Industry Focus: Commercial Real Estate

The commercial real estate (CRE) industry in Nevada has been growing in recent years despite a number of hurdles professionals have overcome. Leaders in commercial real estate recently met at the Las Vegas offices of City National Bank to discuss the challenges and opportunities facing their industry and what’s on the horizon moving forward.

Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.

How is Nevada challenged In regards to Land?

GUY MARTIN: We work both Northern and Southern Nevada. For us, it’s the difference between land and real estate. Land holds the globe together and real estate is something you can actually build on. There’s not a lot of buildable land out there.

SCOTT LOUGHRIDGE: I think there’s two issues. One is available land. I see land prices going up and I worry about pricing ourselves out of the market or pressuring construction budgets so much because of the land price that we just can’t make clients’ projects work any longer. The sister of that is manpower in our industry. But, if we don’t have land to build on, we don’t need manpower. I put the land ahead of manpower because that to me is a critical aspect.

JOHN RAMOUS: The land is certainly becoming more challenging. Finding opportunities that we want to buy now, not for the short term, but for 10 or 20 years from now and trying to envision that is becoming more of a challenge for us.

KEVIN BURKE: From a development perspective, we’re starting to see a disconnect on land prices. Land is the start for infrastructure, so you end up with a piece that you really have to lay over pretty heavy costs to develop it. It’s creating some constraints. I don’t know how realistic the land owners are with trying to make these projects work, but I’m hopeful that will all solve itself in due time.

LOUGHRIDGE: Then a caveat to that is getting, not only infrastructure, but the city, county, building departments, planning back up to speed so they can process this stuff quick enough to get us in the ground and get going.

MICHAEL DUNN: Any kind of big land, you’ve got to have the municipalities involved. You’ve got to deliver utilities. Raw dirt at these prices, you can be sitting on it for years without utilities.

How is the retail market looking?

BRENDAN KEATING: You’ve got a little more gas on the fire with the elections being over and people have a pretty positive outlook. On the positive side of things, the coffee guys and quick service restaurants are coming to town and paying at record pricing for their spaces. As you get into larger users, it’s obviously getting pretty scary with what’s happening in retail right now. Payless filed bankruptcy. Bebe is shutting all their stores down. Everybody thinks Sears is closing. There’s a lot of reshuffling happening. A lot of that momentum has shifted to the industrial side of the business. We are looking at the retail sector and trying to figure out where the opportunities are going to open up from the stress.

DUNN: I would agree that there’s a major shift going on. I think JC Penny and Macy’s are also in trouble. It’s going to be interesting to see how our malls are affected when some of these anchors pull out. Are they going to be able to reinvent themselves into entertainment zones, which seems to be the thing that’s driving everything nowadays? It’s also going to be interesting where the stadium for the Raiders is going to be located. Are they going to do something that other cities have done where they’ve created a lot of retail and other entertainment options around those stadiums? Or is it going to be like the Phoenix Cardinals stadium in Glendale where it’s just out in the middle of nowhere and the ripple effect is not really felt? For the most part, in any of these sectors, well-located quality products always do better during good times and bad.

KEATING: I read something in the Wall Street Journal that said the U.S. has more square footage of retail than Europe and Asia on a per capita basis. I think through the loose lending cycles and the big box development, it just got overbuilt. Then e-commerce comes in and crushes it on that side. What’s happened is you’ve seen a flight to quality. The quality retail centers are doing amazing. They’re at 100 percent occupancy. Tenants are calling to try and push other tenants out of the spaces. It’s feeling very healthy. Overall, your vacancy is about 9 percent in retail across Las Vegas. Rental rates, in general, are not above peak but the best products are at or above peak.

How is Office Space faring?

MIKE MONTANDON: This is going to go back to the flight to quality. I’ll have a tenant who wants to look at two office buildings. One of them is $0.70 a foot and one of them is $2.30 a foot and they’re really not that far apart. If you want to be close to the 215 and have good access to Las Vegas’ version of class A space, you’re going to pay through the nose for it here. Then just down the street, there’s one that’s going to be sitting there vacant and can’t move.

KEATING: I think we’re about 15 percent [vacancy rate] on office overall, but it’s trending down. The 215 from Charleston to Jones is hot and there’s not a lot of large square footage available. The good stuff is leasing excellent and some of the other stuff is $1.25 when the previous peak was $1.75 and the buildings are half full.

DAN STEWART: One of the reasons that enticed Gardner [Company] to come here is they’re bullish on the economy. Number two is they see there’s a dearth of really class A [office space] in great locations.

GUY MARTIN: I want to be careful, though, on the office conversation. I believe it is a different dialogue when you talk about north of 20,000 square-foot contiguous space. It is a hugely different vacancy rate, different accessibility or availability for that product. I’d even lower that down to 15,000 [square feet]. There just isn’t a collection of large, contiguous class A, class B+ space in office. That vacancy rate has got to be very low.

DUNN: We’ve just done some recent surveys and you’re right. There’s probably 10 or 11 spaces in the entire Valley that’s 20,000 square feet or larger. That’ll tweak its way down. There’s a number of problems with the office side of it. It’s the type of companies that are looking to come in that are absorbing bigger square footages. A lot of them are looking for back office operations. Most of these buildings are constructed with four, maybe even four and a half, per thousand parking. Not enough. Thomas & Mack with their building off Warm Springs and the 215 did a really smart thing. They built some parking structures. Now they’re able to take in these higher density companies, which is the trend going forward.

BURKE: Just thinking about office, we’ve spent quite a bit of time out of the market and looking for influence on what will eventually be driven into the market in places where there’s constraint. In Southern California, Northern California, Texas, Florida, you start to see what happens in office. The developers, in particular, look at it as, “What’s my incremental investment per person for me to compete against another company?” And it’s amazing what they’re able to do. Eventually you’ll see some obsolescence in our market because putting up an office building just for space is not going to cut it.

RAMOUS: I’ve been to a number of different markets prior to Vegas and you had 40 or 50 years of creating an office market, if not longer. Vegas may just miss that. With industrial, we’re seeing it not just penetrating the retail market, it’s penetrating the office market as well. As technology changes, they’re utilizing a lot of these [industrial] facilities for office use. So we’re starting to build out higher ceilings and more creative space because the number of employees is increasing. That’s also feeding into that office market. I see the office market is being diluted by a number of different factors, not only the demand, but also the supply.

What’s happening in industrial?

RAMOUS: In general, I don’t know if we’re a barometer. I would say more smaller, mid-bay product is doing extremely well, but not as good as the big box as far as demand. But we’re probably at 5.5 or 6 percent [vacancy], which mirrors our portfolio. I mean, we were at 3.5 percent vacancy. But we’ve had a lot of movement and we’ve added some new inventories. We’ve kind of spiked down but it gets relet quickly for the most part. Rents have gone up pretty dramatically. In the worst part of the recession, it was high teens and low twenties [per square foot] on industrial. That same product is leasing today close to $0.50 a square foot.

ROD MARTIN: The market, on the industrial side, takes large lots of land. Is there an industrial developer that’s going to take down more than 20 acres for a single phase? Probably not. If you pick up a couple hundred acres in West Henderson right now, what are you going to do with that? There is no infrastructure and you’re going to have to get that critical mass of 400 or 600 acres just to bring the infrastructure down there. Now you’re saying, “how long is it going to take me to develop 600 acres?”

How difficult is it to get financing?

ROD MARTIN: Generally, we run through ups and down and the recessions because people want to build and there’s too much money out there. There’s not too much money out there. If you’ve got a good track record and a good sponsorship behind your loan, you’ve got a pretty good loan. Rates are fantastic today. If I go out there on my own with no experience and no balance sheet, I’m not going to get any money and that’s preventing the over building that got us into a lot of trouble 10 years ago.

GUY MARTIN: With multi-family and mid-service hotels, financing is a struggle because everybody’s afraid of the bubble. They’re afraid of overbuilding in those markets. Today lenders are just wiser from the experience of the economic downturn. We build for primarily cash-funded clients and those particular environments. The little bit of financing that they need to get, they’re seeing the cash participation requirement on the term sheets go through the roof. We do have a couple of multi-family jobs that are going HUD (US Department of Housing and Urban Development) financing, so that seems to still be an opportunity. As far as conventionally financed, the two markets that are really struggling is multi-family and mid-service hotel.

RAMON PEREZ: As far as getting funds, whether you’re a contractor or developer, we’ve seen more deals and we’ve been doing more deals. One thing that’s interesting is we’ve seen deals lately that come from people who have maybe done one little project here and there and all of a sudden embark on a project that’s a little bit big for them. They’re going to jump from a $1 million project to a $20 million project they’ve never done before and they don’t have a lot of liquidity. So I’ve seen them shop at 10 different banks because the brokers and the bankers get together and talk. We’ve seen a lot of activity. In general, given our credit committee that handles commercial real estate, they’re willing to do deals. It’s just finding the right deal that has the experience, the capital and liquidity behind them.

How can CRE in Nevada improve?

SHAWN DANOSKI: I think there’s three components. It’s time, cost and regulation. Regulation to get an appropriate balance of our infrastructure and our governing systems to get approvals and permits and processes in place to appropriately control the type of development where it should be. The challenge with the government agencies being understaffed and trying to keep up with the growth when the regulations get in the way is, it causes time constraint and creates an urgency. Then we’ve got this challenge of labor which is causing construction costs and development costs to continue to go up. I’m not sure when we’re going to hit that threshold of making it not work, but I do see it somewhere in the future.

MONTANDON: You’ve touched on the problem; the coordination. It’s not just four municipalities, it’s the BLM and NV Energy. You’ve got so many entities that you have to coordinate. Clark County doesn’t always get along with the municipalities. If you look at the relationship that has to exist between Clark County and Henderson for West Henderson to develop, those are really hard relationships to make work over any period of time.

BURKE: Just from a builder’s perspective, the shortage of skill and trades, manpower and administrative staff [is a challenge]. If things start to heat up more than they are, that will become a problem. I think it’s manageable right now, but if it does pick up, we’re going to start to see some constraints which is going to push up the cost. Right now, we’re projecting 3 plus percent inflation a year. That can certainly escalate if things pick up even more. One of the biggest concerns I see is construction pricing. We see a lot of work in the pipeline. I just worry that we have all these factors working in the wrong direction of more building.

STEWART: The biggest challenge is not a fun thing to talk about and that’s education. We need to be diversified and I think the only way we’re going to get there is through education. We’re just beating up against the ceiling and we just can’t attract the folks that we really need to break out and take that next step on the commercial side of things. I certainly agree with everybody talking on the specifics relative to land and construction prices, but globally, education is a major issue that we’ve just got to tackle.

DUNN: We all know [education] is a deterrent to our state for bringing in the right type of companies. The other thing is our municipalities seem to be always on the down side of the curve and behind everything. They’re not thinking futuristic from the standpoint of where we’re going to grow certain industries like industrial. We should be directing where that growth should be versus letting entrepreneurs determine that because ultimately we’re going to have a very unplanned community. I think there’s signs of it all over the place now, which further contributes to education issues, crime and everything else. These are complicated issues, but I would like to see our governments get ahead of the curve in planning and directing where certain types of development is going to take place.