Vegas set to weather economic downturn

Monday, March 26, 2001 | 11:23 a.m.

Las Vegas developers say they're cautiously optimistic that they won't be hurt if the national economic slowdown hits Las Vegas.

In a pair of market-trend forecasting presentations last week, experts said the city could dodge the worst of the economic gloom predicted in the wake of the recent stock market meltdown.

They cited recent history in which Las Vegas was the last to feel the effects of economic downturns and the first to recover. And they pointed to other mitigating circumstances and theories that they say should shield the local economy from disaster.

Some local lenders say they've already begun seeing the effects of the public's lack of confidence in the economy.

But builders say their biggest problem continues to be the rising cost of land, not a lack of buyers.

Home builders say buyers haven't retreated yet, probably because mortgage rates are at their lowest levels in months. Industrial and office developers, meanwhile, say they're remaining upbeat, even though some potential out-of-state clients are waiting to see how the next two quarters look before committing to new projects and expansions.

"There seems to be a split in personality between Wall Street and Main Street," said Keith Schwer, director for the Center for Business and Economic Research at UNLV.

Schwer said Wall Street was clearly disappointed that the Federal Reserve didn't cut interest rates more than half a percentage point last week, but he added that stock prices are just one indicator when measuring the health of the economy.

"Some commentators would lead you to think that the world was coming to an end," Schwer said.

But he pointed out that the unemployment rate remains below 5 percent and inflation is in check. Schwer said Southern Nevada continues to have an enviable employment picture that will draw people to the city.

That's good news for home builders, who are relying on the continued heavy in-migration of people to buy the homes that are being built at increased levels.

Dennis Smith, president of Home Builders Research, Las Vegas, said there were 1,582 homes sold in January, an 18.2 percent increase over the 1,338 sold in January 2000. In addition, developers secured 1,801 permits compared with 1,607 new permits a year earlier.

January is the last month for which Smith has statistics, but he said there is no indication conditions are worsening.

"From the general perspective, continued in-migration has been positive, job growth is still roughly twice the national average and lower interest rates have kept people in the buying mode," Smith said. "And you have to give the home builders some credit -- they are producing product that is in demand by consumers."

Smith said the Las Vegas housing outlook will depend on the length and depth of the downturn of the national markets.

"If it doesn't get any worse, builders won't feel a thing," Smith said. "If it lasts the rest of the year, we will."

Mark Doppe, newly elected president of the Southern Nevada Home Builders Association and president of Carina Corp., which is developing Lamplight Village at Centennial Springs in northwest Las Vegas, said he has detected no slowdown in sales. Last week's stock market performance hasn't dampened buyer enthusiasm, but a long-term problem that continues to affect builders could if something isn't done.

Doppe said he is concerned that home affordability is growing beyond the reach of people at the median family income level. The median new home price in Southern Nevada is expected to climb past the $160,000 level this spring -- an increase of 9 percent per year over the last two years.

Doppe in January called for some major changes in the industry to keep housing affordable. He called for reform in Bureau of Land Management land disposal policy and for local government leaders to rethink the costly requirements they place on developers when they approve master plans for neighborhoods. Among those requirements, he said, are tree-lined streets and medians and "parks on every corner."

But while local home builders say they aren't seeing signs of a downturn yet, other property developers say some companies are taking a wait-and-see approach before approving projects in Southern Nevada, even though the Las Vegas outlook may be favorable. And bankers say while they've seen a slowdown in activity, last week's Fed rate cut should stimulate more activity.

Kevin Higgins, a real estate expert for the Las Vegas office of CB Richard Ellis Inc., likened his position in the current economy as "one man trying to hold back a bunch of dominoes that are falling all around me."

Panelists who discussed Southern Nevada market trends in a Thursday breakfast meeting of the local chapter of the National Association of Industrial and Office Properties (NAIOP) concurred.

They said while local developers are generally upbeat about the city's prospects, lenders and potential clients don't share the same optimism.

"I'm bullish on the local market," said Mark Bouchard, senior vice president of Thomas & Mack Development Group. "We've never said Las Vegas has been recession-proof, but it is recession-resistant."

At a second forecasting event, CB Richard Ellis' Market Watch 2001, there was similar optimism on the local economy, while Marc Falcone of Bear Stearns & Co. was more reserved about the outlook for the gaming industry nationally.

But while the local real estate community is cautiously optimistic about the prospects of a soft landing as the national economy battles its recent doldrums, lenders aren't nearly as enthused and are seeing fewer loan applications and a general pull-back from capital projects.

"You're not likely to see a lender stretch for a deal," Majestic Realty's Rod Martin, a member of the NAIOP panel, said.

John Guedry, president and chief executive officer of Business Bank of Nevada, said loan applications have slowed since the beginning of the year, so the recent drop in interest rates is being warmly received. He, too, said the scarcity of land and an escalation in development costs that he detected last summer have been a bigger concern to the local economy.

"It caused developers to accept lower returns or to let the price of land dictate the types of products that they would build," Guedry said. "And it pushed some developers into product types that there would be an overabundance of."

Guedry said in addition, bankers have made things tougher on developers by wanting more equity and preleasing in the projects they are asked to finance.

Guedry said that in the long term, the dropping interest rates will improve the bottom-line profits of the big companies -- the Fortune 500 firms that have sizable credit limits. In six to nine months, those companies can stabilize their finances, hire new staff, plan for growth and expand, possibly in Southern Nevada.

"It's going to take some time," Guedry said. "We're not at the point of panic, not at a recession stage. We're certainly happy that we're in this market."

At the largest bank in Nevada, Wells Fargo, its chief economist said the Fed cut was not enough, criticizing the decision to cut federal fund interest rates by only half a percentage point.

"The $4 trillion drop in stock market wealth has sapped the confidence and purchasing power of consumers, while higher energy prices have acted like a $50 billion tax increase in the past year," said Sung Won Sohn, who's based in Minneapolis. "Coupled with manufacturing cutbacks and accelerating job losses and unemployment claims, there are plenty of signs that the economy needs a major boost from the Fed (and) unfortunately, we didn't get enough."

Sohn said the Fed move increases the possibility of a nationwide recession from 40 percent to 45 percent.

But Schwer said the economy doesn't show signs of becoming recessionary, noting that it takes consecutive quarters of downturns for that to occur. He said Southern Nevadans are used to robust growth and the slower growth makes things seem worse than they are.

Schwer and UNLV researchers predicted in December that 2001 would be a year of slower growth.

Members of the NAIOP panel concur that growth is occurring at a slower pace, noting that recruitment efforts by the Nevada Development Authority are at about the same level as they were a year earlier.

Somer Hollingsworth, president and chief executive officer of the NDA, said site visits by companies considering moving to Nevada are actually up over the previous year.

The NDA, which operates on a July-to-June fiscal year, is averaging 37 site visits a month by companies compared with 35 a year ago. Hollingsworth noted that the previous year's visits involved inquiries from a number of speculative dot-com companies, but the current list of prospects have fewer technology entries.

At the end of the NDA's third quarter, 45 companies had moved to Southern Nevada compared with 57 for the entire 1999-2000 fiscal year. Hollingsworth said the 45 new companies and six NDA-assisted expansions have resulted in 5,706 new jobs, 2.2 million square feet of space filled and a local economic impact of $576 million a year.

Hollingsworth said a number of California companies looking at Southern Nevada are doing so for a new reason -- a more reliable power supply. He said executives understand that energy prices probably aren't going to be any better in Nevada, but they're more confident that they won't have to deal with outages and rolling blackouts.

"On Monday there was a 5-degree increase in the temperature and it blew them apart," Hollingsworth said. "What's going to happen when the summer comes? No one (in California) believes there's going to be a short-term fix."

Hollingsworth said in many cases, representatives of Nevada Power are meeting with executives considering a move to the state to assure them that power would be more readily available here than in California.

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