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April 18, 2014

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Construction projects curbed as economy falters

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Mothballed megaproject: Boyd Gaming’s Echelon development is shown in August.

They stand as steel monuments to the Las Vegas construction boom and a reminder of how a financial meltdown and national recession can bring it all to a halt.

There are resort projects on the Strip such as Echelon Place and away from the Strip such as the mixed-use condominium development ManhattanWest where construction has come to a halt or slowed considerably.

In addition, developers are putting many commercial projects on hold because of the increase in vacancy rates and inability to get construction financing.

That has prompted the Associated General Contractors of Las Vegas to warn that commercial construction could follow the housing market and come to a near standstill in 2009. Office vacancy is expected to exceed 20 percent by the middle of this year, and retail vacancies will rise as retailers downsize.

“It will get worse before it gets better,” said Steve Holloway, the contractors group’s executive vice president. “The housing market has got to recover before commercial does. It’s the adage that housing takes you into a recession and takes you out. We have to follow the rooftops.”

For now, the environment is not lending itself to many new major developments moving forward, said Brian Gordon, principal of Applied Analysis, a research firm that did the analysis for the group. Off the Strip, the commercial sector is struggling because of the oversupply caused by the lack of demand for office, retail and industrial space, Gordon said.

“We have a number of suspended or canceled projects, and that is a reflection of the current economic climate both from the end users demand and financial challenges for developers,” Gordon said. “It is likely we are going to see few projects commence construction in the near term.”

There may be another two years of shakeout in the office market, for example, before projects move forward, Gordon said.

“I think unless buildings are preleased, we are not going to see a significant amount of speculative development because it is difficult to get financing,” Gordon said.

Wall Street and lenders will be paying close attention to projects such as CityCenter to see how it performs when it opens later this year before moving forward with others, Gordon said.

There has the elimination of the condominium component of the Harmon at CityCenter and a delay in finishing the hotel, Gordon said. Harrah’s is delaying completion of a new tower at Caesars Palace because of the soft demand.

ManhattanWest stalled in midconstruction when its financing was pulled last fall.

Gordon talked about Summerlin Centre stalling with little construction taking place. Tivoli Village at Queensridge, an $850 million mixed-use development, has been delayed until spring 2010.

Gordon said he doesn’t expect any projects to halt construction because there aren’t many left in the early stages of work. In some of those that have, lenders may have pulled the plug and other developers handed the project back to the bank, Gordon said.

“Developers are intelligent, and if they don’t see an exit strategy at the end of the road, they may prefer to cut their losses today than take down a company by going forward with construction.”

The delay in projects has had an effect on contractors and construction jobs, which declined by more than 11,000 in 2008. With 93,400 workers employed in construction trades, that number could drop by 30,000 as various projects are completed.

General contractors such as Burke & Associates, which recently completed the new Henderson headquarters for Cashman Equipment, are turning more of their attention to the public sector. Government-related work used to comprise about 20 percent of the business, but that has moved up to 30 percent to 40 percent, Chief Executive and President Kevin Burke said.

That’s why there’s hope the federal stimulus package will fund public works projects because it’s already going to be a tough year for contractors, he said. Unlike other firms, Burke hasn’t had to lay off any of his 60 employees.

Burke recently completed a low-income housing project in downtown Las Vegas and is building a substation for Metro Police. His company recently completed a library in North Las Vegas and is bidding for Clark County School District projects.

“I think all of us are apprehensive,” Burke said. “I don’t know anybody who is not. This is our 25th year in Nevada, and we have been through the ups and down in this market. We are in it for the long haul.”

As for developers, they are prepared to sit on the sidelines when it comes to new projects and focus on filling the space in phases they have completed.

Harsch Investment Properties recently completed 240,000 square feet of light industrial and distribution space at its Henderson Commerce Center IV, but don’t look for Harsch to move forward with any of its other phases or projects right now, including in North Las Vegas where 120,000 square feet of industrial is planned at the Cheyenne Commerce Center. Any new developments in the valley are on hold for six to 12 months, said John Ramous, vice president of operations.

“Like everyone else, we are making sure our existing portfolio is sold before we move forward,” Ramous said. “Everyone is extremely cautious on a number of fronts. One is the financial side and the other is where the rents are going to be in the next 12 to 24 months. We are just making sure the market is more stabilized before we move because once you break ground, it is hard to stop.”

Ramous said he understands the need for developers to slow down. What some paid for land two years ago when prices were higher may not work for them today with plans to build for-sale office and industrial buildings, Ramous said.

“If the land (cost) supports office, and you have a high office vacancy, your ability to put in office has become obsolete because you have four to five years of supply,” Ramous said. “There is very limited development taking place even for some of the projects that have construction financing in place. They are hesitant to break ground.”

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