Nevada’s commercial real estate industry has been used as an example across the nation of how difficult things are for the sector as a whole. Even so, commercial real estate professionals that have survived thus far have indicated a hope for the future while recognizing that they expect a long recovery period. Recently, executives representing this struggling industry met at the law offices of Holland & Hart in Las Vegas to discuss this recovery period and how economic development will play a role.
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 role do commercial real estate professionals play in economic development?
Sallie Doebler: One of the things that NAIOP is re-divisioning itself to do in Nevada is to act as a resource. Quite often, it’s the developers and the brokers who are the first point of contact for anybody looking to relocate, add or even expand in the state. We’re really positioning ourselves to be a piece of that puzzle and we’re recognizing what we can do to be a part of the success story and really provide ourselves as a source of information.
John Guedry: There are several advantages Nevada has to offer over some of our neighboring states. Real estate pricing is a big one right now because of the affordability factor that exists today that didn’t three or four years ago. It’s more affordable in many cases for their commercial real estate needs, whether they’re buying, growing or leasing space. It makes it easier for us as an industry to work with organizations like NAIOP, to feed information to them that can be fed to that single entity. It’s a more targeted and simpler approach to going after businesses and to sell a business on coming here when you’ve got one individual entity that can go out to neighboring markets or those neighboring markets can come to get information or resources for relocation. There’s internal competition going on all the time. You’re much more effective when everybody’s working together towards a common goal. It’s no different than multiple agencies with the same objective. They’re competing. We’re trying to stop competing with ourselves internally and start competing with those neighboring states that we have advantages over. Real estate is one of those advantages that we have to offer over most of our neighbors and we should leverage that.
Perry Muscelli: I’ve been involved in brokering hundreds of company relocation transactions and hundreds of decisions where they didn’t decide to come here. I saw what they were thinking and what mattered to them. We have a tendency, in the real estate business, to think it’s about real estate. More often than not it’s about the cost of employment. It’s about the laws in the state and the liability; the cost of doing business here. Real estate is constantly being measured as a very small part of the cost of operating as an employer. When it comes to their decisions in why they come here, we ought to be careful and not think it’s all about creating a great real estate environment just because we’re in that business. It’s really about making it a very friendly place to employ people. That goes directly to what we need to turn our whole economy around, we need to get people employed.
Have Nevada’s economic development agencies done a good job?
Michael Dermody: It’s easy in these difficult times to point out who’s not doing a good job. But, these are the same organizations, when we were in good times, we gave credit to. We’re mistaken to try to point the blame at people that are suffering just like we are. The solution is restructuring, the way the governor’s looking at it. That’s a positive. You have to adjust to what the economy is. I think that’s what we’re going to see now. It’s easier to take a pot shot later on in the fight, when you forget about all the growth we’ve had under their stewardship.
Mike Montandon: Any organization in boom times grows a little fat or cumbersome. Our economic downturn has given us an opportunity to say “Okay, we’ve done some things well, what can be fixed and what can be structured differently?” We really have two things we can do in economic development. We can either create an attractor, a shared piece of infrastructure or, we can capitalize on the ones we already have. It’s a very rare organization that can go in and create a new piece of infrastructure. If we can take the ones we’ve already got and capitalize on them, we’ve got an opportunity to build it better, right now.
Dermody: In this economy all of our companies are taking different departments, consolidating them and readjusting them to react to this present economy. That’s what we’re going to do in the state, under Governor Sandoval’s direction; that’s healthy. To sit back and say this department has been malfunctioning for 20 years, when we’ve had good growth is missing the boat. It’s the proactive realignment that best benefits the state and this governor’s going to do it. It’s exciting.
Muscelli: The problem I see with Nevada Development Authority (NDA) in Southern Nevada is that to live to fight another day they have to put 80 percent of their time into raising funds. A lot of people that use their resources here have seen that and they just can’t put the focus on what needs to be done. They know what to do; they just don’t have the resources. One thing the state can do is to figure out a way to rise above the constant fundraising effort they have to have just to live to fight another day.
Doebler: At the end of the day, we’re all looking for the same end result. We’re looking for more jobs, more development and people to fill those buildings. That’s what we all do and we can start working together to help accomplish that.
Has this economy hit bottom and if so, when will it begin moving back up?
David Simard: We are at the bottom. We might see an uptick in certain classes, but for the most part we’re pretty much at the bottom of the draw and we’re going to keep flowing at this rate. A lot of people are looking to lock in long-term deals both in retail and office space.
Montandon: We’ll be bouncing along this spot for a while. It won’t get much worse, but it will bounce along for a while.
Guedry: The bigger point is, how long is it going to take? I’m less concerned about how much deeper does this go as I am about how much longer does this go.
Sam Gladstein: Typically you see these V shape charts. We’re in a U shape chart. Our own company analysts aren’t predicting a turnaround until about 2015. That is, a major turnaround, where you really see it up. But, even one percent growth would be fantastic. I see things pretty flat for the next few years.
Dermody: Predicting is very difficult, especially when it’s about the future. Having said that, they’ll be sectors that will grow and that are growing now. We saw that in Urban Outfitters deciding to come to Northern Nevada. That is part of the internet fulfillment which is a different sector, but is growing pretty fast. There’s a certain cautious optimism in the marketplace that falls along this and things are looking a little bit better.
Bobbi Miracle: The expansion of business is just starting to happen. Owners can start gearing up to expand their businesses in certain locations. We’re seeing people move across the street and take double the amount of space with the expectations that they’re going to grow or that they can add on a couple more people that they might need to go after a different market. We’re going to start seeing some people really take off at a quicker pace than they might have been able to if the market was still flying like we were before. They’re starting to restructure their businesses. Not as many new people are coming to Las Vegas, but some of our businesses that have sustained themselves through this time are going to start growing and really gobble up the other people.
Are we still seeing companies downsize?
Simard: We see it from the companies that are locked in higher lease rates. I’ve seen a lot of interest and a lot of foot traffic of people kicking tires to look at expanding on new leases. The guys that are locked in at $2.50 or $2.60 per square foot in office are the ones looking to downsize. As far as the guys that are market rate down, I’m not seeing any downsizing on that end.
Muscelli: That’s right. It’s the older leases. It’s the leases where people calibrated their business volume based on the go-go years and now they’re sitting there. It’s not just about the rate, it’s the fact that they have a lot of debts and don’t need that much space. So when they get a chance to get out of their lease they take a new lease for less space and then they can pay half the rent as well.
Simard: Ironically, the tenants that we’re talking about are actually taking more space than what they need because they now foresee that these lease rates are probably not going to get any lower.
Do businesses still expect lots of concessions because of the economy?
Montandon: We’re seeing both sides. There are tenants who are coming and saying it’s a buyers market and we’re going to get a lot of those. On the other side, there are tenants who are in space right now who are busy hunkered down doing business and aren’t totally aware of how cheap space really is. When we go to them and say they can lease more space for less than they’re currently paying, they’re shocked. We’re giving them more than they expect in some areas. There are still tenants pushing for more, but there are also a few tenants out there surprised by how much they can get.
Miracle: There are landlords though, from the other side, that have said they don’t need to depreciate the value of their projects to such a level and drop those rates. There’s also a lot of landlords that have leased out enough space because they were realistic when the market did drop or were able to fill up enough space that now they can sit back and say, “We appreciate that, however, we want tenants that want to stay with us in the long-term hold, we’re not going to drop to such a ridiculous level.” I’m finding a lot of landlords that have the wherewithal to hold their property and sit back and say, “Hey now, we need to all stay in a realistic environment.”
Muscelli: New owners right now are going to be able to profitably rent their properties for significantly less than the other guy that’s holding on to his own. So how does he compete? There’s going to be a lot of people with very low bases owning fine properties in Las Vegas.
Guedry: There are certain pockets of the market that are obviously doing better than others. There has been a flight to quality in the real estate market just like every sector. People that have high quality product are doing quite well. We’re seeing a movement of tenants to nicer properties, even if it doesn’t mean a reduction in rent, but an upgrade to what they had before. Dated properties at a Class B or C category that may have done reasonably well in the past are going to struggle mightily over the next couple of years.
Miracle: It’s apparent what shouldn’t have been built in the market. The properties that were positioned in the correct location will always remain somewhat stabilized.
Why are lenders telling a different story than borrowers?
Muscelli: The lenders want the most conservative, owner occupied products. They do not want to do anything speculative.
Montandon: It’s the regulators, not the lenders.
Guedry: There’s truth to both sides. There are bankers that have taken the hunker-down mentality and there are regulators that expect that of the bankers. The biggest problem isn’t whether or not there is capital available for new projects because there’s a very limited need for new product in this market. There is need for restructuring existing debt on existing product. That’s where the struggle exists today and that’s the frustration that most property owners have with the lending sector. They don’t feel like they’re being listened to. There needs to be an adjustment of thinking. Lenders need to quit thinking, “I’m purely a lender on this,” and start thinking that, whether they like it or not, they’re a partner. Ultimately, what needs to happen is those lenders need to sit down with the borrower and come up with a reasonable plan where both sides are feeling the pain. I don’t know what it’s going to take for that to happen; I’m seeing some of it starting to occur.
Gladstein: In some of the larger construction projects, the banks are still gun shy and they’re not willing to lend any more than a 50 percent loan-to-value, which requires the developer to go to other markets. They have a tendency of realizing they made a mistake for a lot of years and then go completely in the other direction. They’ve got to find the middle ground that gets them back to lending in a reasonable fashion.
What can we expect in regards to commercial foreclosures?
Dermody: Commercial real estate has held up surprisingly strong in the foreclosure area compared to what it was predicted to do two years ago. Even though you may be underwater, if you have cash flow then you’ll be able to have an asset that has a value.
Muscelli: These special services that have a conflict of interest in a lot of these situations are getting paid fees to take over properties and that is an impossible situation.
Simard: There is a lot of conflict of interest there. There are some assets that should have been put back on the market a long time ago and they haven’t been. There will be another wave or two of assets coming back simply because they should be back on the market. Because of how some of those deals were structured, it’s taking a bit longer that it should to return them to the market.
Guedry: I think there is actually going to be more foreclosures coming for those off-balance sheet, conduit lenders where the special servicers are controlling a lot of the decision making and they have incentive not to move the property. The on-balance sheet lenders, specifically the commercial bank industry, have a different challenge. They’ve got regulators looking over their shoulders and they’ve got accounting rules they’re required to follow. Assets are sitting on their balance sheet and they’re justifying holding on to them for a little longer because they have to write it down a little further. As soon as demand starts to come back, you’ll see a motivation to sell and all the problem loans that they’ve not wanted to take back as real estate owned will start working through the system. Unfortunately, I think there are many more properties going through this cycle and there are problems in the cycle holding it up. Unless regulations change, I don’t see that changing.
Muscelli: The appraisal community is finally catching up with reality and that’s precipitating a lot of this too.