Commercial development in Nevada is among the state’s hardest hit industries. The industry has been feeling the sting of the current economy and will continue to feel it even while other industries see a turn-around in their businesses. Recently, executives representing the commercial development industry met at the law offices of Holland & Hart in Las Vegas to discuss the issues facing commercial development.
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 organization. Following is a condensed version of the roundtable discussion.
In what ways has the economy affected commercial developers?
Ralph Murphy: A number of regional and national firms have closed their development offices in this market, as well as in the Southwest. I was a victim of that, so I started my own company a few months ago and I’ve been pursuing a number of development and consulting opportunities.
John Ramous: We are one of the regional companies that actually is surviving. Although it has been a struggle, we have close to eight million square feet in the marketplace that spans the entire Valley. I think that there is still a bit of optimism through these tough times; we’re actually seeing signs of life or a little bit of light at the end of the tunnel. With our various tenant bases, we see the whole spectrum.
George Garcia: Clearly everything is down, there’s no doubt about that. I think we’re seeing an enormous loss of intellectual talent and capital exiting the Valley. Chances are we’ll never see them come back. We’re going to have to go back out and start recruiting again at some point. We still have activity, but it’s totally different. There are some real projects out there, but the banks are making it very difficult for anybody and everybody, particularly small companies, to find capital and that’s going to hurt everybody. In the end, the credit crisis seems to be a huge issue with all the clients we talk to.
Rod Martin: The radar screen is turned off. There is nothing out on the horizon for the foreseeable future. I think many of the developers that have historically been here in Las Vegas have kind of had to shift gears to much more of an asset management role and preservation of what you created during the boom times that we were in. But with respect to new development activity, it is not out there on the horizon. It is nowhere in sight.
Did you see this coming?
Martin: As far as seeing it coming, I was very worried back in early 2006. Looking back at the conditions then, it couldn’t really get any better. I remember looking back then we had a piece of industrial land that was appraised at $23 a square foot. Just a little over ten years ago we bought our first piece of land, which was a better located property, which was $2.60 a square foot. To see land prices increase almost ten-fold like that in ten years’ time, that cannot be sustained.
Garcia: That’s absolutely right. I think it was about 2003 when it occurred. In that time frame, you could see that land prices had jumped. It went from something like $300,000 to a million. You go, well okay, this is not logical. There’s no way that’s sustainable. Then the question was when was the collapse going to occur? Well I thought it was going to happen sooner. I was amazed that the run-up went as long as it did. But the higher it ran up, the worse it was going to be. But there was no way you could foresee both the depth of the fall or the extended length of time that we’re dealing with, and the fact that it has spread to every sector of the economy. I think that’s the ramifications. So I didn’t see that, but clearly the problems were there.
Ramous: I think I saw the residential. If anybody said they saw it [to this extent], I think they’re lying because they would have sold everything, or they would have really paired it down 24 to 36 months ago. I personally sold my house about two and a half years ago knowing that things couldn’t possibly get even higher.
Murphy: We are talking about a market here that got way overheated and so we could all feel it coming. We weren’t sure what the impact was going to be. What wasn’t anticipated was the general meltdown of the entire national economy which has doubled the impact here. There was going to clearly be an adjustment here, but it is deeper because of the larger problem. There are a lot of markets around the country that aren’t experiencing anything. There’s clearly a reduction in demand, but they’re not hurt because they didn’t get overheated in the first place. So we’re just the special case.
How big of an issue is dealing with the municipalities in this economy?
Martin: I think it remains an issue. What I saw during the boom times was that the municipalities recognized they needed to do a lot of things for the long-term growth of the Valley. They put that onto the backs of the development community under the concept of growth paying for growth, which I certainly can’t argue with that concept. But, now that those remain on the back of developers, it is very challenging today on a lot of other facets to put a project together. Again, I’m not speaking of new development, because there isn’t any new development, but even with respect to tenant improvements. It’s kind of the chickens are coming home to roost now when you look at a lot of the things that have been imposed over the years from the building departments, the cities, the utilities companies and so forth that make it that much more challenging to put a project together today.
Ramous: Not so much on the utilities side, but in general the municipalities, because I think we’re walking a delicate line. I’m already starting to sense obvious shortfalls. Each of the municipalities is starting to really be evident in our day-to-day business that we are struggling with. Forget about the new developments; now you’ve got to basically keep what you have operating. I’m already starting to get its inspectors calling and saying, “you’ve got to do this.” It is going to further depress what limited activity there is going on in the marketplace and that’s a big concern right now that I have.
Garcia: Yeah, that is essentially code enforcement. What we’re seeing is substantial rationing of code enforcement because people are concerned about their jobs. At the same time what they’re doing is creating revenue flows by billing. So it’s revenue enhancement and job security, but at the same time it’s adding additional stress to those that are trying to survive.
Martin: As frustrating as that is, and it truly is frustrating, in many instances many of us believe that it’s probably unwarranted or a little bit over the top, it’s still not really making a difference one way or another. They could eliminate all fees and we still wouldn’t be developing anything. When we’re talking about new development activity, those types of matters certainly are thorns in our side, but that’s not what is restricting the continuing development here in town.
Do you see banks more willing to work with developers?
Ramous: My feeling is that if you have a deeper relationship with the banks, that’s what is going to help you through. Again, whether it’s developers or whoever, if they have a merchant development mentality and they go for whatever bank will give them money for that project, there’s no relationship, it was just purely dollars. That’s where we’re seeing the challenges. It’s going to be tougher and tougher for those guys to hold onto the property. That’s not always the case. I see some very legitimate developers that also have been in major trouble. It’s not only projects under construction but even performing loans are having an issue. There are certain mechanisms in place that are hopefully going to help that, but it’s the relationship many times. If you don’t have it or it’s not deep rooted, you don’t have control.
Martin: I think you need to bifurcate the difference between new construction loans and existing borrowers and existing loans. On the new construction loan front, when there’s no business to be had, it really doesn’t matter whether the banks are playing ball or not. I don’t think they are playing ball, despite the fact that they say they’ve got money to loan, because the terms under which they’re willing to loan really don’t make any sense for a developer. Taking that a step further, maybe it’s a good thing because maybe a developer shouldn’t be building now. I don’t think, with the lack of tenant demand and business activity that we see, we don’t need to put anymore product on the market if we’re going to recover from this. I think the greater question becomes what they’re doing with their existing borrowers, and that is the land loans that they have out, that’s the construction loans that they have out. As loans are getting classified and they have to set aside greater reserves for those loans, it makes it very difficult on those bankers to continue to work things out with even their good borrowers. And unfortunately, sometimes you become a victim of who you chose to do your business with and the health of that individual bank. From Las Vegas’ perspective overall, our community banks got caught up in the business of the decade and that was making land loans, making construction loans, acquisition and development loans, and that music stopped so darn quickly, and now there’s really nowhere to turn.
What’s the outlook for commercial real estate in Nevada?
Murphy: Commercial real estate valuations are going to continue to be hit, so it’s going to be a difficult year next year. But general business demand is holding. And for most of the country, they’re not anticipating a further erosion of local economies. One of the concerns I left with was, fast forward a year or 18 months, the national economy will be back, we’ll be past the recession and into recovery, and we’ll be out here in the west going wait a second, what about us? Because we’re still going to be struggling.
Ramous: And we talked about that. It’s like comparisons with different markets. I mean, Vegas, hopefully will see prosperity as people gain consumer confidence, they start to spend money and they want to come to Vegas. Some of the other markets may not see necessarily that prosperity as quickly. We suffer from the non-diversification, but we do benefit from the consumer confidence.
Murphy: I think we can predict that the local tourism numbers will begin to go up again because there is a general sense of confidence nationally. So that will be the first indication that things are starting to improve.
Do you expect to see any significant activity in the near future?
Martin: You are going to start seeing some new homes cropping up, but not many. I think that you’re seeing the national homebuilders and the local homebuilders starting to wade into the market and buy the finished lots. There is going to be some homebuilding, but not only is it not going to be to the degree that it was for the last decade and a half, it’s going to be very, very nominal. So it is not really, in my mind, going to move the needle much, if at all.
Murphy: Enough to keep their core team together.
Garcia: They are just sustaining themselves. But they are definitely getting back into acquiring finished lots. But if you look at the amount of finished lots, then you look at what were mapped, you’re not even going to start pouring into the pipeline because there’s enough sitting in that pipeline today to draw it down. It is going to take a long time to draw it down. And basically, I don’t think we’ll start any work up on the engineer’s side. Because when those maps expire, they’ve got four years instead of two. But a lot of those are two years into it now or beyond, and they’re on their way to four and they will never make it. They will have to be redone or just let die.
Murphy: You will see more conventions, more tourists and the gaming numbers will start to improve. Employment numbers will start to improve and there will be some increase on the residential side, but don’t expect any significant activity in terms of new development of industrial, commercial, certainly not mixed-use projects for years.
Martin: I don’t think there’s going to be a whole lot of change from where we are here today. Other than I think fast forward a year there’ll be a little bit more optimism. And I think whereas today I just said there’s nothing in the pipeline and the radar screen is turned off, at least a year from today I think the radar screen will be back on looking for opportunities and trying to gauge when is the right time to get out in front of the next wave. And again, not that we’re going to be there, but I think we’re going to be talking about that again. But as far as between here and next year, I don’t see much change at all.
Ramous: I don’t want to call it a wave, but there is going to be definitely a reset on the commercial side. We’re going to see a number of very legitimate projects come back. I’m seeing very good, well-located retail projects that are going to trade at $50 and $60 a square foot, that are going to be repositioned. That’s going to take time. I see legitimate industrial projects that are coming very close to coming back. Those are going to have to be repositioned.
Murphy: But what will happen is, once there’s a signal that the tourism side of our economy is going to come back, then there’ll be reasons for people to think about moving their business to Las Vegas again. And for the first time in a long time we can say we are the low-cost alternative again. We’ve got to make that move. And a lot of us are working pretty hard right now to try and convince the economic development groups at the city and the state level to really get a focused message that we’re back, and this is the place to do business.
Martin: I see convention traffic increasing next year, and I’m hearing that from tenants of ours that are in that business almost universally that 2009 was a very challenging year. 2010 is looking good. And that’s beyond just looking better than it is from 2009. That is a tremendous positive for the direction that the city is going here.
Murphy: I think there’s a signal that the backbone of our local economy is going to start to feel an improvement in January. So, keep an eye on what happens in the first half of 2010. My suspicion is it will be better than people think.
Martin: I think we’ve got to watch what happens at City Center. That’s really going to be the bell weather. My fear is if City Center doesn’t perform or something terrible happens there it’s going to get a lot worse for us. That is why I’m certainly pulling for its success. I think it’s going to be a pleasant surprise just because of the project’s timing.