Real Estate and Development

Commercial sector might face own credit crunch

January 11, 2008 - Although the Las Vegas housing market struggled with a downturn in 2007, commercial development, even though it slowed, remained a bright spot for the local economy.

What does 2008 have in store?

A key to watch is the effect of the nationwide credit crunch in the housing market on the commercial sector, says John Restrepo, principal of Restrepo Consulting Group. Financing has been slowing for commercial projects.

"Everything we have been hearing in talking to lenders and finance people indicates there will be a credit crunch in the commercial sector in Southern Nevada in 2008," Restrepo says.

That's bad news for the industrial market whose vacancy rate remains low because of the high cost of development, Restrepo says.

But it would be good news to slow down development in the office market where there is a danger of an oversupply, he says.

The office vacancy rate in Las Vegas was 11 percent at the end of last year's third quarter. It has the potential to reach 12 percent this year, Restrepo says. The jump in the cost of tenant improvements has forced some to stay where they are rather than look to moving, he says

At the end of the third quarter 2.3 million square feet were under construction and another 4 million square feet planned. If all that is built, there would be a four-year supply, he says. The problem has been worsened by the availability of office condos that haven't been leased by the tenant owners, he says.

With that supply, Restrepo says he expects rents will have a slight growth at the most. Again, the cancellation of projects because of the credit crunch will be key, he says.

In the industrial market, Restrepo says the vacancy rate should stay below 5 percent in 2008. There are 3.1 million square feet under construction and another 5.6 million planned, Restrepo says.

"Most of that space will move forward, barring the credit market," Restrepo says. "While lenders are not high on office, they are still OK with industrial. But even though we have a healthy industrial market, it can also be affected. Las Vegas has become a hyped market and because of that, some may not get built."

Restrepo predicts industrial rents will increase 3 percent to 5 percent.

Applied Analysis: When it comes to the commercial sector, Jeremy Aguero, principal of Applied Analysis, says commercial markets are looking at unprecedented construction with 13 million square feet of new commercial and industrial space coming on line during the next 12 months.

Aguero predicts office vacancy rates will rise through the first three quarters. Because of the lack of industrial, places such as Maricopa County, Ariz., look more attractive.

"The interesting dynamic is that Southern Nevada is a contrast between the residential and commercial construction sectors," Aguero says.

Although the opening of new megaresorts should spur the economy, the local growth wouldn't be immune from national economic trends. The employment levels are approaching the lowest nonrecessionary growth in two decades.