Builders and Developers: Bullish on Nevada

Commercial real estate, which saw many projects stalled mid-recession, is finally moving in Nevada: contractors are hiring and builders are returning.Nevada’s skyline is once again changing. Commercial real estate, which saw many projects stalled mid-recession, is finally moving: contractors are hiring and builders are returning. But is there activity across the board in all industry sectors – industrial, office, retail, mixed-use – or are some moving faster than others? Does it spell recovery? Or another boom and bust cycle?

The Comeback Year

“My overall [outlook] for 2013 is, it was certainly better than 2012, but spotty,” said Kevin Burke, CEO, Burke Construction Group. “That’s the best way I can characterize last year. It was moving in fits and starts; there was nothing that had any real legs behind it.”

“Nobody thought we were going to be in the tank as long as we were,” said Warren Hardy, lobbyist, Associated Builders and Contractors. “Nevada is always last in and first out of any economic downturn and people expected that to happen.” Which means we’re coming out of it more cautious than we went in.

“We’re still recovering, particularly in our industry, no question,” said Burke. “But we’re seeing more sustained regrowth in the commercial real estate industry, in particular in the office market and federal (public works). Also in retail and certainly in the senior care market.”

Harsch Investment Properties has a portfolio of 8 million square feet of industrial and 500,000 square feet of retail in Southern Nevada. “For 15 of the 20 years we’ve had an office in Las Vegas I think we looked pretty smart,” said Jordan Schnitzer, president. “For five of them we looked pretty stupid, because we had the most vacancy of anyone.”

The bottom of the recession for Harsch was 2008. “I’d say the market for real estate just stopped,” said Schnitzer. “It didn’t slow down, it hit a wall, and there was an overhang of product in every category.”

However Harsch, and every other builder and developer still in the market, are in a much better position now than they were five years ago.

Things are starting to move, though they’re not as fast and furious as they were in the early 2000s, said Mike Dianda, managing partner, Q&D Construction. There’s slow, steady growth in commercial building and public works projects including state projects for the Nevada Department of Transportation (NDOT), road repair and reworking. Homeowners are returning, doing remodels, and builders are starting housing projects.

“For us as a contractor, [growth] is coming from unusual sectors,” said Frank Martin, president, Martin Harris Construction. “In previous years you could always plan for specific sectors, like offices were going really, really well so you could expect to get a certain sector of that work, and/or warehouses, distribution or condos or whatever. There were always markets that were clearly cut and clearly defined.”

Today’s business is coming from all over, making it hard to plan ahead, said Martin. “It’s like there was a pent up demand for it and all of a sudden people are ready to build and it comes from markets that in some instances have never been a piece of our resume.”

Some of Southern Nevada’s major projects include the Echelon hotel, casino, shopping and convention complex, the Shops at Summerlin starting up again, a master plan project in Henderson to build 13,000 new homes and tenant improvement projects.

In Northern Nevada there’s a tremendous demand for the bigger box warehouse distribution facilities; inventory is low enough that developers are gearing up to build, according to Todd McKenzie, president, McKenzie Properties and president of the Northern Nevada chapter of the National Association of Industrial and Office Properties (NAIOP). A 624,000 square foot spec project is going up in Golden Valley, and McKenzie Properties is building a 70,000 square foot build-to-suit in South Meadows for a company expanding out of Baltimore.

On the office side the South Meadows market remains strong and the Meadow Wood sub-market is the strongest in Reno with a low vacancy rate of less than 10 percent. Retail is picking up at well located centers. McKenzie is planning a fairly sizeable project off Kietzke and McCarran, 250,000-square-feet of retail and office product that should break ground in 2014 or early 2015.

Dianda indicated there’s a lot of growth in the industrial region along I-80 between Reno and Fernley, the USA Parkway area. “In our opinion there’s still quite a bit [of inventory] out there. I think it’s more of a choice as far as new clients, do they want existing space or do they want to pay for a new building or location.”

Projects in the public sector helped commercial builders through the crisis, said Hardy. “It took a little while for the legislature and governing bodies to realize they needed to help with recovery but NDOT has a lot of projects. In the North UNR has a massive project on campus and there’s one on campus [in Southern Nevada]. Those help bridge the gap; those are all new projects.”

When the economic downturn hit, many builders and developers left the state, which wasn’t completely a negative event. “Everybody and their dog came to Vegas and Southern Nevada for construction business during the boom,” said Hardy. “We sort of thinned the herd in terms of companies.”

Developers are returning but still struggling in the commercial real estate market in Southern Nevada, with more returning to build in industrial and anchored retail centers but there’s no spec office building underway.

Burke Construction works in all commercial real estate sectors, with office, retail and industrial being the core markets, and it was the core markets that were hammered from a construction standpoint, said Burke. “We went from literally being in those core markets to almost no activities in those from 2009 to 2011. There wasn’t demand and there was no need to build another office building or shopping center.”

The Projects – New, Old, Speculative

In light of the significant overhang and continuing vacancy rates in some sectors, developers and builders are moving a little more slowly, waiting for absorption of existing properties. To meet changing needs in the market, Burke Construction created a special projects division to deal specifically with tenant improvements and projects involving existing properties.

Abandoned, foreclosed, repossessed and bank-owned properties are starting to move. “We’ve restarted projects like these for a variety of developers, people have come in and bought them out of foreclosure, bought them from banks that had to repossess them. And now we’re starting them up again,” said Martin.

McKenzie Properties is finishing up SouthGate, a local business center that broke ground at the worst possible time – October 2008. The slow and steady project built one to two 8,000 square foot buildings every year. “There is demand for that kind of product, it just wasn’t as fast as we would have liked because of the recession,” said McKenzie.

Looking at industrial properties on the south end of the state, John Stewart, principal, Juliet Companies, expects the industrial sector will pick up, but notes Nevada is in competition with other states for large companies. “I don’t think the market is necessarily back to the point of developers and lenders constructing industrial buildings on spec without an end user in tow,” said Stewart. “I think the industrial marketplace will be more strategically driven by end-user requirements.”

While vacancy rates for industrial product are declining and rents are going up, a trend headed in the right direction, there’s not a big enough change to generate much new construction. Vacancy rates need to be closer to 10 percent for a significant period before we’ll see a wave of construction activity, said John Restrepo, principal, RCG Economics.

Even if there’s a need for new construction, lenders are still pretty hesitant in Las Vegas. This means companies eyeing Nevada may move on because they can’t find the space. But without a committed company looking for a build-to-suit, and with no developer building on spec and no bank loaning to build on spec?

There’s the rub, said Restrepo. “Developers would love to build larger spaces because there’s a shortage of it, but the banks are still not lending. They’re concerned about where the Las Vegas economy is heading because there’s still some headwind, chiefly in the job growth side and consumer spending and a variety of other indicators like that which are occurring on the economic side and which are constraining lenders lending.” Not to mention new tough federal lending requirements.

So how do we match up companies needing space, developers who want to build the space and lenders who can provide financing for the space? In some instances we start with what we’ve already got.

Supplementing the Market

Economic development authorities in Nevada are working within the commercial real estate market to affect absorption of vacancies. The Governor’s Office of Economic Development and local economic development organizations work to attract new companies to Southern Nevada. The efforts of these entitites working together has led to Barclaycard US, the credit card division of international UK-based Barclays Bank, opening a customer-service call center in the formerly vacant building American Nevada had on its books.

Nevada’s favorable tax climate in conjunction with a solid economic development plan moving forward are an asset to the state. “It’s not overwhelming to where we’re going to build ourselves out of anything or have a major boom any time soon, but just a slow, steady growth which I think is healthy for our community,” said Dianda.

A Little Bang, but not a Boom

While some projects sidelined mid-recession are restarting, and new projects are building, not everything stalled will start again, and probably not everything should.

So can we expect another building boom? Or, are builders a little more gun shy since the downturn? “I think we can expect a little bit of bang, but no booms,” Martin said.

“I don’t expect we’ll ever see anything like that again, and we’re fine with that,” said Tony Dazzio, chief marketing governmental affairs officer for Burke Construction Group. “Nevada enjoyed sustained explosive growth in that time period. We think we’ve paid the price for it. We’re very bullish about this market, in particular with Southern Nevada, and also realistic about what success will be in the future.”

“I think we’re on the verge of a massive boom in industrial,” said McKenzie. “With the e-tailing distribution centers that have been coming here and with the internet demand, which isn’t going to stop, there’s a need for bigger and better boxes. Reno is well positioned and has the infrastructure for those kinds of instances.”

Retail is driven by consumer demand, said Stewart, which means newly built residential areas without a population living in them to make that demand aren’t going to need new retail. Most likely a handful of areas where there’s already population will see retail growth.

With everyone moving cautiously, Stewart expects, “an increase in commercial development, but hopefully not so much of a boom as something more stabilized and sustainable.”

People as Well as Places

When the economy went down for the count, construction projects dried up throughout the state. Skilled tradesmen left the state or found other work, and many haven’t returned.

Between 2000 and 2005, there was a period when Nevada contractors were recruiting talent from out of state. By the time the recession hit, there was a mass exodus of construction workers from Nevada. Now, as the industry turns around, contractors are finding themselves recruiting from out-of-state again.

“I’m talking to some people in the tenant improvements and remodeling sector and they’re saying if everything they have on the books happens that 2014 could be one of their best years ever. That’s not an indication that there’s a whole lot of work out there, but an indication that there are fewer companies competing for the work that is out there,” said Hardy.

What we didn’t really lose, for those employees who could find the work, were wages. Prevailing wage, based on reported payroll and wages of workers on job sites, stayed pretty much consistent through the recession. “The way the law is set up it’s almost impossible for prevailing wage to go down and I think we saw that in the recession,” said Hardy. “Because while private sector wages were dropping and dropping, we didn’t really see a drop in prevailing wage; in fact, we saw an increase in many sectors.”

Some of the craftsmen and construction professionals we lost may return. Nevada is seeing a population boom even if we’re not yet seeing an economic boom. “That’s what’s driving the housing market right now and prices in Nevada are certainly recovering a lot faster than any of us thought they would with a 30 percent increase in 12 months in prices,” said Hardy. “I think that’s significant. We may be in for another housing boom. That just shows you that people are bullish on Nevada.”

Recovery in commercial real estate continues to move slow and steady. While we may be impatient for something faster, right now we’re headed in the right direction, and probably at the right speed.

“The problem with rapid recoveries is they’re generally followed by declines,” said Restrepo. “High risk, high reward. We forgot during the extended period of time of hyper growth for 20 years prior to the recession that it was a unique period of time. Unfortunately we started believing that it was the norm, but we yield to the laws of economics and gravity.”