Keith Schwer, head of UNLV’s Center for Business and Economic Research, said at year-end 2003 the national economy is continuing to “gain traction,” an image which brings to mind a vehicle struggling out of a deep rut. This may be as good a characterization as any of the way the economy is gradually recovering. Schwer said increased military expenditures, low interest rates and the return of investment spending are providing economic impetus. In Nevada, Jeremy Aguero, principal of Applied Analysis, said, “We noted in late August to mid-September (2003) that most overall indicators of growth had returned to pre-Sept. 11 levels, including visitor volume, gaming revenue and the unemployment rate.”
What lagged behind was employment growth. National figures have shown a jobless recovery, said Aguero, partly because of increased productivity per worker. Businesses are doing more with fewer employees, which has been good news for corporate profits, but bad news for people trying to find jobs. “In Nevada, employment in the hotel, gaming and recreation fields continues to decline, but quarterly earnings and market capitalization for gaming and tourism-related companies have improved,” he noted. Schwer pointed out that employment levels at year-end 2003 are still below those of March 2001, but, “It looks like employment growth will continue. A large increase in the rate of GDP growth (in the third quarter of 2003) is expected to translate into a stimulus for the labor market.”
Aguero predicted the addition of new resort rooms on the Las Vegas Strip in late 2004 and early 2005 will bring a jump in Southern Nevada employment “very reminiscent of the 1990s.” These new developments are expected to bolster the economy for around 18 months after the rooms are added to inventory. In rural Nevada, Schwer said the current high prices for precious metals should have a positive impact on many mining-dependent communities. Chuck Alvey, president/CEO of the Economic Development Agency of Western Nevada (EDAWN), said business in the Reno/Sparks area is “very robust.” Despite a certain degree of public apprehension about the effects of the new casino on Indian land near Susanville, Calif., Alvey said he doesn’t expect this new competitor to have a major impact on the Reno economy, which is more diversified than gaming-dependent Las Vegas.
Schwer noted Nevada’s economy is vulnerable to the effects of an uncertain world environment, with its increased risk of terrorist attacks. Because of its dependence on tourism and travel, factors out of local control – such as the price of gasoline and the health of other states’ economies – can have potentially negative effects on Nevada’s primary industry. Concerns citied by Aguero are healthcare costs, which have been increasing at an average national rate of 13.5 percent per year, and the continuing drought, which has been causing problems in all parts of the state.
Despite these caveats, the experts we interviewed predict better times ahead, once the economy has gained enough traction to get back onto the road to prosperity.
According to Russ Fields, president of the Nevada Mining Association, “The price of gold describes either the fortunes or misfortunes of Nevada’s mining industry, which depends on gold for over 90 percent of its income.” That being the case, the consistently high gold prices enjoyed in 2003 should lead to a healthy 2004. The price of gold rises when the U.S. dollar is weak in comparison to other economies, but it is also affected by other variables, including the health of the stock market. The price of an ounce of gold at press time hovered around $380, compared to an average of $270 in 2001.
Fields said high gold prices have led to an increase in exploration. “I have seen more exploration today than there’s been in the last six years,” he said. “Nevada is well poised because of its geology and infrastructure for new discoveries.” However, Fields pointed out there is a lag of at least four years between the discovery of an ore body and the actual mine opening. During this period, engineering work must be done and permits and paperwork approved. “But, at least we are loading the pipeline so we’ll have something in the future,” he noted. Healthy gold prices have also led to the expansion of existing projects, including Newmont’s Carlin Trend in Eureka County and Placer Dome at Cortez in Lander County.
Renewed activity in Nevada’s mines will have a tremendous positive impact on rural communities, not only because mines provide jobs, but also because mining operations contribute to tax coffers. Mining provided over 8,800 direct jobs in Nevada in 2002, a figure Fields wants to see increase over the next few years, although he noted it will take some time. “I’m looking for 2004 to be better than 2003,” said Fields. “I see nothing suggesting a precipitous drop in the price of gold.”
“It’s going to be a good year,” said Bruce Bommarito, head of the Nevada Commission on Tourism (NCOT). “We are adding new room inventory, with the Venetian, Caesars Palace and Mandalay Bay each adding around 1,000 rooms, and Steve Wynn’s huge project is also in the pipeline.”
Casinos in Reno have banded together in response to the threat from the new Thunder Valley Casino near Susanville, Calif. Circus Circus, The Eldorado, Silver Legacy and Harrahs, acting as a group called Downtown Reno Presents, sponsored a $5 million advertising campaign this year aimed at Reno’s feeder market in Northern California. Kathy Hickman, marketing director for Harrah’s Reno, said, “There is no doubt [Thunder Valley] has affected us and will continue to affect us, but the key is to be ahead of the game.” The group is promoting Reno as an overnight getaway with amenities, entertainment options and award-winning restaurants that can’t be found at California’s Indian casinos. It sponsored 17 concerts, four boxing matches and a million-dollar slot tournament this year, and has plans to continue its ad campaign and event sponsorship in 2004. It is also working with the Reno-Sparks Convention and Visitors Authority to help prepare for the opening in mid-2005 of a new downtown convention center.
Bommarito said NCOT will continue its adventure travel campaign through 2004 with the addition of television commercials, but will soften the approach, which previously emphasized the harsh nature of Nevada’s wilderness areas. “Adventure travel, a $100 million-per-year industry, is a fast-growing addition to our already strong portfolio of tourism attractions,” said Bommarito. NCOT is also pursuing steps to regain the Asian tourists whose numbers declined sharply after the terrorist attacks of Sept. 11. The state now has a full-time representative in China charged with finding ways to increase Chinese tourism. Bommarito estimated that by 2020, China will be the fourth-largest outbound international market in the world, and the Chinese already lead other tourists in spending per trip, at $5,200.
Although Nevada’s economy picked up momentum in 2003, the labor force has not rebounded yet, according to Joe Reel, an economist with the Nevada Department of Employment Training and Rehabilitation (DETR). Statewide job growth for 2002 was a miniscule 0.2 percent, while 2003 showed a healthier 3.1 percent. “My crystal ball says to expect about 3.0 percent statewide job growth in 2004, with a 2005 estimate of 3.4 percent,” said Reel. Most – but not all – of the gaming jobs lost in 2001 have been replaced, and Reel predicted expansions in hotels along the Las Vegas Strip will help gaming employment figures in 2004. The projected opening of Wynn Las Vegas in 2005 should provide a further boost. Unemployment at the end of 2003 stands at about 5.3 percent, a number Reel said should remain stable through 2004, as an increase in the number of new jobs is offset by people returning to the workforce who had previously stopped looking for work and were dropped from the rolls.
Firms providing temporary employees are often the first to reflect changes in the employment picture. “If staffing services are hiring, that’s a good indication employment is picking up,” said Thomas Hubbard II, branch manager in Southern Nevada for Adecco Staffing Services, the largest firm of its kind in the world. Hubbard has seen increased requests recently for temporary employees, and Adecco’s national 7.2 percent growth rate for the third quarter 2003 was the fastest quarterly growth in 20 years. “I believe unemployment in Nevada will go down in 2004,” he said. “However, many businesses are choosing to use staffing firms for contingent, or ‘just-in-time’ staffing to fill seasonal or temporary needs, rather than hiring permanent employees. In today’s uncertain economy, this gives them more flexibility to react to changing conditions, and also less exposure and liability.”
Nevada’s banks have adjusted to the low-interest-rate environment over the last two years, and Ted Wehking, executive vice president of the Nevada Bankers Association, said the state’s banks should continue to be profitable into 2004. “We’re not willing to project a much higher interest rate for 2004,” said Wehking. “If an increase does occur, it won’t happen until mid-year, and probably won’t be much.” The mega-merger recently announced between Wells Fargo and Fleet Bank may lead to other large bank corporations following suit. However, Wehking sees no downside for Nevada and predicts Nevada consumers will not notice any changes as a result. The tax package passed by the 2003 Legislature contained two measures targeting financial institutions, and they may provide a challenge, especially to bank branches in small, rural communities. Wehking gave the example of a bank branch in a rural community that only makes $40,000 a year, but provides a valuable service to residents. If the bank has to pay a $7,000 excise tax for that branch, it may decide it is too costly to operate. On the other hand, Wehking said neither the bank, the community or legislators want to leave the town without a bank. “Nevada’s bankers made a conscious decision early-on to accept the tax provisions,” said Wehking. “We want to pay our fair share. Only time will tell whether this will prove to be our fair share, or a whole lot more. Once the numbers are in, if the tax proves to be burdensome, we will seek some kind of redress in the next legislative session.”
Commercial Real Estate-Southern Nevada
John Restrepo, principal of Restrepo Consulting Group, which compiles Southern Nevada commercial real estate statistics, predicts all three market segments will show improvement in 2004, barring unforeseen events affecting the national economy. While industrial and retail vacancy rates in Southern Nevada are expected to decrease, Restrepo believes the office market will show the greatest improvement. “This is a good news/bad news situation,” he stated. “Office will show the most improvement because it was the segment this year that fared the worst.” Restrepo said Southern Nevada will remain competitive with other states in the region trying to lure businesses to lease or buy commercial property. “Although our tax structure changed a bit as a result of the tax package passed by the 2003 Legislature, we are still attractive relative to our biggest competitors among the Western states,” he said. In addition, Nevada offers an attractive quality of life because of its climate and cost of living, although Restrepo stated rising housing costs may become a concern if unchecked.
“In 2004, we should return to what we consider normal construction and absorption,” said Kevin Higgins, outgoing president of NAIOP’s (National Association of Industrial and Office Properties) Southern Nevada chapter. “Certain periods of 2003 were slow, but 2004 will be a better year than 2003.” Higgins cited high land prices as a challenge for developers and leasing agents. “Developers are now setting precedents in what they are paying for land,” he stated. “In the second half of 2004 and the beginning of 2005, when their projects are completed, they may have some interesting times, since they will need to set a precedent in the price they set for the end product. The question is, when will the user market catch up? Will there be a lag before the price people are willing to pay rises to meet the price the developers need in order to make a profit?” Higgins noted the high price of land may lead developers to pursue infill projects in mature parts of the Las Vegas Valley, or to retrofit and modernize existing inventory.
Richard Lee, director of public relations for First American Title, predicted 2004 won’t set any records. However, from his perspective in the real estate industry, he said the market is still “hot” and homebuilders have no standing inventory. While he joins others in concerns about the high price of land, he pointed out that the abundance of activity in the residential sector drives commercial activity, especially in retail – a trend expected to continue through 2004.
Commercial Real Estate-Northern Nevada
Tim Ruffin, SIOR, CCIM, managing partner and vice president of office properties for Colliers International in Northern Nevada, is expecting the region’s commercial real estate market to rebound in 2004 from “a tough year” in 2003. The first half of 2003 was the worst six-month period on record in the industrial sector, with negative net absorption. Now, said Ruffin, he is seeing, “A tremendous amount of activity – more than we’ve seen in two years.” He said this renewed interest is partly caused by California companies comparing California’s tax structure and worker’s comp insurance rates with Nevada’s. The office market has been “steady”, said Ruffin, with 250,000 square feet of net absorption in 2003. He predicted 2004 will see another 300,000 square feet. “Retail has been absolutely on fire,” he declared. Northern Nevada’s steady population growth is encouraging retailers that haven’t yet had a presence there to come in, and he has seen a growing interest in major lifestyle centers.
The Housing Market-Southern Nevada
Dennis Smith, president of Homebuilders Research, reported that new-home sales in Southern Nevada reached the 24,000 mark in 2003. “That will probably be a peak for a couple years,” he said. “Builders can’t produce more than that.” Smith said a number of factors have combined to slow construction of new homes, including the rising price of land, a shortage of labor in the building trades and political issues with local entities, including zoning and permitting. He said interest rates for home loans should remain fairly stable for the near future, and shouldn’t be a factor in the housing market. “If sales of new homes do slow, it will be because of rising home prices,” he noted. “We don’t need any artificial moratoriums to slow growth. The market will take care of it, as increasing prices for new homes will lead people to move into the resale market.”
Two factors are leading to renewed interest in constructing multi-family developments, especially high-rise projects, according to Jeremy Aguero. The first is price pressure caused by the high cost of land. The second is legislation passed this year in Nevada, which has eased concerns about construction-defect lawsuits. Aguero fears many people will be priced out of the housing market in 2004. Residential housing prices in 2003 rose 13 percent over the previous year, and show no signs of slowing down. “By the end of 2004, the price of an average new house may well reach $250,000,” he said. “Many people will find themselves in trouble when interest rates go up, because they mortgaged their homes to the very limit of their available credit. When interest rates go up, people with adjustable-rate mortgages will be living in houses they can’t afford.” Aguero’s partner, Brian Gordon, said the 30-year fixed home mortgage rate, which is now around 5.9 percent, will not go up drastically in 2004, but an increase to 7 percent in 2004 is likely.
The Housing Market-Northern Nevada
Colliers International sells land to residential developers in Northern Nevada. Tim Ruffin stated, “If you can find residential land, you can sell it.” He reported the residential market is so hot that potential homebuyers are willing to put up a $5,000 deposit for a lottery in hopes they will get chosen to purchase a home. Ruffin predicted the Truckee Meadows valley will be built out within eight years, and homebuyers will have to look either south or east for new homes. Residential projects are already being developed in Fernley, a 30-minute drive east of the city.
When it comes to manufacturing, Nevada is affected by the same forces as the rest of the nation, according to Ray Bacon, executive director of the Nevada Manufacturers Association. Bacon explained that, as the economy improves, there will be increased demand for consumer goods. Unfortunately, the vast majority of these products are made overseas, so increased demand will not affect U.S. manufacturers until the producers of these goods – whether in China, Mexico or elsewhere – run out of capacity and need to buy more machinery to increase production. Only then will the U.S. see an upswing in manufacturing, said Bacon, since we produce “the goods that make the goods.” He pointed out the U.S. has made “quantum leaps” in productivity due to systems changes, automation and optimization of equipment, so the manufacturing sector can now do more with less. “The wild card in this is whether manufacturers overseas are also experiencing gains in productivity,” said Bacon. “We have no way of knowing. If they are becoming more efficient, they may not run out of capacity after all. In that case, they won’t need more U.S. machinery.”
Looking at the various sectors of the Nevada manufacturing scene, Bacon said gaming-related suppliers, such as International Game Technology, “appear to be doing fine,” due to the national and worldwide expansion of gaming. As the national economy improves, domestic producers of consumer goods, such as Hidden Valley, which has a salad dressing plant in Northern Nevada, should experience more demand for their products. For specialty suppliers, said Bacon, the 2004 outlook will depend on the health of the individual market segments they serve. Construction-related manufacturers, such as sheetrock suppliers and window manufacturers like Milgard, “should do okay, as long as construction stays up,” said Bacon. However, he pointed out that the recent federal investigation of Southern Nevada politicians for corruption and taking bribes may have far-reaching effects on the Southern Nevada development community. “I suspect that, once they’re done with the strip clubs, they’ll start investigating ties between these politicians and real estate developers,” said Bacon. “Who was getting bribed for pushing which developments through the zoning and permitting process? If that happens, all bets are off for the future of the construction industry. Who would pay in advance for a house if the developer was facing a federal indictment?”
There is little doubt Nevadans will face challenges with healthcare in 2004. Individuals will struggle to find affordable care for their families and may find it more difficult to find a doctor to meet specialized needs. Business owners providing healthcare benefits will be squeezed between employees’ demands for better coverage and ever-increasing insurance premiums. For Nevada’s hospitals, 2004 will also be a year of challenge. Bill Welch, president/CEO of the Nevada Hospital Association, reported that hospitals are building and expanding across the state to meet demands of a growing population. In Southern Nevada, Spring Valley Hospital recently opened, Southern Hills Hospital will open next quarter, and St. Rose will soon break ground for another hospital near the I-215 Beltway. Mesa View Regional Hospital in Mesquite will open next summer, and Carson Tahoe Hospital is building a new campus in Carson City. In Reno, St. Mary’s and Washoe Medical Center are both expanding. Welch reported that Washoe Health System is partnering with a California company to build a hospital in the Gardnerville/Minden area.
“While the hospital industry continues to expand capacity and update technology to meet demands for services, that’s only one piece of the puzzle,” said Welch. “We now have to recruit licensed healthcare professionals to provide the services we need – from pharmacists and therapists to physicians and nurses.” Finding these people means offering attractive salaries. Coupled with outlays for capital improvements, this increased payroll burden is hurting hospitals’ bottom lines in an environment when payers and managed care plans are trying to cut costs by reducing reimbursement rates. In addition, Nevada’s Medicaid rates have not increased since 2001.
Anther factor adding to the hospitals’ woes is the growing number of uninsured – a trend seen not only in Nevada, but across the country. “Hospitals often foot the bill for uninsured people who use the hospital emergency room as their primary care provider,” Welch pointed out.
An initiative on the 2004 ballot holds some hope for easing the medical malpractice crisis in Nevada, said Welch. By expanding tort reform, he hopes this measure will make it easier for Nevada’s physicians to stay here, and will also help in efforts to recruit professionals to the state.
Lt. Gov. Lorraine Hunt, chair of the Nevada Commission on Economic Development, said she is “very bullish” about Nevada’s 2004 outlook. “California is still doing us a favor by making things difficult for businesses,” she said. “We have seen a lot of new business activity, especially coming in from California.” Hopeful signs include the construction of new resorts and timeshare projects in Southern Nevada, as well as the opening of the Truckee Whitewater Park in Reno. Hunt said her recent trip to China to promote Nevada laid the groundwork for future business dealings, including discussions about air cargo and charter passenger flights into the Reno and Las Vegas airports. “We are also exporting our expertise,” said Hunt, who explained that Chinese executives involved in planning the 2006 Olympic games in Beijing may travel to Las Vegas for intensive classes at the UNLV College of Hotel Administration. UNLV instructors may also travel to China to conduct classes, with revenues accruing to the state’s university system.
NCED, EDAWN, the Nevada Development Authority (NDA) and other public and private partners have sponsored a marketing campaign targeted at California businesses, pointing out the advantages of moving to Nevada. The print ads’ bold headlines, “You’re Out of Business”, which attracted the attention of national and regional media outlets, have resulted in over 115 news articles, coverage valued by Chuck Alvey of EDAWN at $2.8 million. More importantly, said Alvey, EDAWN received 26 leads from companies as diverse as manufacturers, call centers, distribution facilities, software companies and food processing plants interested in finding out more about Nevada. EDAWN’s goal for the fiscal year from July 2003 to June 2004 was to generate $160 million in economic impact for the Reno/Sparks/Tahoe area. Alvey reported the agency reached the $130 million mark before the end of November 2003.
Somer Hollingsworth is president of the Nevada Development Authority (NDA), which promotes economic development in Southern Nevada. Hollingsworth said, “We don’t see any slowdown in companies looking at Southern Nevada. We’re as busy as we’ve been in the last five years.” He reports “tremendous interest” from companies interested in relocating, especially those from California, both north and south. “The trend is increasing,” said Hollingsworth. The skyrocketing cost of California’s workman’s comp insurance premiums is often mentioned as a factor in causing business owners to look to their eastern neighbor. Hollingsworth sees no quick solution to that crisis. In addition, he said, “The problem is bigger than that. Remember, for 25 years California has been developing a culture based on building social programs – programs paid for by business owners.” He estimates that, even though a new California governor has taken office, it will take at least three to five years to “slow the train down”, assuming Gov. Schwarzenegger gets the full cooperation of the Legislature, which is a big assumption to make. “Some California political insiders we’ve spoken with put that number at closer to 10 years,” said Hollingsworth.
Business owners are now reaching the breaking point, said the NDA president. “At the beginning of 2003, the people calling us could be described as ‘inquisitive’. Now, it’s more an attitude of, ‘Get me out of here now, before I go bankrupt.’ They’ve seen our advertisements and we seem to have hit a nerve. There’s a real sense of urgency. Our biggest problem is not convincing them to come here – it’s finding them a building or a piece of land to locate on.” Hollingsworth is also optimistic about the resort industry in Southern Nevada, saying 2004 will be a “turnaround year” for travel and tourism in the Las Vegas area.
To 2005 and Beyond
“I believe 2004 will be better than 2001, 2002 or 2003,” declared Keith Schwer. Richard Lee stated confidently, “We’ve had Sept. 11; we’ve had a brief lull; we’re through all that. I believe 2004 will be the year we get ready to rock-and-roll in 2005.”