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You are here: Home / Uncategorized / Time to Buy? Commercial Retail Market in Nevada

Time to Buy? Commercial Retail Market in Nevada

June 1, 2010 By Nevada Business Magazine Leave a Comment

Like the tail wagging the dog, Southern Nevada’s commercial retail properties market has followed the industrial and office markets into the doldrums of recession. “The Las Vegas retail market has been impacted tremendously,” says David Grant, senior vice president retail division for Colliers International in Las Vegas. As first quarter 2010 statistics continue to paint a bleak picture of the market, property professionals find themselves battling uncharted waters as they scramble to make deals in what persists to be primarily a tenant’s market. “It’s a rough game for everybody. We’re picking and choosing our assignments carefully,” explains Tom Naseef, president and corporate broker for Las Vegas-based Coldwell Banker Commercial.

Although some brokers say that deal volume has picked up slightly, causing them to believe the downturn has hopefully hit a plateau, critical first quarter numbers don’t point in that direction. Continuing its upward trend, the vacancy rate rose another .9 percent from the fourth quarter 2009, pushing it to 9.3 percent compared to 7.3 percent just two years ago, according to Colliers International figures. At the same time, net absorption fell to a minus 199,221 square feet and the average asking lease rate dropped to $1.72 per square foot from $1.83 from last quarter. “People need to come to the reality of what the new normal market is,” Naseef says.

That new normal market has made wheeling and dealing a lot tougher for brokers and landlords who are required to be more responsive and flexible in order to ink deals. Faced with a plethora of vacant space, brokers acknowledge that the boom of just a few years ago is long gone. “We’re going back to the basic fundamentals of real estate. We lost track of that,” Grant says.

Going back to the basics also means embracing new numbers which are considerably less than those enjoyed not too long ago. “Most deals done today are 30 to 50 percent less than several years ago,” says Chris Godino, senior associate at Grubb & Ellis in Las Vegas. Tenants have the luxury of searching almost endlessly for a bigger, better deal while buyers believe they should be buying at 15 to 20 cents on the dollar, according to Grant. “There’s still a gap between sellers’ and buyers’ expectations,” he says. Also, with property values falling, it’s sometimes difficult to nail down realistic numbers. “Lenders need to start lending on the merits of the property,” Grant says.

Holding On

With a paucity of new clients coming to town, a lot of deals involve internal shuffling among those who are already here. “The majority of business is helping clients with existing properties,” Grant explains. This can involve downsizing or upgrading, depending upon individual circumstances. The good news is that select businesses have been able to take advantage of the abundance of bargains they find all over the area. “It’s a tremendous opportunity because prices have gone down to more affordable values. The tough part is that the economy has a lot of negative feedback,” Godino says.

One of the few new businesses that have recently taken advantage of the Southern Nevada welcome mat is a Mexico City-based dining/entertainment enterprise that emphasizes billiards. The company is shopping for 6,000 square feet of leased space as they expand from 10 existing locations in the Southwest and Mexico. They expect to need five locations in the Las Vegas area eventually. Proving that ultimately each deal is individual, the billiard company found that the timing is just right for them to branch out. “They waited because the market was inflated before,” Naseef says.

As a harbinger of what the economy of the future could likely be, many of the businesses that seem to be doing well are value-oriented enterprises that emphasize basic needs over luxury. In a time of high unemployment and uncertainty about the future, it appears that many people are bunkering in to make do with just the basics they need. “Discount operators are fairing well, such as Walmart and Target,” Grant says. Other successes include Kohl’s (which has absorbed three Mervyns locations), Walgreens and Chase Bank along with a number of niche ethnic grocery markets. Fast food restaurants, such as Jack In The Box and Carl’s Jr., are also holding up well as many people make their food dollars stretch as far as they can.

As expected, new construction has stagnated with just a few projects in the works. After a slowdown in 2008, Tivoli Village at Queensridge has resumed construction with a soft opening scheduled for December on the 370,000-square-foot mixed-use project. Work also continues on a 258,000-square-foot Lowe’s and on Caroline’s Court which will add 274,000 square feet in the Northwest submarket. With around $10 billion worth of major development and more than six million square feet of planned construction put on the back burner, the immediate future of new construction looks dubious at best. As projects such as Echelon, Fountainebleau and Harmon Tower languish on the stalled list, the once dynamic synergy of the construction boom seems considerably dimmed, at least for now.

Along with new construction, the population growth of the Las Vegas Valley has also slowed down. “It’s essentially flat,” says Jake Joyce, project manager for Applied Analysis. While the area enjoyed a five percent growth rate resulting in a gain of around 60,000 people annually for about a decade, it lost around 10,000 in 2008 and gained only 20,000 in 2009, according to Joyce. Compounding that negative is the continued problem of high unemployment which hovers around 13.8 percent, with 141,000 people still out of work in Southern Nevada.

Similar Story up North

With falling rents and rising vacancy rates, the situation in Northern Nevada isn’t much better. Of the 15.4 million square feet of retail space tracked by Colliers International, the vacancy rate jumped from 16.3 percent for the fourth quarter of 2009 to a record 17.43 percent in the first quarter of 2010. Median monthly rents fell from $1.60 per square foot to $1.50, with the total available space reaching 2,666,876 square feet. Some brokers fear that the worst isn’t over yet. “I don’t think we’ve quite reached bottom in retail yet,” says Roxanne Stevenson, senior vice president for the retail properties group at Colliers International. “This recession is by far the worst, longest and deepest [I’ve experienced].”

As he discusses the latest statistics, Kelly Bland, senior vice president of retail properties for NAI Alliance, says he just hopes the bottom is in sight. “My hope is that we are approaching or are at the bottom, that the trend in general will be sideways or up,” he explains.

The roll call of retail closures in recent months has been brutal to mom and pop enterprises as well as franchises and big box stores. Casualties include Long’s, Gottschalks, Sports Authority, Circuit City, TGI Fridays, Ann Taylor Loft, Name Droppers, Asian Bistro, Straw Hat Pizza and Butcher Boy, to name just a few. “Demand plunged and people went out of business,” Bland says. “It wasn’t a speculative frenzy.” To top it off, population growth in the Reno/Sparks area has slowed as well. “I think we’ve flat lined in population,” he says.

With such a large exodus to deal with, brokers are having to dig deep to continue to make deals by blending and extending leases of existing clients and by emphasizing the fact that it’s a great tenant’s/buyer’s market. “There are great opportunities in terms of rents and vacancies,” Stevenson says. “We haven’t seen rents like this in ten years.” Recent activity has been seen for home and garden, automotive, discount, electronics and grocery stores. Even though smaller deals are kicking loose once in awhile, the overall climate remains tough, however. “It’s been very difficult to be involved in an industry that’s had such a drop in demand,” Bland says. “It’s really a survival of the fittest right now.”

Despite the doom and gloom, however, developers added around a half million square feel of retail in 2009 to locations such as Shoppers Square, the Legends at Sparks Marina, North McCarran Crossing, Pioneer Meadows and Canyon Center. Claiming more than 300,000 square feet of new construction, Legends added more than 40 businesses that include Tommy Hilfiger, Nike Factory Store, Off Broadway Shoes Warehouse, Michael Kors and Nine West Outlet. With an emphasis on factory value stores, many people believe retail at Legends will do well in today’s more frugal economic times. In addition, SK Baseball added four restaurants in the Freight House District as part of the Reno Aces entertainment complex. Future construction is expected at Legends, Summit Sierra, and Park Lane Promenade.

Looking Ahead

As brokers look to the future, they agree that the unemployment rate is the most critical factor in the economic recovery. “It comes back to putting people to work,” Joyce says. “The key thing for retail is jobs. Until people are back to work they’ll be watching their spending,” Stevenson emphasizes. Although it’s difficult to have any affect on the macro world economy, economic movers and shakers in Nevada can work to attract new businesses, such as healthcare and alternative energy, to the state. “We need to diversify and find new ways to get business to move here,” Joyce says. “We’ll come out of this stronger and better. We have to have our hand on the national economy and understand the consumer.”

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