Assuming that the 2005 economic picture for the state of Nevada is composed of the sum of its parts, we can all look forward to good times in the coming year. The experts we interviewed all agreed that the overall economy is on the upswing, and most expressed the belief that their own industry segment would improve as well. While some may have been looking at 2005 through rose-colored glasses, they weren’t wearing blinders – several factors could derail even our best-laid plans for economic success. Chief among these would be some form of terrorist attack, which would have a major impact on travel and tourism. Other, less serious reasons for caution are rising land prices, the continued drought, and competition from other states for tourists and gamblers. With 2005 being a legislative year, there is always the unknown factor of what the Gang of 63 has in store for the business community, although most of our experts expressed satisfaction with the outcome of the 2004 Nevada election, especially some hotly-contested ballot questions. What’s in store? Let’s ask the experts.
Joe Reel, Economist
Nevada Department of Employment, Training and Rehabilitation
“The employment picture in Nevada will definitely look better in 2005,”said Reel, who pointed out the two main categories of employment figures: job growth and unemployment.
Overall, jobs are expected to increase because of several interrelated factors: population growth drives up demand for housing, and as people move into new housing, demands increase for infrastructure, retail outlets, restaurants, healthcare facilities and schools. People moving in to build and staff this new support network start the cycle all over again. “Nevada remains an attractive alternative to other states because of its business incentives, tax environment and location, so this cycle should continue for the near future,” said Reel, although he cautioned that higher land prices, especially in Southern Nevada, have the potential to slow the growth engine.
Unemployment – a measure of the number of people actively seeking work – is at historically low levels. Reel said the 2004 level averaged around 4 percent, only slightly higher than the record low level for the last 20 years, which was 3.9 percent. He predicted 2005 unemployment would remain in the 4 percent to 4.5 percent range.
Commercial Real Estate (South)
Tom Naseef, Coldwell Banker Commercial
President, Southern Nevada Chapter of CCIM
Naseef predicted the commercial real estate market in Southern Nevada will remain strong, but noted there may be some leveling off from this year’s fast growth rates. “There are about 32 million square feet of existing office inventory,” he said. “Another 2 million square feet is in the pipeline. With absorption averaging about 450,000 square feet a year, that means we’ll have enough new office product to last four or five years.” The industrial market is in a similar situation, according to Naseef, and it also faces the problem of competition with nearby markets, especially Phoenix, where prices for industrial land are not as high as in Southern Nevada. “Retail will remain strong, as more people move into the Valley,” he said. The main challenges for commercial developers are the price of land and the rising cost of building materials, which Naseef said have risen 119 percent over the past year. There are no quick fixes to these problems, which largely result from the imbalance between supply and demand. “One solution would be for landowners to lower their prices, which isn’t going to happen,” he said. “Another would be for the BLM to release a large supply of land, which doesn’t seem likely either. So, we’ll have to wait it out. It’s just a matter of time.”
Commercial Real Estate (North)
Par Tolles, Trammell Crow Company
Incoming President, Northern Nevada Chapter of CCIM
“The Northern Nevada market is not white-hot, but it is active and healthy, and should continue that way through 2005,” said Tolles, who predicted vacancy rates will decrease next year in all three commercial areas (office, industrial and retail). Two factors have been holding faster growth in check: higher land prices and increased costs for building materials. “I don’t foresee either of these costs going down in the near future,” he said, “which makes it more difficult for developers to build profitable spec projects, especially in industrial. Rents will have to increase to cover these higher costs.” He said the main challenge for commercial brokers in 2005 will be to convince businesses considering relocating to Northern Nevada that its quality of life, tax structure and location justify paying higher rents. Tolles pointed out that the Reno area has experienced a “huge immigration” of new residents from California, causing an upsurge in the residential market, with an overflow into retail. However, many of these immigrants are either retired or self-employed. “We have not seen a ton of new job-creating companies coming in, although there have been a few,” he said. “Naturally, we would like to see more skilled jobs moving into the area.” He said he is “encouraged” that Northern Nevada is getting positive publicity that will lead companies, not just individuals, to relocate there.
Bruce Bommarito, Executive Director
Nevada Commission on Tourism
“With the economy improving – not only in the United States, but also abroad – Nevada’s tourism industry is on the upswing,” said Bommarito, who noted that Nevada is a popular destination for visitors from around the world. Another factor helping the outlook is a successful effort to broaden the market base for Nevada tourism. For U.S. tourists, this is reflected in ads touting Nevada as a destination for adventure travel, off-roading, extreme sports and RV travel. Nevada has also made inroads into the People’s Republic of China, where it is the only U.S. state licensed for outbound destination marketing. Bommarito sees competition from other states as the greatest challenge to Nevada tourism. “The rest of the country has figured out that tourism is profitable, and they’re taking action,” he warned. “Oregon has almost doubled its tourism budget, Colorado added between $4 million and $5 million to theirs, and Arizona added $5 million.” To deal with this competition, the Commission on Tourism has been researching ways to get more bang for its buck, said Bommarito. It recently re-allocated some of its advertising dollars to hit the cable television market, a venture that seems to be paying off. It also sponsors familiarization (“fam”) tours for media representatives, hosting them at Nevada locations in hopes the articles they write about their experiences will get the state some valuable media coverage.
Residential Real Estate (North)
Marc Sykes, Broker/Manager, Century 21 Mountain Properties
2004 President, Reno/Sparks Association of Realtors
The Northern Nevada real estate market will continue to expand, according to Sykes, who cites three main reasons for his answer: developers are continuing to build; Californians are still relocating to Northern Nevada and also buying investment properties there; and interest rates remain at historically low levels. “We are comfortable that our market is driven by sound economic principles, and we are not on a bubble,” said Sykes. “Demand for housing has been steady, and even though prices are rising due to increased costs for land and building materials, there is still room for appreciation when you compare our prices to the Bay Area. A quality home here sells for about $200 a square foot, compared to $300 or $400 there.” Sykes reported he is pleased with the outcome of the recent election, but said the biggest challenge for the real estate industry is “the Legislature’s continued quest for additional revenue sources.” He said the Nevada Association of Realtors and local boards of Realtors are working together to raise money and identify key issues to support during the 2005 session.
Residential Real Estate (South)
Lee K. Barrett, Century 21 Barrett & Company
President, Greater Las Vegas Association of Realtors
“Last year, no one could have predicted that real estate prices in Southern Nevada would jump 52.5 percent between June 2003 and July 1, 2004,” reminded Barrett, “but that’s what happened, according to figures from the National Association of Realtors. We’ve now seen a market adjustment, and for 2005, I’d be happy with a 5 percent to 10 percent growth rate, which is much more normal. That will allow home buyers to see their properties appreciate, but still keep housing affordable.” As long as interest rates remain stable, Barrett expects the real estate market to remain “good” till the end of 2005. He said real estate agents and their clients in Southern Nevada will face two main challenges in the coming year: affordable housing and loan availability. “Efforts to diversify our economy depend on companies being able to find affordable housing for their employees,” said Barrett. “This is a major issue.” He said many people who can afford monthly house payments are having trouble finding the funds they need for a down payment and closing costs. The Greater Las Vegas Association of Realtors is attempting to spread the word about programs to assist potential homebuyers in locating sources of funds to cover these costs. “The best way to educate the public is by educating our members, because we touch 70,000 to 80,000 families a year,” said Barrett.
Carl Dahlen, Director of Rural Community Development
Nevada Commission on Economic Development
Although rural Nevada does not have the economic growth and overall health that urban areas have been experiencing, Dahlen predicted its economic outlook will improve in 2005. “Near-urban areas such as Pahrump, Fallon, Dayton, Fernley and Lovelock are seeing population growth as an overflow from their urban neighbors,” he explained. “In addition, rural towns dependent on mining are healthier due to a boom in the mining cycle.” He also cited Elko County’s developing role as a regional hub for retail, distribution and medical services as a cause for optimism. However, the challenge for many rural areas remains what it’s always been: getting there. “Overall, there’s hope for rural Nevada,” said Dahlen, “but certain pockets are having tough times and some won’t get much better in the near future. They are stymied by their distance from population centers, the lack of private land for development, and their limited tax base.” In addition to promoting tourism to rural areas, Dahlen said economic development officials are encouraging communities to work together across county lines to face common problems, helping them apply for grant money, and working with state and federal agencies to help develop leadership in rural areas.
Russ Fields, President
Nevada Mining Association
Fields is “looking forward to a good year” in 2005, principally because the price of gold is expected to remain at a relatively high level. “Over 80 percent of Nevada’s revenue from mineral production comes from gold,” he pointed out. “In 2003, the average price per ounce was $363, which was high relative to the previous five-year average, and the price in November 2004 stands at $433.” Higher gold prices cause mining companies to expand their operations, invest in more capital equipment and explore for new deposits. Fields said some mines will now be able to remain open after high-grade ore has been depleted, because mining lower-grade ore is profitable when prices are up. Copper prices are up as well, causing Quadra Mining to re-open a copper mine in Ruth, in White Pine County. “This will have a significant impact on the economy of White Pine County,” said Fields. The main challenge for the Nevada mining industry is the length of time necessary to complete the permitting process for a new mine or an expansion of an existing mine. “It’s not a technical challenge,” he said. “We’re able to do whatever’s necessary to run a safe and environmentally responsible operation, but it may take five years for a large mine to make it through the permitting process. By that time, the owner may have missed the window of opportunity that would enable him to take advantage of market conditions to make a profit.”
William Uffelman, President and CEO
Nevada Bankers Association
The Nevada banking industry will experience a “minor expansion” in 2005, according to Uffelman, who surveyed members of his organization to get their predictions. While banking will expand in response to growth in population and in the business community, Uffelman said expansion will be limited by saturation of the market, which is causing banks to compete with each other for customers. The solution, he said, lies in banks finding a niche market where they can fill the needs of a specific category of customer. Greater than the challenge of competition, however, is the negative impact of the payroll tax and branch tax placed on banks by the 2003 Legislature, said Uffelman. A total of 45 banks, from small to large, belong to the Nevada Bankers Association, and Uffelman said the organization will make a strong effort to lobby the Legislature for change in 2005. “We will be diligently working during the next session to amend these provisions,” he noted, “to gain parity with the rest of the business community.”
Ray Bacon, Executive Director
Nevada Manufacturers Association
The rebounding economy is the main factor Bacon cited in predicting improvement in Nevada’s manufacturing sector will for 2005. “Since manufacturers produce goods, which will be in increasing demand as the economy recovers, most of our members will see increased business,” he stated. However, he expressed some concern that the rising cost of housing may cause a downturn in the construction market, which would affect producers of building materials. Bacon said competition from foreign markets is the main threat to Nevada manufacturers. “The 1.6 billion workers in new free markets are hungrier than our people,” he said. “They want what we have, and they understand that it will come from education and hard work.” For several years, the Manufacturers Association has emphasized the importance of education to the Nevada economy, and Bacon said, “We are not preparing the generation in our schools and colleges for the challenges they will face. In this state, we are generally ignoring our education problems.”
Bill Welch, President
Nevada Hospital Association
“Nevada’s economy has been on the upswing for the past year, and I haven’t seen anything to indicate it will turn around,” stated Welch, who said he believes hospitals and other healthcare providers in Nevada will have a better year in 2005 than they did in 2004, partly because three controversial questions on the November ballot turned out in their favor. However, keeping up with increased demand for services remains a persistent problem, especially for hospitals. Demand has been driven by several factors, said Welch: population growth; increasing numbers of uninsured or under-insured residents; problems with Medicaid that have caused private practitioners to opt out of the system, leaving Medicaid patients to use hospital emergency rooms for primary care; and the shortage of facilities for psychiatric patients. As a building boom in hospitals continues, efforts are underway to find licensed professionals to staff them. “The shortage of nurses has somewhat stabilized due to successful efforts in recruiting people from out-of-state,” said Welch, “and we did get funding from the 2003 Legislature to double the number of students in Nevada’s nursing education programs.” However, he pointed out that it will be mid-2005 before the first students on the fast-track program graduate, and another year after that before students seeking associates degrees enter the job market.
If our experts’ predictions come true, if no unforeseen crisis disrupts our major industry, and if business interests prevail in the upcoming legislative session, 2005 should prove to be a vintage year for the Nevada economy. That’s a few too many “if’s” to allow business owners and executives to relax and take their eyes off the big picture, but being prepared for the future, whatever it may hold, has always been a major part of the job description for Nevada’s leaders.