Recession taking its toll on Las Vegas economy

July 25, 2008 - The Las Vegas economy is continuing its slump, and commercial real estate and development are paying the price.

Pressured by overbuilding and retail outlets closing, Las Vegas recorded its highest retail and office vacancy rates in two decades. As a result, commercial construction has fallen 66 percent in the past year.

Triggered by Las Vegas' 2-year-old housing slump and coupled with this year's slowdown in tourism and gaming and commercial construction, the local economy is in a recession. And it worsened slightly in June's Southern Nevada Index of Leading Economic Indicators, released by UNLV's Center for Business and Economic Research.

The June index, which measures activity in April, showed eight of the 10 indicators declined from the same month a year ago. The value of commercial building permits fell 47 percent, and the number of housing permits fell 43 percent. Taxable sales fell 4.8 percent, and visitor volume 1.5 percent. The two gains were in convention attendance, up 4 percent, and taxable sales, up 0.22 percent.

"This is the worst I have seen it here in 20 years," says John Restrepo, an economist and principal of Restrepo Consulting. "People are in shock because they are used to the economy bouncing right back, but I don't think we are going to have that quick of a recovery."

Keith Schwer, the UNLV center's director, calls it the first recession to hit all aspects of the local economy since the 1980s. He maintains it's not likely to recover until the second half of 2009 at the earliest when new resorts will provide a boost.

Schwer is projecting gaming revenue will be down 3.6 percent for 2008, while visitor volume will fall 4.3 percent. Gaming revenue will increase 4.7 percent in 2009, and visitor volume will increase 2.7 percent, he says.

"We have had such a long period of economic expansion and growth, I don't think anybody thought we could have a recession like this," Schwer says. "With housing, we know it was a case where we overbuilt, overlent and overborrowed, and I think it was the same with commercial development. When it comes to commercial development here, it is driven by the demand of travel and tourism."

That's bad news for developers that during the good times placed their bets on Las Vegas and expected tenants to fill out their space. And it's a hard lesson for some who have long said Las Vegas' economy was immune to the type of slowdown faced in other parts of the country.

Commercial construction has slowed dramatically, with the Associated General Contractors reporting the value of commercial projects permits in this year's second quarter dropping 66 percent to $131 million, compared with 2007's second quarter.

Analysts attribute the construction slowdown not only to soft demand but the credit crunch making it tougher for commercial developers to get financing.

At the end of the second quarter, the office market had a vacancy rate of 16.1 percent, up from 11 percent at the end of June 2007, according to Colliers International and Restrepo Consulting. That's the sixth consecutive quarterly increase and nearly double the vacancy rate of two years ago, and it doesn't include the rapidly growing amount of sublease space.

The soft demand was evident in the second quarter when, despite the completion of 435,000 square feet of office space, the market absorbed 414,800 square feet less than it had filled at the end of March, according to Restrepo and Colliers International.

Brian Gordon, a principal with Las Vegas-based Applied Analysis, says the office market is sagging in part because the professional, business and financial services sector lost more than 8,000 jobs in the second quarter.

Companies considering moving or expansion are being more cautious, Gordon says. That has resulted in rents holding steady or decreasing and developers trying to lure companies with concessions, including higher tenant improvements.

Some analysts attribute the weakness in the office market to "irrational exuberance" two years ago when credit was easier to obtain and office developers not anticipating a housing bubble, credit crunch or slowdown. The problem should worsen because another 3.6 million square feet were under construction at the end of June.

With the housing meltdown, high fuel costs and rising unemployment, it could be another 18 to 24 months before the office market recovers, Gordon says. In the interim, he says he expects property repossessions by lenders to become more common.

Brad Schnepf, president of Marnell Properties, an office and commercial developer, agrees that a recovery could take time. Citing a five-story office building near McCarran International Airport that has been only 60 percent leased since it opened in 2007, Schnepf says his firm isn't planning any new commercial projects in the near term.

"You would have to be nuts if you were not concerned," Schnepf says. "We are having a correction in the commercial market, and I think that is going to bring us back to a more healthy growth pattern long term." Land prices will then stabilize, he says. "We were appreciating at double digits on an annual basis, and you wondered how far that could go."