Feature Stories - August 2010

Industry Focus

Commercial Real Estate

    The commercial real estate industry has suffered a severe downturn in Nevada because of the recession.  Each sub-section of commercial real estate, from developers to engineers has experienced a negative impact from the downturn.  Executives representing commercial real estate companies recently met at the law offices of Holland & Hart in Las Vegas to discuss some of the problems they are facing today and share their insights on the future of commercial real estate in Nevada.  Those present represented design and engineering firms, brokerages, builders and an analysis company.

    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.

What challenges are you currently facing?

Michael Holloway, Poggemeyer Design Group: The biggest challenge in the design field, is can our industry survive until business picks up?  I don’t see an early pick up in sight.

Larry Monkarsh, LM Construction: Our largest struggle today is where do we go from here, what is the next stage?  Whatever money we have left, where is it best spent?  Our levels today are less than when we opened.  It’s tough to sit here.  We’ve been at the peak and we’ve been at the bottom.

John Vorsheck, Marcus & Millichap: My biggest issue is effective use of time.  Right now, as a broker, there are so many different things you can focus on that can take you out of your business.  Finding the right decision maker regarding the sale of a product can be time consuming.  Once you get in front of that person, truly being able to have a productive conversation can be difficult.

Craig Galati, Lucchesi Galati: Our biggest challenge is cash flow.  We have lots of contracts, we have a significant backlog of work, but the payment cycle is longer now and we don’t have a lot of operation capital to sustain.  That’s been our biggest challenge.  How do we keep up with all the opportunities that we do have when lines of credit are tighter?

Brent Wright, Wright Engineers:  The biggest challenge for us is pretty much the same, having enough work to make payroll.  The thing that’s keeping us going is public projects.  If we didn’t have public projects, there’s so little on the commercial side and the non-private side that it couldn’t sustain us.

Art Carll, NAI Las Vegas:  I see a lot of our challenges currently in inventory.  I believe that our lenders are still controlling the majority of the projects.  Right now, there aren’t too many principals.  Principals can service their debt on whatever their asset is.  There would be no reason to try and sell in this market because they’ve taken quite a loss.  It’s just making adjustments and keep fighting, we’re going to fight.

Has commercial real estate hit the bottom?

Wright: It feels like we hit the bottom and we’ve just been skidding along.  I don’t feel the recovery yet.  There are signs of hope.  I just hope it doesn’t slope downward more.

Monkarsh: We used to do a lot of volume.  We would do 35 tenant improvements in a month and it was absolutely incredible.  Unfortunately, today it’s like the old game show, “Name that Tune”.  What do you want to pay for something and we’ll make sure we can get it done for that price.  It’s almost like a reverse setting of the market.  It just seems to be this constant running in place.  When we are talking about when the land values kick back, it might be measured in decades.  It may be 20 years before we see those values again.

Galati: If we’re thinking that it’s going to recover to what it was, I don’t think that’s it at all.  I truly don’t believe this is a recession.  I believe this is a shift of the economy.  It’s a change in the economy and we have to change our mindsets to a new economy.  Once we change our mindsets to a new economy, there will be an abundance of things, but it won’t be business as usual.  The economy is going to shift from commodity to value.  It’s on its ways.  The consumer mentality is going away, you can see that.  We all knew that this boom could never be sustained.

Vorsheck: Prices in Nevada had increased tremendously, debt was extremely cheap.  We’re a few years into it.  You can’t fix six years worth of euphoria overnight.  It’s just not going to happen, that’s common sense.  The problem is roughly 65 -80 percent of the entire Las Vegas marketplace fell apart.  Rents have reduced by 40 percent, if you can collect.  Until we have job creation, expansion, business rehiring, growth and profit margins across the board, office space won’t be released.

    Until people are confident enough to truly go spend the money they were spending during the boom, retail numbers aren’t going to increase to where the majority are going to pay two dollars a foot to be able to meet that service for an owner.  The values have come down so fast it’s very difficult for appraisals to meet where the true market value is.  There’s a tremendous amount of capital ready to pounce on Vegas.

    In my opinion, we’re just now seeing some sort of liquidity or flow in our market where some people have said, the market is not going to rebound like we think, let’s be the first in, we can still potentially take advantage of this pent-up demand.

Jake Joyce, Applied Analysis: It’s much easier to survive a recession and cut what you already have than to try and build what you don’t have.  I think we’ve hit bottom, the question is how long we trudge along that bottom.  

Holloway: Do you really think on the commercial side that we’re at bottom?  Its vacancy, vacancy, vacancy and it just snowballs because the growth funded it and we had big office spaces.

Joyce: I certainly agree with that but there’s more and more signs of it bottoming out.  The pace of decline has slowed.

Holloway:  Is there a new term between recession and recovery, because I don’t think we’re in recovery.

What will be the catalyst for rebound?

Vorsheck: We need to have diversity in our economy to fill office space.  We have a tremendous amount of office product.  We need some form of other type of income, other than the gaming corridor and construction and real estate.    

Galati: I agree.  It’s clear we need diversification in this economy, but at the same time, as we’re doing that we ought to diversify around the areas of our assets.  We have things in this Valley that nobody else has.  We’re truly recognized as an international city.  We have an international airport that can move and bring in people and we can house any event, any time.  I think as a community, we haven’t figured out what we really want to be.  All those things have to be dealt with.  You can’t restructure everything overnight; it’s going to take time. What we can do is start focusing back on that diversification and on utilizing the assets we have to fuel that diversification.

Do you find banks easier to work with?

Galati: It’s not that they’re not friendly and not willing to work with you, they are.  I get the sense that a lot more regulations are put on them than they’ve had before because of some of their poor decisions in the past and they’re not going to make them again.  So, instead of getting to a happy medium, they went to the other side of the pendulum and are maybe even more restrictive.  At some point, you’ll have to come back to more of a middle ground to get things rolling again.

Monkarsh: There seems to be no confidence on either side of the deal-making table.  Every case is a case-by-case scenario.  If you had a relationship with a lender in the past, it doesn’t mean you have one today.  I think the banking system has to change.  The regulations that have now been put into place are almost too strict to foster an environment of growth.  People want to do things, the government wants to get things done, but the environment just isn’t right.  Private money is where this country is going to start beginning its growth, going back to the days of how this country was founded.

Carll: There’s no inventory for that private planning right now.  You have to get inventory and release inventory to get the stimulation of cash going through the community.  We need jobs and inventory to get cash moving.  I think we’re all in a stalemate right now.  We’re just waiting.

Galati: I have a stronger backlog than I did last year, yet I got approved for a smaller line of credit.  I understand, the numbers are the numbers.  

Joyce: I think it’s a Catch 22.  If you look at the banking stuff from the FDIC, in the fourth quarter banking filing, the ratio from loan loss reserves to total assets was 3.12 percent.  That’s the highest it’s ever been since the FDIC was created.  They’re just holding more reserve because they’re expecting more loss and probably expecting some regulation to come down the line that says, not only are you holding it for your benefit, but you’re also going to be required to hold more because we don’t want to bail you out again.  I think there’s a lot of concern on the banking side because they don’t know the market value; they don’t know when they can release.  At the end of the day, when you get cash, they’re going to be much more concerned with it.

Vorsheck: They have so many high network individuals and everyone has the same story. “I’m more capitalized, I’m looking for this and here’s my track record.”  They’re all great choices so the banks are picking that right down the fairway-type loan.  There’s got to be some sort of happy medium. Once we get to that point, I think you’ll start to see more deal flow in the marketplace.  I mean, trying to get money on a retail deal or an office project in Las Vegas right now, forget about it.

Monkarsh: The banks have a responsibility and until such time that we can get to that middle ground and say we’re all responsible here, how do we start getting things moving?  You’re not going to get that perfect balance every time.

Holloway:   You’re going to see, when the recovery happens and people have deals out there, they can go to any bank they want to.  There’s not going to be any loyalty on the business side either, because they’re going to remember the slow time.  Five years ago every bank was knocking on our door and wanting our business, we were loyal to our bank.  That loyalty goes both ways.  The banks are going to have to spend a lot of marketing money to keep people.

Where is the commercial real estate business coming from?

Holloway: We’ve gone to the military market. That’s how we’ve been surviving, a lot of Department of Defense work.  There’s a lot out there in Southern California and we made deals with different contractors to go after it.  We went where the fees were, that’s where they are.

Wright: We’ve been really fortunate here in Nevada, but the biggest growth for us is government work in Southern California and other places.  Thank heavens we’re in the surrounding areas because I think that’s what’s going to sustain us until Southern Nevada comes back, that work we’re doing elsewhere.

Monkarsh: We’re licensed in four states and we’ll go and do work.  We’re getting a lot of leads but they’re western states with the same problems we’re encountering in Southern Nevada.  We’re doing a lot of pre-engineered metal buildings.

Galati: We’ve never tried to be tied to a geographic location.  We haven’t tied ourselves to a building or product type but to a like-minded client.  For us, we go for clients wherever they are and we seek and connect with them through lots of different networks.  We’ve always been a little bit here, little bit there.

Is there a silver lining to the recession?

Galati: I think we will see more sustainably, I don’t mean in a green building perspective, but more sustainably about our country, about the world in terms of getting balance in the systems.  That’s where the silver lining is.  Things will come back, but it will come back with a new mindset.  That’s the key to it.  When we change our mindset change is instantaneous.  Business that focus on finding that shift in mindset, finding what they do and how it fits into this new economy, those are the ones that are going to make a lot of money.

Joyce: I think the silver lining going forward is people that have survived this will realize this isn’t a make your money and run town.  They’ll say, “I’m here, let me invest in it, let me do something.”  They’ll foster growth and foster community.

Monkarsh: The way we bring it back is by everyone saying, “How did we get here in the first place?”  We did it by providing a good tourist destination with value.  You could get a hotel room, a meal and a good night’s sleep for under 100 bucks.  We should build on what we did well before and make it better.

Holloway: I think another silver lining stems from the hotels that had gotten too big for their britches.  This was a loss leader town, that is how they brought people here.  All of a sudden, middle America can’t afford to vacation here.  Now, you can go to the Wynn for $69 a night on some weeknights.  I think that is bringing us back to what our roots were.

Do you think your company will be in a better position next year?

Monkarsh: I think we’re going to be the same.  It’s going to be very difficult in the long run.

Wright: I’m hopeful, but I don’t expect it to be any better or worse.

Holloway: If it wasn’t for the fact that we’ve been selected on some projects that are financing, through alternative financing, I’d be right there too.  If we didn’t have these that we’ve been chasing for three and a half years, I would say we’d be in a worse place.