While many feel that most industries in Nevada are beginning to experience small rebounds, one industry that still has a long road ahead is the commercial real estate sector. With asking rents remaining low and the large quantities of available space on the market, brokers, builders and developers continue to feel the effects of the recession. Executives representing this industry recently met at the Las Vegas office of Holland & Hart to discuss commercial real estate and what’s in store for the future.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues pertinent to their industries. Following is a condensed version of the roundtable discussion.
Has the commercial real estate market completely reset, or will it go down further?
Mike Montandon: One of the inherent characteristics of deflation in anything, whether it’s televisions or industrial buildings, is, when the price is going down, everybody is a little afraid to jump in for fear of how much more it’s going to go down. It appears, at least to us, that we’re not going down anymore and its bringing people back. Just this year, we’ve seen a tremendous uptake in tours and people coming out and saying, “I’m looking.” I don’t think this is going to get any worse, it seems to be the end of that reset.
Doug Roberts: Some product types have not hit bottom. Some projects were ill-conceived and some were ill timed and well conceived. The stuff that was ill-conceived will never be a good product. For me, the reset is to go out and find the opportunity on well conceived projects at the right number and reposition them on price. It sounds funny to say, but cash is the least of our problems. It’s finding deals that make sense. You have to have a tenant and some reason to buy it. Getting the bank isn’t as bad, but it still has to make sense.
Ryan Martin: From a leasing perspective, the tenant was never worried about who the landlords are. Now, tenants are digging in a lot harder on that side. It used to be all one way, getting audited financials as the tenants let us look at them; it’s the reverse now.
Cathy Jones: That is an interesting phenomena, where the tenants are asking the landlord for financials.
Jeff Ehret: I think the reset from our perspective is we see a lot of developers where, if they have cash, it’s more attractive for them to go secure and procure distressed properties. It has been easier for them to get money for the right distressed property. Seeing the reset is when we see that tapering off, some new stuff will be happening at a lot higher frequency.
Mike Mixer: One impact from commercial real estate is the development of new skill sets in this new economy. For instance, negotiating a note sale is something most of our people have never done before. That is occurring regularly as well as working with banks on behalf of their clients to help renegotiate terms. New relationships and new skill sets are a big part of our reset.
Is financing still an issue in this market?
Mason Gorda: We’re into mining commercial ventures, we’re partially a developer. It’s mostly construction financing we struggle with. It’s very difficult to get.
Ehret: It’s a little bit easier than say, a couple years ago, but there is still the recession reaction from the time when money was easy with loan-to-cost of 90 percent. Now it’s gone; the pendulum has gone so dramatically the other way. I’m waiting for where the loan-to-cost is 50 or 60 percent at least. Even with that, it seems like there is a lot of extra hoops that developers have to go through. Essentially, we’re just waiting on the sidelines and projects continually get pushed and pushed and pushed.
Jones: What we’re seeing is pretty much all the banks are open to doing the owner-user type financing. That has definitely been active over the last 12 months. We’re just starting to see a little bit of investment money available. But, the loan-to-values are completely different than what they were in the heyday. They will tell you that they will loan up to 75 percent, but you don’t see that very often. They usually push it back down to 60 or 70 percent. An investor has to have quite a bit of cash to come in and get the continuing financing component. Not only cash to put into the deal but also to demonstrate a really strong sponsorship behind the asset itself.
Kyle Nagy: Financing has evolved over the last couple of years. Nobody wants to come into Las Vegas and land into a falling market. At that time there was only those permanent institution leaders that want the best available. Since then, you have seen more bridge lenders enter the market for those investors. They buy a 60 percent unoccupied building and get financing at 65 percent of the purchase price. That will help absorb some of that half leased stuff that is not competing but needs to be repositioned. For the first time in as long as I can remember, 10 year fixed rate money is below five percent. You can borrow long term funds for under five percent, up to 75 percent loan-to-value. These rates we didn’t even have at the height of the market and the loan-to-values are returning because there are more lenders in the market. There are more lenders available today than there has been in the last four years. What is true is there is very little construction lending because lenders are nervous about supply and existing stock in the market. They are not going to finance speculative building. It has to be owner-occupied or very well-leased.
Lance Earl: A lot of lending came from the smaller banks, community banks, as opposed to the large institution lenders. Those banks are still subject to some very heavy scrutiny on the examination regulatory side. They are constantly looking over their shoulder. That is why you’re seeing some of the concern with being able to lend. They are so cautious now about being criticized and having their loans being criticized when the regulators come in, that it’s swung the pendulum to the point that unless it’s almost a sure thing, they are reluctant to take the risk.
Jeffrey Vilkin: We were involved in a project in 2008, a 209-room, non-gaming hotel in town that stepped in when Silver State Bank was siezed. The owner has maintained the property. He got the shell out and was not able to procure the additional financing to complete the interior. He [recently] got a loan commitment and arranged for that to happen. I’m sure there is a stated clause in there for the next couple months, but it looks like it’s going to finish.
Is this industry still very competitive?
Kevin Burke: It’s way down. You may have 11, 12 bidders on [public works] projects. It’s a function of people getting worn out in that market. They don’t want to spend the money to chase that type of work because it’s expensive to estimate. The reality is, in the construction industry, there is 17,000 licensed contractors in the State of Nevada. There’s not enough work to go around for that many contractors. Those are the cold, hard facts.
Vilkin: A lot of our work is multi-family in California. It’s a popular asset class. That is part of why I’m still standing here today. We’ve been able to adapt to new ways to contract.
How healthy is the vacancy rate?
Martin: If you look at office and take out those ill-conceived projects, you have high vacancy in office. If you’re a larger user, your options get pretty thin, pretty quick. We’re finding that the true vacancy at [good] locations isn’t this 24, 25 percent. It’s actually a lot lower.
Michael Dermody: The larger companies are moving in. I think throughout the state there is a smaller availability of large building
that there has been in the past. They are starting to be absorbed some. We’re seeing that up North.
Robert Leidig: I’m finding it easier to build my clients new buildings than it is to find existing product, especially for these people that I’m moving out of California into Southern Nevada. They can’t find product that is existing and meets their needs since they are all custom manufacturing. In this type of deal, it’s easier to build a building even though it’s more money. They’d rather do that.
Mixer: Multi-family is definitely the highest demand we’re seeing locally. I would say that land is least in demand.
Laurie Paquette: [The] Strip is doing much better on a retail perspective. We have lots of activities. Let’s be honest, there was a tremendous amount of ill-conceived products the banks financed. At the same time, we have to take our own medicine in that we were doing deals with people that we shouldn’t have been doing deals with. As much as we want to fault the banks for handing out loans, we were doing deals as well. It’s a vastly different market perspective when you take out the ill-conceived projects on all product types.
Is there any type of building activity?
Dermody: We’re doing a project now. It’s an herbal vitamin product facility. It’s a good case study. They were in Nevada, in Reno, and have been there for a few years. Now they want to have a distribution center. We started the process. Halfway through the process, they decided to pull their manufacturing in China and they are adding on a manufacturing component to the distribution as they look deeper. They’re a great example of what a lot of companies do in this economy. There’s building going on again. It’s all relevant. It’s spotty, subject to financing, but here is some activity compared to last year.
Gorda: I’ve been pretty busy in Elko in commercial and mining and building some commercial product.
How does prevailing wage affect your industry?
Vilkin: I think in the upcoming legislative session there is a strong appetite on both sides of the aisle to affect some kind of prevailing wage reform in Nevada. We played a significant role in the construction of Nevada Solar One, the solar thermal power plant outside of Boulder City. The developer of that power plant, said it very succinctly, he said, “Arizona’s biggest or one of their most effective business development tools to get those projects into Arizona instead of Nevada is Nevada’s excessive prevailing wage rate.” Most of the utilities scale renewable energy power plants are getting financed to some degree with federal government subsidiaries. With the federal government subsidiary comes a prevailing wage requirement. Pretty much across the board, Arizona’s prevailing wage is about half of Southern Nevada’s. When you have an $80 million delta because of the cost of labor, guess where that project is going? From an economic development perspective, Nevada is at a significant disadvantage. As a quick example, for carpenters, $48.61 an hour for prevailing wage rate in Nevada, $14.70 in certain counties in Arizona.
Paquette: Are you seeing prevailing wage issues or standard area wage? The union is all over me because there is an additional dollar on a benefit package, they want both. They want prevailing wage plus the benefit package.
Montandon: A lot of the way we collect and calculate prevailing wage does not make a lot of sense. They send out a bunch of voluntary questionnaires to 500 carpenters and five say, this is what we pay and that becomes the prevailing wage. I’m exaggerating a little, but not much.
Vilkin: You’re not. Prevailing wage is what the intent is, pay what the prevailing wage in the industry is. In Nevada, is that $50 an hour for a carpenter when 83 percent of the work done is not done by unions? How is it that the union scale is the prevailing wage?
Mixer: Shouldn’t we spearhead an easier way to get a public awareness program to have more people fill out a prevailing wage correction rather than the five union guys sending it in? Wouldn’t it be quicker and easier to educate everybody to submit the forms?
Vilkin: It’s not so easy. Everybody is tapped. Everybody is understaffed. The surveys come out and goes to guys that don’t do government work and they don’t fill it out.
Burke: I’m going to add a twist to this, over to HUD finances. The same dynamics is on the HUD side. We do a lot of senior care and senior housing projects. It’s the same dynamic where it’s not really a prevailing wage. I know when the prevailing wage in Nevada for an air technician that does air balances, the cheapest rate is $60 an hour; that is just not correct. Certainly something needs to be done about that. I’m not speaking from a contractor, more from a taxpayer’s perspective. We have to stretch our tax dollars on these capital projects in Nevada.
Are you seeing more public/private collaborations?
Ehret: In California, they’ve been doing it for years at all levels of public agencies, states, county and school district municipalities. There is more acceptance, more familiarity with that sort of process. Nevada hasn’t had the budget shortfalls California has historically
had. California had to get creative in terms of how to fund public projects. In Nevada, we were fortunate that we haven’t had the budget issues until lately. Obviously, when the spigot is turned off, when there is a downturn, capital improvements and big expenditures for public projects is turned off. We were involved with the Las Vegas Metropolitan Police headquarters; we were the builder for that. It’s an example of that process working very well as a design, leaseback process that was a win all the way around. I think there could be more of that going on all levels in the state.
Leidig: That just happened with the veterans administration clinics. I’ve taken that program and applied it to a total private scenario which works really well in this crazy market we’re in.
Montandon: Nevada is young in a lot of these areas. Government agencies weren’t even allowed to use construction manager risk or design and build, up until the last decade. Other states have been using those alternative delivery systems for decades. Moving
from that into public/private partnerships is groundbreaking. We don’t have a lot of those to build on yet. They will come. We have to mature in those markets.