Real estate experts cautiously optimistic about market

By Buck Wargo

Friday, Nov. 27, 2009 | 3 a.m.

Several real estate, financing and gaming executives recently gave a sober assessment of Las Vegas’ economy, but they are optimistic about the future.

The assessment came during the annual Emerging Trends for Real Estate 2010 conference Nov. 18, sponsored by the Southern Nevada chapter of the Urban Land Institute.

Even gaming officials at the nine-person panel discussion said the health of the real estate market will be one of the keys to the gaming sector’s recovery.

Tom Roberts, corporate vice president of development at Station Casinos, said the gaming industry is stabilizing and showing small signs of a recovery, and real estate will be part of that.

“If we can retain some level of stability in the housing market, our customers aren’t going to feel guilty to come out to our properties and spend a little of their dollars on entertainment,” Roberts said.

Everyone in the city is rooting for the success of CityCenter because that will benefit gaming and other industries, including real estate, Roberts said. But the hope among gaming competitors is that CityCenter will grow the market organically and not cannibalize it, he said.

Station Casinos, a casino operator that relies on locals as 80 percent of its customer base, realizes its customers’ financial health and confidence will be vital for the recovery, Roberts said. There can’t be any more big layoffs, and other projects can’t fail, he said.

“We don’t need anything more to shake the confidence of the local customer who worries about an assault on his job, financial portfolio or home value,” Roberts said.

“We do a little paranoid optimism in our business. We are looking forward, but everyone has an eye behind them ... to be sure the economic boogeyman isn’t there to continue to hurt them.

“So if we see some of those markets stabilized and see the money in (people’s) pockets, and CityCenter (is) successful, then our customers will continue to show up and hopefully spend more.”

Commercial real estate

Rod Martin, vice president of Majestic Development, said blanket statements can’t be made about the industrial market to assess how it’s faring during the recession.

It really depends on product type and location, Martin said. Those with a better location and better quality of design have a leg up, and industrial buildings that cater to national distribution companies rather than mom-and-pop businesses are in better positions, he said.

The southwest valley is faring poorly because it had a lot of contractors who have either downsized or left the market altogether, Martin said. In North Las Vegas, however, bulk distribution is strong.

“We still have 2 million people here who need goods and services,” Martin said.

The problem with the sector is a lack of new tenants for available space because companies aren’t coming into the market, Martin said. Normally, his company has about 30 new deals, but it has two deals this year, he said.

Kirk Boylston, regional director of EJM Development, the developer of The Arroyo, an office and retail park at Interstate 215 and Rainbow Boulevard, said although industrial leasing may be slow, office leasing is glacial.

“You can work on a deal for a year before it finally craters,” Boylston joked. “We have been fortunate to get our share, but it’s still really slow. You have to look at what is the absolute pain you can take on a deal and do it. You are not going to be able to achieve that next year because next year’s deals will be worse … Developers have to do underperforming deals because something is better than nothing.”

Boylston said it helps to have a great location and product, but it still requires at least a month of no rent for every year of the lease. On five-year deals, it may be 10 months of no rent, he said. Tenants have wised up and are asking for $45 to $50 per square foot to do the improvements themselves instead of asking for space with the improvements completed by the landlords, pocketing the difference since construction costs have come down, he said.

No developers are going to build speculative office space for the next two to three years given the high vacancy rate in the market, Boylston said.

“It just doesn’t pencil,” he said. “It does bode well for people who are trying to hang onto their office properties for a period of time because there should be a good rent spike at some point. It is just a mater of when that is.”

Terri Sturm, Territory Inc. CEO, said the retail market isn’t faring as poorly as portrayed by the media, but she said it helps to be a landlord of Wal-Mart.

Consumers are looking for value and that has helped those value-oriented retailers succeed, Sturm said.

The leasing decline started in summer 2007 with home improvement and furniture stores affected the most, but those retailers are starting to show signs of recovery with the pick up in the housing market, she said.

“Leasing picked up in the summer,” Sturm said. “We went a good year without our phone ringing. Landing the deal is still extremely hard. You have to dig deep in your bag of tricks. We are trying to be creative.

“In dealing, you take the worst hits upfront and as the market comes back, my rates will keep track with that.”

Territory had never offered no-rent incentives before and didn’t have deals of less than five years, but that is now the reality of this marketplace, Sturm said.

Despite the improvement of some retailers, Sturm said that doesn’t mean that problems exist. Some national retailers who are overleveraged and face a lot of competition, such as Circuit City had, might not survive this economy.

The executives said sales are few because potential buyers of commercial real estate are looking for deep discounts. The wave of foreclosures hasn’t happened yet and so capital remains on the sidelines for now.

Kev Zoryan, Morgan Stanley executive director, said less capital is on the sidelines waiting for these deals than people realize. Domestic pension funds aren’t interested, but international pension funds and sovereign investment entities are, he said.

“There is a tremendous amount of bidding, but very little supply,” Zoryan said.

Banks have been slow to foreclose on commercial properties and sell them, he said. The reason is because of regulatory pressure to find other measures to encourage banks to hang onto what they have, he said.

Dan Van Epp, executive vice president of Newland Communities, said regulators have been encouraging banks to keep the bad commercial real estate loans on their books for now. That may be bad for investors looking for opportunities, but it’s better for the economy, he said.