Vegas commercial real estate market grows, cools from ‘99

Phil Levine

Friday, April 14, 2000 | 10:53 a.m.

A survey of Las Vegas' commercial real estate market predicts the industry will continue to flourish this year, although not at the breakneck pace set in 1999.

In its Market Watch 2000 forecast of the area's commercial sector presented Thursday, officials from real estate broker CB Richard Ellis said rising interest rates and land costs won't end the current boom.

Glen Esnard, CB Richard Ellis' senior managing director for investment properties, said rising interest rates may actually prove beneficial, helping to stabilize the commercial real estate market.

"I think higher interest rates may mean (real estate) lenders are more cautious, and that's not really a bad thing," he said.

"More due diligence and caution helps to keep a balance between the available supply and demand."

The report says Las Vegas's burgeoning population and the resulting demand for commercial real estate mean all sectors -- except industrial -- will see continued strong growth this year.

The report found industrial construction dropped 30 percent last year following six years of "unprecedented speculative building," a trend expected to continue this year.

Industrial construction will decrease slightly this year, to about 3 million square feet, due mainly to a lack of larger industrial zoned and feasibly priced land.

Still, bidders are expected to actively seek out Clark County Department of Aviation property along the southern I-215 beltway; approximately 3.5 million square feet of industrial space should be absorbed by year's end, down slightly from 3.7 million square feet a year ago.

Esnard said the concurrent strength of Las Vegas' multi-family market and the weakness of its industrial market make for a unique situation.

"Industrial and multi-family housing usually follow the economy, and both of those (sectors) have been determined by institutional investors to have the highest risk-adjusted returns," he said.

"The fact that one is strong in Las Vegas while the other is weak makes this market contrary to most other markets we see nationally."

As Las Vegas attracts a growing number of families, the demand for multi-family dwellings also rises. CB Richard Ellis reports that 36 local properties with more than 100 units were sold in 1999, with an average vacancy rate of 6.53 percent.

That vacancy rate is expected to drop to 5.8 percent by year's end.

The broker also predicts that continued strong apartment demand means absorption will increase to 7,500 units this year, up slightly from 7,250 units in 1999.

However, rising interest rates and higher equity requirements will also trigger a decline in multi-family construction; the report predits multi-family construction will decline from 1999's 7,750 units to 6,500 units this year.

John Knott, managing director of CB Richard Ellis' Las Vegas office, said the city's commercial sector is unlike most other markets nationwide.

"It's important to remember that 50 percent of all office, retail and industrial property in Las Vegas was built in the last six years," he said.

"No other city in America has had that kind of building pace."

The survey says the breakneck pace of development in Metro Las Vegas means between 6,000 and 8,000 acres of undeveloped land are required annually to accommodate the area's growth.

At that rate, the residential land supply will be consumed within the next 15 to 20 years.

In the land market, the survey points to the forthcoming sale of 7,500 acres in North Las Vegas by the Bureau of Land Management as the "last pipeline for true master-plan scaled development."

The survey says future expansion of McCarran International Airport will require a second location likely to result in the purchase of 6,000 acres south of Las Vegas, near Primm; that project should be built within the next 10 years.

Also driving up the cost of land is the price of property along the Las Vegas Strip. The survey reports that land in prime areas along the Strip can now cost as much as $12 million per acre.

Despite a surge of office construction, that sector remains one of the commercial market's strongest performers.

The survey found office inventory grew by more than 2.2 million square feet last year. Demand continued to outpace supply, however, resulting in a decrease in vacancy rates to 14.2 percent.

Jeremy Aguero, research specialist at Las Vegas real estate firm Lee & Associates, agreed the area's office sector will continue to grow, albeit at a slower pace.

"Over the next 18 months, we expect the (office) market growth to slow," he said.

"This year, we expect it to grow by about 5 percent, down from last year's growth level of about 7 percent.

"We expect to see a building up of inventory, but with less actual (office) construction this year."

CB Richard Ellis predicts between 1.5 million and 1.8 million square feet of Las Vegas office space will come online by year's end.

The survey also predicts 2000 may bring good news for the city's downtown office sector; that market may experience revitalization as construction of flex-type, concrete tilt-up product is expected to increase.

CB Richard Ellis' Senior Vice President Kevin Higgins said at a presentation on the report that Las Vegans can expect a "vast array of new retailers" to enter the local market this year.

Higgins said Las Vegas can expect "its first significant shopping center redevelopment."

That process is already under way, he said, along the Maryland Parkway and Decatur Boulevard corridors.

In 1999, a major factor affecting the cost of retail space was pent-up demand by large grocery stores; Higgins said both Smith's Food & Drug and Albertson's actively vied for space throughout the Las Vegas Valley.

"That had a dramatic affect on land prices," he said. "Typical (monthly) rents for large format retailers ranged from $12 to $18 (per square foot) while anchored commercial property ranged from $9 to $11."