Construction market to see a slight drop

December 10, 2004 - Nevada construction spending is expected to see a slight drop in 2005, due to single-family housing experiencing rising mortgage rates, escalating land prices and higher building costs, says Cliff Brewis, senior editorial director for McGraw-Hill Construction, at a forecast event held at Mandalay Bay last week.

There has been $4.28 billion worth of single family construction in Southern Nevada through October 2004, a 21 percent increase over last year. However, 30-year fixed mortgage rates are expected to climb to 6.5 percent in 2005 and 7.1 percent by 2006. That coupled with skyrocketing property values and a 30 percent increase in concrete and steel prices will result a 7 percent drop in single family homebuilding in 2005, Brewis says.

The residential sector is seen as an important economic indicator for the construction market's vitality. Typically, homebuilding will drive the need for service and infrastructure-related spending, including roads and fire stations, schools and grocery stores, which are needed to accommodate residents.

Despite an expected drop, there will be an increase in multi-family residential spending next year. Southern Nevada saw $470 million worth of multifamily starts through October 2004, a 9 percent increase over last year. And that figure is expected to climb by 53 percent in 2005, with such projects as $325 million, 2.5 million-square-foot Vegas Grand Condominiums underway as well as the $90 million Hilton Grand Vacations Club Timeshare Phase Two, $89.5 million Panorama Condominium tower Phase One, the $30.6 million Soho Lofts, and the $39 million Tahiti Village Timeshare complex, among others.

"Multifamily is a huge growing market due to land issues and affordable entry-level housing," says Gary Siroky, president of CORE Construction of Nevada Inc., a local general contracting firm that expects to record nearly $100 million in revenue next year. "Multi-family work accounts for twenty percent of current backlog, and we expect to see that sector grow by up to ten percent in 2005."

In part, multi-family construction is in response to an aging demographic that favors a low-maintenance lifestyle. Baby boomers, or those born between 1946 and 1964, will account for 33 percent of total homeowner growth between 2000 and 2010. They currently represent 78 million consumers nationwide, with a new a boomer turning 50 every seven seconds, according to the Massachusetts Institute of Technology's AgeLab. Between now and 2030 -- the year the last boomer will be 65 -- the number of Americans 65 and older will double from 35.6 million to 71.5 million.

Meanwhile, the office market is a bright spot for Las Vegas construction with $205 million worth of new starts through October 2004, a 72 percent increase over last year, with jobs like the $35 million First Phase of World Market Center now underway. There was a 5.7 percent increase in professional and business services employment during the past year, reports Applied Analysis, a Las Vegas-based economic research firm. For the third quarter, office workers accounted for 307,000 positions or 35.7 percent of the valley's total employment. There was 2 million square feet of new office space under construction, plus another 5.1 million square feet planned in the third quarter, Applied Analysis says. Yet much of the work is tied to office expansions and building renovations rather than new construction.

Retail remains strong with $286 million worth of new starts in Las Vegas through October, an 18 percent gain over 2003. There was 4.7 million square feet of retail space under construction in the third quarter, with another 1.98 million square feet planned. In addition, the third quarter saw 513,000 square feet worth of absorption or over six times the amount recorded in 2003.

"Neighborhood shopping centers servicing dense residential areas were the strongest retail product type during the third quarter, with a 3.4 percent vacancy rate and 379,950 square feet worth of absorption," says John Restrepo, principal of Restrepo Consulting Group LLC, a Las Vegas-based economic research firm.

Future retail projects consist of Triple Five Nevada's planned 65-acre, 2-million-square-foot regional mall near U.S. Highway 95 and Centennial Parkway in northwest Las Vegas; CENTRA/Turnberry's $300 million, 1.5-million-square-foot Town Centre, situated on 100 acres at the northwest corner of Sunset Road and Las Vegas Boulevard South; and Olympia/Simon Property Group's $750 million, Southern Highlands Center, situated on 125 acres at the southwest corner of Las Vegas Boulevard South and Cactus Avenue.

But resort construction remains Southern Nevada's most robust construction sector with $806 million worth of new starts through October, a 112 percent increase over 2003. An estimated 10,600 new hotel rooms will come online by 2007, says Erica Yowell, spokesperson for the Las Vegas Convention Visitors Authority.

And that figure doesn't include MGM Mirage's Project CityCenter -- a $4-billion, 18-million-square-foot mini-metropolis between the Bellagio and Monte Carlo hotel casinos, or Steve Wynn's planned $900 million, 1,500-suite "Encore" tower expansion to Wynn Las Vegas. Other projects include the new $1.5 billion, 4 million square-foot Cosmopolitan Resort & Casino; Caesars Palace $297 million South Tower addition, the $153 million South Coast hotel-casino; the $98 million Palms hotel-casino expansion; The Venetian's $1.6 billion, 3,020-room "Palazzo" addition and the new $92 million Red Rock Station, among others.

Nevada saw $283 million worth of education construction through October, a 21 percent drop from the previous year. Much of the school activity is taking place at the K-12 level rather than at community colleges or universities. Clark County will spend $600 million over the next year to build new schools under a 10-year, $3.69 billion bond program passed by voters in 1998.

This graph charts Nevada's booming construction industry.

The program produces 12 new schools a year, but will ramp-up to 20 new facilities annually, according to Paul Gerner, the School District's associate superintendent of facilities. The district will be asking voters to re-approve another 10-year property tax freeze in November 2008, essentially extending the current school construction program resulting in 88 additional schools.

Healthcare is another construction growth area with $268 million worth of new starts through October for a 206 percent gain over 2003. An aging demographic is fueling the demand for medical services. Seniors now represent 11 percent of Clark County's total population, reports the U.S. Census Bureau. From 1995 to 2000, Nevada experienced a 114.2 percent growth in migration of people aged 65 years and older. Healthcare projects underway include St. Rose Dominican Hospital's new $145 million, 140-bed facility San Martin Campus; the new $40 million, 100,000-square-foot Nevada Cancer Institute; the $180 million, 212-bed Meadows Hospital in North Las Vegas, plus a $50 million, 200,000-square-foot expansion to Sunrise Hospital.

Nevada State Public Works recorded $1 billion worth of new starts through October, a 13 percent drop from 2003. The most significant factor impacting this area is the lack of a federal multi-year transportation bill. The Transportation Equity Act for the 21st Century (TEA-21) expired on September 30, 2003, and Congress has been forced to pass a series of short-term extensions in order to prevent a virtual shutdown of transportation agencies. Despite this, Nevada is undergoing a $1.3 billion two-year road and highways building program financed by 10-year bonds backed by monies pledged against future federal transportation funds.

In Clark County, some of those jobs include the $7.4 million Union Pacific Railroad bridge replacement at I-15, between I-215 and Russell Road in Las Vegas; the $17.39 million Lamb Boulevard/I-15 interchange in North Las Vegas; the $82.2 million I-515/215 interchange in Henderson; and the $42 million I-15/Rainbow Boulevard interchange in Las Vegas.

But the work on the $408.4-million widening of U.S. Highway 95, from Martin Luther King Boulevard to Craig Road, is delayed indefinitely due to a lawsuit filed by the Sierra Club, alleging that project doesn't adequately consider the health impacts from an expansion project. Although $238.9 million worth of work has already occurred or is currently underway, the project's $60 million phase 3C widening from Martin Luther King to Valley View boulevards, was scheduled to bid in August, followed by the $120 million phase 4B/5, from Valley View to Rainbow boulevards, in September. Those jobs now remain in limbo, pending a court decision.

Despite this, Las Vegas is now the nation's 11th largest construction market with approximately $8.5 billion in projected spending this year. And that figure is expected to reach $8.9 billion by 2008. Construction in Southern Nevada employed 92,800 people in September (the most recent figure available), a 10.2 percent increase over last year, reports the state Department of Employment, Training and Rehabilitation (DETR). And the industry is expected to create 123,919 jobs by 2010, making construction one of Southern Nevada's fastest growing employers behind gaming, hospitality, and service positions.

"By far, this one of the country's best performing construction markets," Brewis says. "Although there will be some diminishment in single family activity that will bring things down some in 2005, overall, Nevada remains the best economic market in the country."

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