Las Vegas – Southern Nevada’s warehouse/distribution properties continued to post impressive results in the third quarter of 2015, but other industrial segments showed strong demand as well. Vacancy in the warehouse/distribution sector is now a very low 3.1 percent, which continued to stimulate new industrial development; more than 8 million square feet of new industrial projects are now in the development pipeline in Southern Nevada. Vacancy is also very low in the multifamily market, also stimulating new developments. Over the next 12 months, more than 1,600 multifamily units should be completed in Southern Nevada, all of them near the 215 Beltway, spreading from Henderson to Summerlin.
“While the Valley’s hospitality industry recovered over the past three years, the construction industry, another major pillar of the local economy, remained stuck in neutral. That situation has changed, and the construction sector is now posting impressive job gains,” said John Stater, research manager of Colliers International – Las Vegas.
Southern Nevada’s industrial market saw more diversified demand this quarter in its 1.77 million square feet of net absorption. While 54 percent of this net absorption was in warehouse/distribution properties, a notable amount of net absorption occurred in light distribution and light industrial properties. Almost 1 million square feet of industrial product was completed this quarter, all of it warehouse/distribution. Total industrial vacancy is now at 5.8 percent, which we consider normalized vacancy for Southern Nevada. Asking rental rates increased to $0.61 per square foot (psf) on a triple net (NNN) basis.
On the hospitality side, visitor volume at this point in 2015 is slightly ahead of where it was in 2014, putting Southern Nevada on track to have hosted more than 40 million people by the end of the year. Room occupancy continued to be strong in the third quarter, but gaming revenue was down slightly from this point last year, an unwelcome sign given that gaming revenue is still well below peak levels.
Mike Mixer, executive managing director of Colliers International – Las Vegas, said, “Southern Nevada’s hospitality market continues to reinvent and renew itself, adding non-gaming attractions and venues to its already stellar lineup of resort hotels.”
Southern Nevada’s multifamily market is now out of the recovery phase and into the expansion phase. Development has been close to nil for the past several years and demand has finally driven vacancy down to the point that new developments are inevitable. Over the next 24 months, as many as 5,500 new multifamily units may be added to the inventory, all of it on or near the I-215 Beltway, stretching from Henderson to Summerlin. With the passing of the Great Recession, it is likely that we have seen a shift in the balance of demand from single-family to multifamily residential units. Younger folks are now leaving college with more debt than past generations, and appear to be delaying marriage and childbearing, two key life events that move people from multi- to single-family residential. With people staying in multifamily longer, the need for a higher level of multifamily development will likely persist for the next decade.
Southern Nevada’s office market is still fighting headwinds caused by a conservative attitude towards expansion, a holdover from the recession years, and technological innovation that is cutting the amount of space required per office employee. Despite that, the office market does appear to have nearly returned to “normal,” if you define normal as the period before the Great Recession and the boom that immediately preceded it. Over the past three quarters, Southern Nevada has absorbed more than 1 million square feet of office space. Net absorption was negative in the fourth quarter of 2014, ending a five-quarter expansion. Hopefully, the market has at least two more quarters of positive net absorption in it, although weak demand in the fourth quarter of the year is not abnormal. Currently, Southern Nevada has 35.5 million square feet of occupied office space, approximately 700,000 more square feet than was occupied at the last peak in the fourth quarter of 2007. By this standard, 2015 marks the first solid year of recovery for the office market. We think the fourth quarter of 2015 will have weaker demand than the third quarter, but that we will end the year with vacancy lower than in 2014, with asking rates higher and rising.
While health care employment is on the rise, it does not always translate into more demand for medical office space. The majority of health care workers do not work in medical office buildings. Considering this, the positive net absorption in medical office space in 2015 is actually pretty good. It seems likely that medical employment, which is almost always growing and which only suffered a minor setback in the run-up to the implementation of the Affordable Care Act, will continue to grow over the next 12 months. This growth will probably be steady, so growth in medical office occupancy will likely be steady, as well.
“Medical office is a work horse, not a race horse,” Stater said.
The retail market is expanding once again, at the same rate as in 2012, though with more new construction. Net absorption has been positive for the last three quarters, and should remain positive for one or two more quarters. Taxable sales remain very strong in Southern Nevada, but those strong sales are not translating into employment gains, and demand for retail real estate is more closely tied to employment than taxable sales. Colliers International – Las Vegas believes the market will end 2015 with net absorption in the range of 500,000 square feet, with vacancy at approximately 9.4 percent.
Development continues to increase in Southern Nevada, especially the development of industrial and multifamily projects, as well as commercial projects in the southwest submarket. For the time being, this development appears to be “reality-based,” as opposed to the manic construction levels in the 2000s that preceded the Great Recession and Southern Nevada’s fall from grace. Industrial development is strong, but so is demand for industrial space. Likewise, multifamily development is following low vacancy rates that have been falling for several years. Commercial development is in limbo at the moment. While retail and office demand have been rising over the past three years, the rise has been slow and often uneven. Most new commercial development is slated for the southwest submarket, where much of the Valley’s multifamily construction is occurring. Again, this makes sense, and suggests that new development in Southern Nevada is more sustainable and better planned now than it was a decade ago. Land sales remain restrained, suggesting that developers have already pre-positioned themselves for development in the short term. As new projects are completed over the next 24 months, their appetite for land should increase.
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