Nevada.
Perkins: In the north, EDAWN has done a very good job, and we have great dialog with a number of very influential site selectors. They have told us that up until about six months ago, they were sitting on their hands. They had no assignments. So, perhaps you have an issue down here with targeting them as prospects, but the bigger problem is the economy, and what can we do about that? Make do as well as you can with the issues you can control, but the fundamental issue is, until corporate America gets off its wallet, nothing going to happen, and that’s what we’re fighting. We’re beginning to see signs of life in Reno, but the statistics belie that. In Reno, we’ve had an unprecedented two successive quarters of negative net absorption on the industrial market.
Brennan: For the average business owner who needs 20,000 square feet, is now a good time for him to purchase or to lease?
Willmore: Both.
Higgins: It’s the interest rates right now.
Willmore: The whole reason our land values are holding and our building values are holding and going up is because we have a lack of supply, and buyers understand that.
Muscelli: We need in Southern Nevada to change its policy with the BLM [to release more land]. Las Vegas has a higher average housing price than Phoenix, but housing prices are a local phenomenon. Warehouse rates are not a local phenomenon. Businesses looking to relocate are comparing the cost of real estate here with the cost in competing cities, so we can’t just have the warehouse prices go up to reflect our land prices. We’re going to choke.
Perkins: The main difference between Las Vegas and Phoenix is that we’re surrounded by mountains. What is the BLM going to release? We have too many natural barriers.
Muscelli: Let capitalism prevail, and let the land go, and if the developers can make sense out of building at Apex, then let them do it. Let our industrial prices settle down, and then we can see business growth, because my number one question is: Where is the job creation going to happen? Where are all the people moving here into these houses going to work?
Brennan: What’s happening in the retail market? Is it overbuilt?
Callahan: I don’t think it’s overbuilt. We’re seeing a lot of infill, reflecting changes in demographics. We’re seeing a lot of vacancies, but also a lot of Hispanic retailers entering the market, trying to pick up that slack. We’ve seen Hispanic grocery stores and Hispanic electronic stores. There is some turnover, but I don’t think it’s overbuilt. We still have a long way to go.
Brennan: And what about office vacancy rates compared to this time last year in the Las Vegas Valley?
Peterson: It’s ticked up just a little, but not much. In fact, over the last five years, it’s gone between 11.5 percent to almost 16 percent. So there hasn’t been that much fluctuation. What’s interesting is the last four years, gross space leased [per year] has been between 2.2 million and 2.4 million square feet, so it’s been very constant. The second quarter was the highest it’s been since 2000, so we could actually have close to a record net absorption in terms of office space.
Gragson: What’s the current vacancy rate for office space in Southern Nevada?
Peterson: It’s 15.65 percent in what we track right now.
Gragson: Whereas retail is at a high of 3.9 percent.
Marker: Retail is driven by demand. Retailers are selecting sites before a shovel is even in the ground. A lot of our centers are 100 percent leased before the first tenant moves in. So retail is really strong, but it follows residential growth, and as long as residential growth keeps going, retail will keep going. I think the problem for retailers is the larger box – the Wal Marts and the Targets. Wal Mart has the grocery guys kind of shaky, and the grocers have to react and have to restructure and address what Wal Mart’s doing.
Brennan: Paul, what’s going on in the northern part of the state in terms of office vacancy rates?
Perkins: The office market and the retail market have just kept rolling along through the last couple of years. Population growth has, of course, driven the retail sector. Most of the office growth has been internal. We’ve seen growth from within the market –relocations, expanding law firms, some county offices, that sort of thing. The city purchased a large office building and is moving city offices into it. There hasn’t been much external, which is what typically drives our growth.
Schnabel: I think we’re seeing the external change now, though. We are seeing more activities starting to take place.
Brennan: And land costs in the north?
Schnabel: Land just keeps going up, and we’re going to have to keep going further out of town.
Perkins: Along those lines, most of the industrial land that can be developed going forward is in the suburban submarkets, anywhere from 10 to 30 miles from the core business district, and those land prices have not changed. Only in the Truckee Meadows, the central valley, have they escalated.
Schnabel: Everybody in Reno, though, is poised to build. There’s a lot of retail activity, and there is some office activity. When you’re using your own money, you tend to turn the green light on a little later than when you’re using other people’s money, and, you know, some of this is people’s own money.
Brennan: How responsive are city and county governments in Northern Nevada in terms of permitting the use for development?
Perkins: In terms of approval times, in Reno or Sparks, you’re probably looking at three to five months for the overall process, and you go out into Storey County or Lyon County, which are very close by, and they’re talking two weeks. Developers just drool when they hear these timeframes, and they’re achievable.
Schnabel: I would say Northern Nevada governments have very responsive. That’s a positive for our community, relative to our competing communities.
