Land costs beginning to squeeze LV retailers

Phil Levine

Wednesday, Jan. 19, 2000 | 10:51 a.m.

A shortage of affordable land -- coupled with continued population and economic growth -- may lead to tougher times for Las Vegas retailers trying to find affordable locations.

The Las Vegas office of real estate broker Colliers International issued that prediction Tuesday during an update briefing on the Las Vegas commercial real estate market.

"As the price of (retail) land continues to rise, it's going to be much harder for the small guy to afford retail space," said Collier's retail broker Matt Bear. "The locally oriented (off-Strip) retail is expanding rapidly, but is barely keeping pace with the annual avalanche of new Las Vegas residents."

Bear said smaller shops in projects built less than five years ago currently pay between $1.65 and $2.00 per square foot per month for retail space.

"By comparison, five years ago small shop rents of $1.50 per square foot were seen as very expensive," he said. "Today, that (rate) would be viewed as a great rental opportunity. Over the last 24 months, (retail) rental rates have definitely been rising faster than inflation."

Still, retail construction activity remains strong, with a large percentage of new development centered around the future I-215 freeway exits.

Adding to the difficulties facing smaller retailers is the online onslaught of Internet shopping.

"I had many people approach me this past year asking if I thought they should build a bricks and mortar site or just put up a website," said Bear. "Among other things, that tells me that there's a ceiling to what retailers are willing to pay (for land)."

For now, though, Las Vegas' retail sector continues to thrive with an overall vacancy rate of less than 8 percent.

Unlike local-oriented stores, the experience of Las Vegas Strip retailers is as unique as their location; Strip-based shops continue to enjoy the fruits of recently-opened mega-resorts.

"Non-gaming tourism revenue generated $19 billion last year, more than the amount generated by New York and San Francisco combined," said Colliers' broker George Connor. "And tourist spending in Las Vegas is growing at a very rapid pace, 11 percent per year."

He said the location of Strip shops provides customers a built-in "retail experience" that would be the envy of retailers everywhere.

Connor joked that one exception to the blissful retail picture on the Strip was the millennium New Year's Eve.

"The issue really wasn't Y2K, but rather YP2H, as in 'why're you priced too high'?" he said. "Still, Christmas was outstanding for most Strip retailers, with the possible exception of the Venetian's Canal Shoppes."

Despite a plethora of stores, Connor said there's no end in sight for retail expansion along the Strip.

"There are plans for another 3.2 million square feet of space to be built over the next two to three years, including 500,000 square feet at the Aladdin," he said.

Also on tap is a 1 million-square-foot expansion of the Fashion Show Mall, and 1.2 million square feet of retail slated for addition to the Mandalay Bay hotel-casino.

Though that may sound like a lot, Connor said market demand on the Strip remains strong; that's why retail sales per square foot -- along with rental rates -- will maintain their current high levels.

The region's office and industrial sectors are also evolving.

Colliers said the Las Vegas office market has 17.2 million square feet of space. Although the product type is mixed, the market is now oriented more towards affordable Class C space, reflecting the start-up nature of the local economy.

The report found that net absorption of office space totalled 1.5 million square feet in 1999, up 11 percent from the previous year.

However, the big shift in the office sector is the burgeoning demand for "flex space."

Cheaper and more adaptable than higher-end office property, flex property can be used for either light industry or office space; in its first year of tracking, the report found about 677,000 square feet of flex space was absorbed in 1999.

Still, construction of office space -- with the exception of Class A property -- remained strong last year. Approximately 1.5 million square feet of new space was delivered in 1999, up 9 percent from a year earlier.

Office vacancy rates varied last year, depending on the quality of the space. The vacancy rate for Class C space stood at 7.7 percent, Class B was 8.4 percent, while Class A offices had a double-digit vacancy rate of 13.4 percent.

Overall office vacancy rates are expected to drop this year, reaching about 8 percent by year's end; conversely, rental rates will increase by between 3 and 5 percent.

Lower vacancy rates will also be one of the determining factors shaping the region's industrial sector.

"(Industrial) vacancy rates have been dropping at a moderate pace, and are now approaching a point where rental rates are likely to moderately increase," said industrial broker Michael DeLew.

In fact, DeLew noted that Las Vegas remains a relatively new industrial market, with 45 percent of industrial space built within the last eight years.

Demand for industrial space remains very strong, with a 7.3 percent growth rate in 1999 -- three times the national average. Overall vacancy rate for industrial land currently stands at 7.9 percent.

"North Las Vegas remained particularly active," said DeLew. "Net absorption (of industrial space) totaled 1.4 million square feet, much of it in the Las Vegas Motor Speedway Industrial Park."

DeLew said Henderson has also evolved into a major growth center for industrial space.

"However, rising land costs may make it prohibitive for (Henderson) land to be used for distribution centers," he said. "In recent years, there's been a lack of land 'banking' (reserves).

"Overall, though, demand remains strong, and we expect to see more lease concessions and slight (industrial) rental rate increases this year."