Building Nevada - February 2001

If You Build It, They Will Shop

Millennial Retail Update and Preview

by Cindie Geddes

Stable was the key word for 2000, and optimistic seems to be the mood for 2001. Nevada continues to defy doomsayers as the economy grows steadily, if not at a record pace. Retail real estate, driven by residential real estate, continues to reflect the fact that Nevada is a great place to live, work and shop.

SOUTHERN NEVADA

Residential growth (particularly in master-planned communities) was still proceeding at a record pace in the Las Vegas area, leading to a retail growth rate in 2000 similar to the 1999 rate, according to Jacqueline Young, senior vice president for Lee & Associates commercial real estate services. The majority of development was planned or proposed in the northwest or southeast. Kit Graski, senior vice president of CB Richard Ellis, says the principal retail hubs continue to be existing malls and the areas adjacent to them, but he sees Green Valley and the northwest emerging as their own hubs for retail activity.

A significant impact on the retail industry in 2000 was the introduction of Super Wal-Marts into the area, affecting locations being considered by other grocery stores. Competition has been raised a notch by this one very powerful retailer. The trend seems to be to bring in a Wal-Mart (or K-Mart or Sam's Club or other discount store) and then bring in a Super Wal-Mart (or Super K-Mart or expanded Sam's Club) as the market grows. The key is to bring in either a sister store, says Graski, or a different prototype that hasn't been explored for the marketplace.

According to the Las Vegas Year-End Retail Market Report, compiled by Applied Analysis and Lee & Associates Commercial Real Estate Services, the retail market for the Las Vegas area totaled 26.3 million square feet at year-end 2000. Total inventory grew by 7 percent over 1999’s year-end totals. The vacancy rate was 3.1 percent, down from 4 percent reported at the end of 1999. The weighted lease rate for vacant space was approximately $1.56 per square foot on an NNN basis (triple net equivalent, which allows a comparison of lease rates between individual buildings regardless of lease type).

Net absorption for the year was 1.9 million square feet, a 9 percent increase from 1999’s 1.7 million square feet. The 2000 net absorption is also well above the five-year annual average of 1.5 million. New construction continued, with approximately 4.3 million square feet of retail space under construction at year-end. Another 760,000 square feet of new construction is currently on the drawing board.

In total, the retail market's 3.1 percent vacancy rate, positive absorption, continued construction and moderate lease rates all indicate a healthy and expanding market. Signs of overall economic growth in the area, including increases in population and visitor volume, are positive indicators of further expansion. Young remains cautiously optimistic about the future for retail.

Young also expects rents to stabilize over the next year, even though land prices have gone up. Landowners are raising their prices as they realize the land's worth, and this increase is being passed on to tenants through developers. But that increase is reaching its limit. "It has to stabilize," said Young, "otherwise, we won't see as much being developed."

Graski expects to see fewer large centers in the near future, at least until the population increases enough to warrant retailers expanding into new areas of town. Grocery store-anchored centers will continue to pop up, but likely at the same pace as 2000.

A new factor affecting the retail market in Las Vegas is the $1.2 billion, 53-mile Beltway project, which will eventually ring the entire Las Vegas Valley. As each section of the Beltway opens, it will offer new options for developers in the affected area. Said Graski, "We will see a significant change in some of the shopping patterns." Young agrees, stating that the Beltway will change the dynamics of the city. "It's definitely going to change some traffic patterns," she said. "It will be interesting to see how it all shakes out."

NORTHERN NEVADA

The Reno/Sparks area has seen relatively modest retail development over the past year, according to Kelly Bland, vice president of retail properties for Colliers International. "It's sort of a year for the market to take a breath," he said. In 1999, big box development (retail spaces over 20,000 square feet) was booming, with companies such as Border's Books, Cost Plus, Bed Bath & Beyond, Best Buy, Burlington Coat Factory, Wild Oats and PetCo all entering the market for the first time. However, 2000 experienced a drop-off in new construction, with only one big box space (Mor Furniture) constructed in 2000. Though big box development is expected to increase next year, with several projects coming on line, growth will continue to be slower than in previous years. One reason for the relative slowdown was the pushing back of several new or proposed projects to 2001 or 2002 instead of 2000.

Demand for space by retailers remained strong in prime locations. As demand by retailers and investors intensified, the market moved well into the landlord's corner, allowing wide selectivity in choosing tenants. According to Roxanne Stevenson, vice president and co-owner of Grubb-Ellis/Nevada Commercial Group, overall vacancy decreased to approximately 4 percent, down from 1999's year-end figure of 5 percent. The overall inventory base totaled 9.45 million square feet and was comprised of 85 centers exceeding 10,000-square-feet tracked by Grubb-Ellis/Nevada Commercial Group. Overall rental rates increased approximately 3 percent to $13.50 per square foot with newer construction in prime locations demanding up to $21 per square foot. Due to dwindling land supply, pad prices increased as much as $22 per square foot for finished freestanding pads in premium locations. Despite minimal construction, the retail market posted positive net absorption of approximately 100,000 square feet. This, however, is substantially less than the previous five years, which showed over 2.2 million square feet of net absorption, an average of 440,000 square feet per year.

The McCarran/South Virginia retail hub continued to be the trade area's hottest market. The nearby north Reno area near Highway 395 and McCarran is also quickly growing into a hub. In Sparks, the McCarran and Prater area serves as a retail hub, with the area around Oddie and El Rancho growing into a secondary hub.

The big growth segment in 2000 was in retail food concepts. The trend, continuing from 1999 and before, is expected to decline over the next year to year and a half as corresponding retail development slows. Real estate experts have noted that "food follows retail, and retail follows residential." The shopping center industry continued to perform well, fueled by strong job growth rates, low unemployment, steady residential growth and increased retail sales. Retail centers reported high occupancy levels.

Construction in Northern Nevada is expected to pick up again with over 2.7 million square feet of new retail space projected within the next three years. An anticipated 700,000 square feet will be completed in 2001. Big box retailers are expected to drive much of this development as two new Super Wal-Marts and one Super Target reposition in the marketplace. Three grocery-anchored centers are also scheduled, along with a major expansion approval for the regional mall.

Stevenson also expects rents and land prices to stabilize in coming months. With freestanding pads in premier locations in scarce supply, land values for finished pads could stay in the $18 to $22 per square foot range, while rental rates increase by 3 percent, driven by newly constructed centers. Although rental rates in some areas may weaken, rates in better grocery or discount-anchored centers will continue to range from $16.20 to $20 per square foot.

Vacancy rates are expected to remain in the healthy 5 percent overall rate. Strong competition in prime sites will continue to create a landlord's market, particularly in the McCarran/South Virginia sub-market. Interest and new development will also expand to the south Reno, northwest Reno, north Reno and Spanish Springs sub-markets.

Overall, optimism remains high despite national reports and concerns. The area is positioned to continue record vacancy and lease rates throughout 2001. Positive absorption rates are expected to persist, tenant demand is projected to remain strong in prime locations and construction will return to the region.