Shells of our Former Selves

As the city struggles to absorb its glut of empty space, the commercial real estate bomb is ticking

February 18, 2010 - The Vantage Lofts website still proudly claims to have sold out the first release of its modern, cube-shaped lofts. There are even “special buyer incentives for a limited time” on upcoming releases. But a drive out to the site, perched atop a hill at the corner of Gibson Road and Paseo Verde Parkway in Henderson, reveals quite a different story. The sales center is boarded up. The fenced-off project has exposed rebar, and some wood framing is soaked from a recent rainstorm. Construction on the project officially stopped in March 2008, and a bankruptcy filing came by that summer. Despite claims by owner Slade Development—which has a 30-year track record of custom home building here—that it plans to complete the project, Vantage Lofts is dead for now.

A few miles away lies a different type of casualty. The Stephanie Street Power Center, between Sunset and Warm Springs roads, was a bustling suburban shopping complex in a booming part of town for more than a decade. A few chain stores in the half-mile-long strip are still doing their part, including Old Navy, PetSmart and Barnes & Noble, while Tony Roma’s and Macaroni Grill still do a good business in the evening. But it’s jarring to see the encroaching emptiness. The glazed red tile that once glistened around the entryway of Circuit City has lost its luster since the business went bankrupt. And other once solid medium-box businesses, including Wild Oats, Longs Drugs, Shoe Pavilion and Copeland Sports, are now nothing but huge empty shells. Even Starbucks, America’s leading symbol of retail success, is long gone.

Both developments are testaments to the great boom cycle of the decade past, when business expansions, fueled by easy credit and false equity, lured both seasoned and novice investors into the real estate game. With all the hype came demand that couldn’t be sustained. In a shadowy reversal of The Mirage, which kicked off a building boom that lasted years, Las Vegas now has to contend with the long-term impact of the bust. In other words, what happened here lingers here.

We have become a city of empty spaces. In addition to our most notorious voids—foreclosed homes—office vacancy rates are at an all-time high of 23 percent; retail vacancy, usually in the low single digits, has climbed to 10 percent; and industrial space wallows at 13.7. These figures are from Applied Analysis, an economic research firm focused on Southern Nevada that also notes all three are more than double their 10-year averages. In total, there is about 200 million square feet of commercial and industrial space across the Valley, and more than 30 million of it now sits empty.

Empty space is a phenomenon for which there seems to be no end in sight. And for some of us, it leaves an empty feeling, a sort of psychological sense of regret that betting on Las Vegas really wasn’t such a great idea this time; that, unlike in our city’s first century, you just can’t build it and they will come.

Some may find opportunities in this emptiness. Some will pack up and return to the burgs from which they came from. Others may simply appreciate the uncongested silences that now pervade in what a 2009 Forbes article called the “most abandoned city.” What’s certain is that the consequences of the bust—our glut of empty spaces—will haunt the city for years, and in a variety of ways.

Luckily, we didn’t follow through with our condo obsession. More than 100,000 luxury units were expected to come online during the boom. We ended up with only 11,250 units, of which developers still own nearly 4,000. A mere 215 units sold in 2009, according to Salestraq.com. At that rate, it would take nearly 20 years to absorb the developer-owned inventory.

Along with vacancies, valuation—or the lack of it—has partnered in Las Vegas’ precipitous economic decline. That $300,000 Green Valley starter home in 2005 likely has a price tag in the low $100,000s today. Vacant land that fetched upward of a half-million dollars an acre in 2008, and even more in the boom years, now runs in the mid-$200,000s, according to Applied Analysis. Not a trace of commercial or residential space—empty or occupied—has been untouched by this real estate correction. And there is concern that investor money will wait on the sidelines until there is a clearer indication of a real estate bottom. “This is something that’s going to take time,” says Brian Gordon, Applied Analysis principal, “and it may result in further contraction.”

But residential real estate is showing signs of stabilization. Larry Davis, developer of downtown Las Vegas’ Urban Lofts, was able to renegotiate his loans on the property so he could sell at a lower price point—nearly half of what he initially planned on selling the units for. Davis says there is more and more interest in downtown, and he sold three units in December, a typically slow month.

But problems remain. Jim Amorin, past president for the Appraisal Institute, a national trade organization based in Chicago, warns of a coming commercial real estate crisis that could further drag down every economic category. On a national level, $1.5 trillion in commercial development loans are coming due this year, he says, many of which are likely for developments that are no longer viable. And banks, he adds, are putting their heads in the sand with regards to shrinking valuations on the collateral they hold.

Observers are wondering how these commercial problems will play out in Las Vegas. Already, empty land, empty strip malls and other empty spaces (built or partially built) are gradually being taken over by reluctant lenders. Downtown’s Streamline Towers, Newport Lofts and Juhl—virtually empty high-rises these days—shared the same lender, the failed Chicago-based Corus Bank. An investment group led by Starwood Capital Group eventually picked up the properties for a fraction of their construction costs.

“I do believe there is a ticking time bomb in the commercial real estate space,” Amorin says. “If it explodes, you will see a major impact on business and employment, and that can bring down residential real estate as well.” Almost finishing a development project is worse than barely starting it. Both kinds of buildings languish on the Strip across the street from each other: the empty shell of Echelon, which Boyd Gaming put the brakes on in 2008, after its steel structure had barely come out of the ground; and the towering $2 billion Fontainebleau, which is 70 percent complete and was recently snatched up for $156 million by Carl Icahn.

The rumor that the billionaire developer will keep Fontainebleau on hold continues to circulate, but you have to wonder about his patience for absorbing the upkeep costs.