GUEST OPINION: Commercial softness a continued concern

By Jeremy Aguero, Special to the Business Press

May 07, 2002 - Higher than average office, industrial and retail vacancy rates have sparked concern from the investment and development communities.

The question of the valley's supply and demand balance looms over a tentative economic landscape. While there are several signs that our economy is making a stable recovery, it may get worse before it gets better.

Of the more than 280 market variables tracked by Applied Analysis, key commercial and industrial employment sectors, consumer confidence, and retail sales activity have the most direct impact on the valley's non-residential real estate markets.

Moreover, it is not the condition of the market today that supports current development; but rather, market conditions 12 to 24 months ago that have the most direct impact on the construction activity we see today.

Take office market growth as an example. In February of 2000, annualized office-related employment was up 6.9 percent; in February of 2001 it was up 7.5 percent; in February 2002 it was up only 5.0 percent.

The trend has been one of decline since May of 2001, well before the tragic events of Sept. 11. Slower growth rates in the types of businesses that utilize office space mean fewer expansions and less demand for commercial space.

Business expansion decisions are normally delayed by controlling factors like existing leases, desire to control cost and the market expectations of decision-makers.

The average office-related employee utilizes between 150 and 250 square feet. That means that a 1 percent decline in office-related employment growth translates into a 200,000 to 400,000 square foot decline in office market absorption.

Moreover, factors such as concerns over the price and availability of power and the state's ability to quickly provide a meaningful resolution to the medical malpractice insurance dilemma are further constraining the demand for commercial space.

There are other factors such as consumer confidence, which declined to 94.1 in February and remains nearly 13 percentage points below the levels reported last year.

Additionally, while the state's retail sales were up in January, they are being artificially inflated by automotive sales. Automotive sales and gasoline purchases generally make up 10 to 13 percent of the sales tax base; they reported a nearly 16-percentage point increases over January of 2001.

Areas of more routine consumer purchases, such as general retail merchandise and meals away from home, have seen significant declines over the past several months and are a much better indication of the health of the economy.

The most recent gaming numbers released by the Nevada State Gaming Control Board are not as impressive as they may appear at first glance.

In pertinent part, they indicate that gross gaming revenue was up 7.8 percent statewide and 7.4 percent in Clark County for February. Considering the substantial declines reported in the January release, and the fact that the Super Bowl and Chinese New Year were both in February, the firm had anticipated double-digit increases.

While there are other signs of continued improvement in the gaming sector, and the composite index of local gaming stocks is up by more than 50 points over pre-Sept. 11 level, we cannot underestimate the importance of tourism and gaming to our economy.

They not only are the engine that drives the local economy, they own the bus most of us take to work. As such, the industries ability to fully recover will be felt by all sectors, including commercial real estate.

Jeremy Aguero is a principal at Applied Analysis, a Nevada-based advisory services company with offices at 2700 W. Sahara Ave. The firm can be reached at 702.967.3333.

<< Go Back

Article Copyright ©: Las Vegas Business Press