It’s likely that no industry has felt the recession as strongly as the commercial real estate industry. Yet, industry experts are beginning to see an uptick in the previously challenged market. Executives representing commercial real estate interests recently met at the Las Vegas offices of Stable Development to discuss the market.
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 relevant to their industries. Following is a condensed version of the roundtable discussion.
How are Nevada’s commercial real estate sectors faring?
Mike Mixer: The three main groups for Las Vegas are industrial, office and retail. Our industrial market is twice as big as the office and retail markets. We have over a hundred-million square feet of industrial. Industrial is doing the best, in terms of vacancy and rate stability; retail is probably in the middle and in office, we’re still seeing some rate declines and high vacancy. Spreading out the rest of the marketplace, multi-family is a hot commodity [with] lots of demand but not as much product. Our land market has recently become more robust as the home builders have come back. I like to say that our market is on sale right now, it depends on what perspective you’re looking at it from. If you’re a buyer coming into this market, you’re going to see value in respect to comparative markets around Las Vegas. Los Angeles, San Francisco and New York, all the main coastal and bigger cities are back to near peak levels and above in some cases. From a peak values perspective, Las Vegas is still very far below our peak values.
Richard Bird: [On] the investment side, there is a big demand in apartments. That’s definitely come back, especially Class “A” apartments. [Class] “B” and “C” apartments are still struggling. There still seems to be a lack of interest from investors in “B” and “C” products in the rougher parts of town. Single tenant, net leased, whether its office, industrial or retail, is very strong. We’re seeing prices that are comparable to the peak of the market, which is a good sign. We’re bringing in a lot of money from out-of-state where those markets are even more expensive. I view it as a trickle down effect and it’s benefiting the Las Vegas investment market. The nice thing about Las Vegas, versus some of the other regional markets that I work in, is every investor has an appetite, whether it’s for distress or for stability. In Vegas, you can get whatever you want right now. The bigger issue in for sale products is, there’s just not enough of it. It’s a good thing, but the market has a long ways to go.
Tiah Brooks: There is huge interest in the Vegas market, there’s just not enough product to get for these people that are trying to buy on the commercial side. On the land part of it there is seller’s remorse again. We’re hearing that we could have gotten more, someone sold it two-months ago could have gotten more today if they waited.
Jim Tainter: From a tenant’s standpoint, the small tenant is starting to come back into the market in droves. For the small business that hangs the shingle out and lives the American dream, this seems to be one of the ground zeros for that. The whole town seems to be set up for that, almost to the point that it’s blurring a line between industrial and retail. We have seen a significant absorption of our portfolio. [In] the last two years I’ve absorbed positively over 225,000 SF. In a time when the market is negative or [has] no absorption, I’ve already had 200,000 SF in six-months this year. That’s been our indicator that people are feeling better about coming into the market. We’re slowly but surely coming out of what I’ll call the era of profit-less prosperity and everyone is starting to feel a little better about that.
Thomas Powell: On the flex space, light industrial, we’ve just recently financed for outside market people to buy those. They’ve repositioned the asset and filled up with tenants.
Kurt Goebel: We’ve seen an increase over the last year as far as the volume of due diligence requests that are coming in and a lot of those are coming in through the bank. One encouraging sign from us is a lot less of those are foreclosures. A lot of those are just regular refinance or new finance deals, they’re not foreclosures, which is all [we’ve seen] for a couple of years.
How confident are you in this recovery?
Scott Voltz: My clients are really worried about how fragile this recovery may be. They’re wondering whether it’s related to all the quantitative easing in the money that’s given into real estate and investments right now, or is this a real recovery that’s going to end up bringing up the real estate market. There is some concern about the sustainability of what’s happening now.
Mixer: Interest rates are on everyone’s radar because they affect evaluations which affect prices that folks can buy or pay for commercial real estate. Depending on which side of the fence you’re looking on, there could be a bubble coming that might level off or we could be ranking up for a while. It’s something we talk about constantly and we’re trying to put our finger on the pulse.
Jeff Ehret: One thing that would temper the boom going forward, if you think back historically on the booms we’ve had, so much has been because of investments on the Strip. The rate of investment on the Strip, compared to what it was over the last decade and going back to the 90’s, won’t remotely resemble what it has been. That portion of investment, which would fuel a lot of commercial development off Strip, won’t be there, or not to the extent that it was.
Are banks becoming more generous with lending on commercial real estate projects?
Powell: Both sets of balance sheets have cleaned up a little bit and the banks have gotten a lot of their assets off the books. They’re able to lend a little bit more on the real estate side, but they need yield. As rates start pushing up they’re going to get compressed on their margins that they have to make. They have short-term loans and short-term deposits out, but as those deposits start costing them more money, both from the Fed and the depositors, they’re going to have to find loans to make.
Lance Bradford: Appraisals were an issue during the five-year period because banks wanted to loan money, but they couldn’t get evaluation from an appraisal that would meet the requirement of the developer or the borrower. The appraisers were stuck because of the influx of the foreclosures and the problems of the recession. They were stuck with a mix bringing down the prices of a standard deal and you couldn’t get an appraisal to get the monies you needed from the bank. That’s changing now because the appraisals are getting better and a lot more of that foreclosure activity has flushed out of the commercial sector. You’re starting to see better appraisals that can get deals done.
Voltz: The appraisals are a reflection of the market. You say better appraisals, but I think the appraisals were already great. There was just a dichotomy between reality and expectations on a lot of the lenders parts. I work with more of the Class “B” and “C” type of [deals] with the smaller lender and the “mom and pop” type of owners. There’s still difficulty getting money for those people. The SBA 504 program has been a disaster over the last several months and that’s really hurt a lot of people. The regulators are still controlling the banks and we have a lot of small community banks that are zombie banks. I call them the walking dead because they can’t make a loan. Their balance sheets are not good enough yet. They’re being forced into mergers and that’s having a chilling effect on what happens below the surface.
Mason Gorda: The one thing that I’m seeing now is a tremendous amount of private money looking for places to land. There’s a great deal of pressure on us to find them quality projects to invest in. It’s the first time in years I’ve been in the position where the banks, or the private money, has put pressure on us to help them find projects.
What markets are strongest right now?
Bradford: We’ve seen significant increase in absorption in the last 6-12 months in professional office space, especially in the medical office space. Besides the value benefit that Mike [Mixer] talked about earlier, particularly in the markets, there are some really interesting things happening that specifically help Las Vegas; one being the medical industry and what’s happened with Obamacare. There are a lot of situations with accountable care organizations (ACO’s) which are increasing the need for space to deal with the 33 million patients that are coming forward. These ACO groupings are starting to reposition how doctors work together, which is helping the medical office space significantly. Even on the sales side, there’s not a lot of opportunity in medical office for good purchases. We get calls here, probably once a month, from new buyers looking at some of our office buildings and for four-and-a-half years we didn’t get one call, so the Obamacare is helping a lot. The second issue is the increase in income taxes. When you see what happened federally and, on top of that, California had a 30 percent increase in their tax rates. You’re going to see a significant flow of people moving from Southern California to Las Vegas again.
Kevin Burke: We’re seeing some legs in the senior care market, whether it’s in assisted living, skilled care or senior housing. Nevada is a prime state for that continued growth in the senior market, because there’s no question with the whole onslaught, it’s called the Silver Tsunami, of all the baby boomers retiring. [They] have to go somewhere, we have a great valley to offer. From housing, low taxes and great weather, we’re right back to where we were 10 years ago making that claim. When the housing started to really take off it was a hard to attract some of the seniors and that’s starting to come back. We’re seeing that in our market.
Ehret: Timeshares are definitely coming back near and off the Strip.
Mixer: We’re starting to see some resort tourism growth. There are arenas and new hotels planned and high-end Strip retail projects that have been built or are being built.
What indicators are there that the market is getting stronger?
Gregory Blackburn: A year or two ago it was [local] businesses downsizing and moving to cheaper rent and smaller buildings. Any commercial growth we had on numbers wasn’t growth, it was downsize at best. We’re now seeing it the other way around [with] companies coming in from out of town, ground-up buildings and also change of occupancy to industrial or a type of unique industrial or manufacturing. All throughout the valley we’re seeing that the trend is up. The residential market is also an indicator that the economy is good. We had a false benefit with all the vacant lots that were finished where all the infrastructures end. It was quick, easy money and no long term investment on the development. Those are almost gone now. We had a bubble, residential is down in some areas, but land development, grading and infrastructure is considerably up. Throughout the valley, one end to the other is the same.