Optimistic forecast issued for LV commercial real estate market

Phil Levine

Tuesday, Sept. 21, 1999 | 11:37 a.m.

Real Estate

The Las Vegas commercial real estate market now includes:

495 buildings consisting of 18,369,321 square feet; 2,063,677 square feet of vacant office space; vacancy rate of 11.23 percent

1,357 buildings consisting of 54,285,417 square feet; 5,894,186 square feet of vacant industrial space; vacancy rate of 10.85 percent

(all anchored properties are 30,000 square feet or above) 137 buildings consisting of 21,947,918 square feet; 865,752 square feet of vacant retail space; vacancy rate of 3.94 percent Source: Lee & Associates/Restrepo Consulting, which tracks office and industrial space over 5,000 square feet:

Strong performances in the tourism, retail and manufacturing sectors point to continued growth in the Las Vegas-area commercial real estate industry, though a national recession could cause a slowdown.

That's the optimistic assessment in "Projection 2003," a report on the future of Southern Nevada's commercial real estate sector presented this morning to the Nevada Development Authority and the local chapter of the National Association of Industrial and Office Properties.

The report is a combined effort of the NDA, NAIOP, the Lied Institute for Real Estate Studies and the UNLV Center for Business and Economic Research.

It includes survey findings from 24 regional developers and property owners, as well as public and private sector officials.

Positive factors the next few years include growth in tourism, manufacturing and distribution, tourist-oriented retail and local population growth.

The retail sector is expected to grow 5.2 percent between 1999 and 2003, with peak expansion in the year 2000. Retail vacancy rates will be in the 5.6 percent range.

During that same period, local office and industrial space will also increase, growing 5.6 percent and 4.17 percent respectively. The report also noted that "increased use of flex space makes the division between office and industrial somewhat blurry."

At midyear 1999, the vacancy rate for the area's office and industrial sectors stood at slightly more than 10 percent.

However, the torrid development pace set during the last few years is expected to slow down.

Tempering the report's optimism are three fundamental challenges facing the region's commercial real estate sector:

In addition, an eventual slowdown of the nation's booming economy could negatively affect Las Vegas' commercial development.

International economic prosperity will also help determine Las Vegas' future, the report said. With the number of hotel rooms jumping from 75,000 in 1990 to more than 125,000 this year, the city is further exposed to the vagaries of the world economy.

Examining the next four years, the report concludes that 2001 will likely be the most challenging year for the office market. The following year will be the toughest period for the industrial sector, with the retail market facing a difficult year in 2003.

That retail forecast is in keeping with a separate research report issued by Marcus & Millichap Real Estate Investment Brokerage. According to that study, "the inventory of retail properties (in Las Vegas) will rise by an average of nearly 9 percent per year in 1999 and 2000." The report said the retail vacancy rate currently stands at 4.9 percent, but is expected to climb over the next 12 to 18 months.

Another recent survey examining the Las Vegas office market also sounded a cautionary note for that booming sector. In its second quarter 1999 analysis, Lee & Associates/Restrepo Consulting Group concluded that "slower-than-average employment growth reported between the 4th quarter of 1997 and the 3rd quarter of 1998 may impact absorption (of Las Vegas office space) in late 1999 and early-2000."

However that downward employment trend has shifted this year, and Jeremy Aguero expects the demand for Las Vegas office space to gradually increase over the next the next two years.

"On a delayed basis, employment growth fosters greater demand for office space," said Aguero, a principal analyst with Lee & Associates. "That's why the decrease in employment (growth) in 1997 and 1998 is affecting today's market. But if you look at all the employment growth over the last year, we'd expect to see a stronger demand for office space over the next two years."

But regional employment growth is just one of the factors shaping commercial real estate's future. Developers surveyed for the Projection 2003 report said that over the next five years, new industrial speculation will be needed if their industry is to prosper. Other important factors affecting the health of commercial real estate will be new industrial development, office speculation, office development, existing facility rehabilitation and new public sector construction.

The Projection 2003 report concludes that the likelihood of a national recession -- defined as two quarters of economic decline -- will increase over the next few years. Several economic uncertainties, including a change in fuel prices, higher labor costs, and either a decline in worker productivity or business profitability, could increase the chances of an economic slowdown.

However, the report predicts that no matter how the national economy performs, Nevada's business climate will remain among the nation's best. According to the study, the absence of personal or corporate income taxes, increasing social acceptance of gaming, and a "pro-business community and political infrastructure" bode well for the state's economic future.