Real Estate: Strong markets still face challenges

October 15, 2004 - Local real estate and research firms released their third-quarter numbers last week.

Overall, the markets continued to be strong but continue to face challenges, industry experts said.

Many of the commercial markets have been affected by the housing market and its roller coaster ride, while all have been affected by the increasing costs of land.

Industrial

Local industry experts hope the cooling off of the housing market will help take the pressure off land prices and the demand for industrial land -- often rezoned for housing.

"Hopefully it will free up or lower prices of land so industrial can get back in there," said John Restrepo, principal of Restrepo Consulting Group LLC. Restrepo releases quarterly numbers with Colliers International, Las Vegas.

Industrial brokers and developers have bemoaned the rezoning of industrial land for residential purposes and the run-up in land prices that have made development for industrial purposes less cost effective and less profitable.

Rapid escalations in land prices are pushing some developers out of the market and have the potential to limit industrial supply after 2004, research firm Applied Analysis reported.

Those challenges have made it difficult to find suitable space for large users, those in need of more than 100,000 square feet, said Kevin Higgins, senior vice president of Voit Commercial Brokerage.

"Right now if you look, there really isn't anything in the southwest for the large user, 100,000 square feet or more. In Henderson space is almost nonexistent. Almost the only area of town where you'll find something is in North Las Vegas," Higgins said. "If you needed to move in between now and the end of the year, there are only one, maybe three, projects that you can do that in."

Despite those challenges, the industrial market reported strong expansion in the third quarter with 933,000 square feet of completed space, the highest quarterly total since the fourth quarter of 2002, said Brian Gordon, principal of Applied Analysis.

"The increasing trend of owner-occupied buildings may ultimately result in vacancies of speculative space in less desirable areas," he said.

Office

Vacancies in the office market, which have dropped steadily over the past few quarters, may again be moderated in coming quarters by the more than 1.5 million square feet now under construction.

The cause, said local office industry experts, was the sluggishness in the economy during 2002 that caused developers to curtail their future office plans. The supply line is now starting to peter out because of slower development, but demand has now started to pick up. As a result, developers are again starting to work on plans for future office developments.

"It's due to the fact that office development tends to lag demand," said David Scherer, senior vice president, office and industrial division at Grubb & Ellis, Las Vegas. "The growth tends to follow the demand. Conversely, when the market starts to slow down, the product is already in the pipeline, and so it is still coming out of the pipeline (causing an increase in vacancy)."

Gordon said declining vacancy rates over the past several quarters were a sign of cautious development, which has led the way recently to a significant amount of construction activity.

Gordon puts the total square footage of office space under construction at 2.1 million square feet -- with an additional 5.1 million square feet planned for future development.

"It appears that vacancy rates have hit the bottom of the trough as they will likely witness increases in the upcoming quarters due to the 2.1 million square feet currently under development and expected to enter the market in the next 12 months," he said.

The cooling of the local housing market also could affect office vacancies, Scherer said.

As the housing industry expanded, so did the services that catered to the market.

"All the different services expanded during the housing expansion," he said. "As it slows down and as interest rates go up, there will be a downsizing in the office market and I think you're going to see that more in the next couple years."

Another factor impacting the for-rent office market is the for-sale office market, which has gained popularity among small users that want to build equity by purchasing, rather than renting, he said.

"Interest rates and speculation of further land price appreciation have sparked the recent flurry," Gordon said.

Scherer expects that there won't be a spike in office vacancies, because of continued demand overall, but rather a flattening-out of vacancies.

"We are going to see healthier absorption than in the past couple years, though we're going to see more construction coming online later this year and next year because of increased activity. So that new construction coming on is going to temper absorption, and it's going to balance it. Vacancies will remain flat or will moderately get better." Continue >>

Retail

The retail market could be viewed as the most deceptive of the commercial markets in the Las Vegas Valley.

It has the lowest vacancy rate of all the markets, hovering at 5 percent or less depending on which firm's numbers are used. But that vacancy rate has steadily increased over the past couple years, despite growing demand and a growing population base.

"The vacancy rate has been steadily increasing the last couple years while we're still growing populationwise, and that's what's a little worrisome," Restrepo said.

Catherine Lucchesi, broker/owner of Lucchesi & Associates, said one reason for the growing vacancy is tenants leaving older retail centers and moving into the new centers.

"A lot of retailers chase the new center," she said.

There is about 2 million square feet of retail space under construction, according to Applied Analysis.

Lucchesi said with so much new development under way -- and even more in the planning stages -- developers might start to rethink their development schedule.

"Instead of building all of the pads, they may just do the main section of the development and then get tenant commitments before building additional portions," she said.

Another growing concern for the retail market is the increase in rents, which are being driving by land and construction costs, industry experts said.

Gordon said developers are nearing a critical point of striking a balance between occupancies and lease rates.

Apartments

Apartment rents are expected to increase and the median cost of multifamily complexes to go up as the market continues to benefit from strong in-migration and job growth.

Limited developable land and the run-up in housing prices earlier this year has in turn increased the cost of land, causing many developers to abandon plans for apartments.

And while fewer apartments are being built, many complexes are being taken off the market through apartment-to-condo conversions. There are about 12 projects in different stages of the conversion process, Marcus & Millichap reported.

The number of apartment permits are down 450 percent over 2003, said Bob Flanagan, multifamily specialist with Marcus & Millichap.

There have been fewer than 400 permits issued so far this year (permits are issued per apartment units) compared with 3,000 permits for 2003, Flanagan said.

Christopher LoBello, regional manager with Marcus & Millichap, said the larger pool of renters -- people moving to Las Vegas, those that have been priced out of the local housing market and those who have been evicted because of a conversion -- is a positive sign for apartment owners.

Regional apartment vacancy is at 6.5 percent, the firm reported. Other local firms, such as CB Richard Ellis, have reported a much lower vacancy rate of 4.62 percent in August.

The steady decline in vacancy rates has caused area apartment owners to become less dependent on concessions that were very common in 2003, and even somewhat through 2004.

"They are not gone completely, but we are going to see them go," LoBello said.

Rents are expected to increase 2.5 percent this year. Strong demand for multifamily properties has pushed the median price to almost $50,000 per unit, up 21 percent since 2002, Marcus & Millichap reported.

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Article ©: J. Shubinski, In Business Las Vegas