Overall, commercial real estate (CRE) in Nevada has been seeing an uptick from the recession. However, some markets are recovering more quickly than others and there are still many challenges the industry must face moving forward. Recently, CRE experts met at the Las Vegas offices of City National Bank to discuss the changes, challenges and opportunities, facing the industry in Nevada.
Connie Brennan, publisher and CEO 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.
What are some challenges facing the industry?
Chris Emanuel: The biggest challenge is maintaining the velocity that we have right now. There’s great positive momentum. There will be that pivot where we start focusing more on redeveloping rather than just the “buy land, build, lease and sell.” That will be a challenge, but I think all of us can meet that.
Michael Newman: On a macro level, there is uncertainty that exists about what’s going to happen in 2018, what’s going to happen to the national economy and how that’s going to filter down to the local economies is crucial. Most economists agree there’s more than a 50 percent chance we’re going to see some kind of adjustment in 2018. That uncertainty may be causing a lot of investors to pause a little bit on acquisitions and investment locally.
Mike Montandon: With the BLM restricting what becomes available, there is an absolute lack of available land. The big developers who would all like to build a 300,000 square foot development are just scratching for a piece of land to do so.
Richard Truesdell: We have a shortage of labor here for construction; we see it in every project we’re involved with. Just getting people to bid half the time has become a greater hurdle, but tenant demands are still there.
How is each market segment faring?
Emanuel: We need to thank retail because it led us out of the recession. The consumer always needs to consume. We’ve had a good launch with Natural Grocers in the market and they’re going to continue opening stores. That’s the grocery thing that the Internet can’t change, people going and shopping. Hopefully the building departments don’t stand in our way with shopping center REAs (Reciprocal Easement Agreements) from continuing to give what the consumer wants. That can be a challenge in redeveloping some locations in retail. Overall, retail is strong.
Daniel Adamson: Part of it is recovering. From the tenants that are expanding, you look at a heat map and there’s 10 or 12 really hot spots, then a block away, not. So it’s the hot spots and the not spots all over town, which is pretty incredible. I’ve seen site plans and know that retailers are looking. There’s probably eight to 10 grocery-anchored stores on the drawing boards now to come out of the ground. It feels like we’re getting back to where we were or close to it, so that’s game on again. Maybe it’s going to take a couple years to get there, but it’s encouraging.
Brendan Keating: All real estate is so specific to which corner or which street you’re on. In the retail business, we’re seeing rents at or above peak pricing. We’ve done some deals at Canyon Point that were $4.00 a square foot. Those prices haven’t been around for a while. With new construction, the best pads are getting $3.50 or $4.00 [per square foot], so we’re definitely seeing some strong pricing. It feels very healthy. I think of everything as supply and demand and there’s new supply coming on where it needs to be.
Carol Cline-Ong: In the retail arena for the smaller units, say 2,000 square feet, we are seeing some concerns with some people that are not making it just recently. Going into 2018, what’s happening, are we going to see an adjustment? The big box is great, but with the smaller mom-and-pops, we have some concerns.
Adamson: I don’t think we see as much leasing activity. We’ve seen it dwindle. We’ve seen some impact with the Internet and Amazon.
Mike Mixer: On the other side of the coin is the resort corridor which is seeing a robust retail experience. We’re seeing Wynn expand his retail offerings. The Linq, obviously, has gone through some changing but it’s very successful on the Strip. We’re seeing a large number of investment groups coming in to buy resort corridor retail assets. We’re on the map as a destination place like Beverly Hills or New York City to come to and shop.
Montandon: At ICSC (International Council of Shopping Centers) last year, I saw a list of the top grossing sales per square foot retail centers in the world, and I think four of the top 10 were in Vegas. It was really quite shocking.
Truesdell: Industrial has spun off residential in some of the markets. The pressure on that is up in North Las Vegas. The Southwest [area of Las Vegas] is in the CMA (comparative market analysis). The county desires to change the CMA a little bit. That affects everybody. The retail in the CMAs have already driven the prices up there, which should have been industrial.
Newman: I’ve heard people voice skepticism about the strength of the big box industrial market going forward because there has been so much of it delivered and there’s so much under construction right now. I’m not as concerned by it because I think what’s driving that is a change in strategy in the supply chain from the large regionally-located million square-foot distribution hubs to now an intermediate facility a couple hundred thousand square feet closer to a population. Then in some locations like in Southern California, you got people buying obsolete infill buildings and using those for last mile distribution.
Michael Dunn: The thing that strikes me with [Apex] is you take a look at the Inland Empire which is all a direct supply line from the ports of LA. Apex is closer than the Inland Empire to the ports in Long Beach and LA to service it. I don’t think we should preclude that the industrial market will flow out to Apex. Maybe that’s a positive thing.
Larry Singer: I wouldn’t call the office market particularly healthy, but I think it’s good. We’re seeing tenants moving around. The tenants have gone from Class B to Class A spaces to take advantage of lower rental rates to actually needing to relocate because their space is tired and they want to expand. A lot of them are utilizing space more efficiently. It allows them to spend more on finish than on rent. I’d like to see more product coming online. My issue is that lenders and investors really aren’t taking serious looks at Southern Nevada at this time. They shied away from our market. As a result, we can’t get any traction to build new office buildings. We’re running out of office space, particularly large box.
Dunn: Businesses still have to operate. Overheads, outside of employee costs, is your second largest cost. So what are they doing? They’re getting denser which puts pressure on parking requirements. The T.I. (tenant improvement) costs are challenging. The financing is challenging. From the standpoint of these landlords, it’s a lot of pressure on them financially. [In regards to] investors coming to the market, diversity is part of [the issue] – the endless conversations about our education system, taxes and a whole variety of things. They’re looking at things and scrutinizing.
Mixer: At 17 percent vacancy, the office segment of the market is the last to recover. It’s the last product type to see benefits from the improvement in the economy.
Bret Davis: It’s not 17 percent across the market. It’s 30, 40, 50 percent on East Flamingo and East Sahara, the older parts which are arguably more obsolete. We’re coming across more tenants competing for the same space. That’s really becoming more of a problem in the Summerlin area or in the high desirable areas.
Dunn: With office product, location plays a big role. I’m not quite sure where we’re going to push out to. Land values are up $15 or more a foot, which means you’ve got to go vertical. Going vertical, you’ve got to get into a different type of lender and that lender is going to require a lot of pre-leasing. You’re going to have to obtain 50 percent pre-leasing to come out of the ground. We have never, in my 30 years here, been a big pre-leasing market.
Emanuel: I’m really bullish on Class B and C office. We have a very small Class A market here. Sometimes we need to not confuse a nice Class B as Class A. It’s not. We’re coming off dollar per square foot rents. Those rates are starting to creep up and eventually the tenants will have to pay what it takes to build new. It will help when the banks are lending on that.
How does lending affect this industry?
Keating: It’s getting close to where developers would want to start building, but it’s all driven by the lenders. If the lenders will lend it, people will build it. In the last cycle, we saw that. Lenders will drive this cycle, not the borrowers. Borrowers are greedy enough that they’ll take whatever the lenders give. If the lenders will do it, it will drive new construction.
Bruce Ford: Speaking as a banker, it’s not as easy as a few years ago. Eighteen banks failed [during the recession]. That’s a concern if you’re a banker. The regulation burden has increased on bankers. We’re still typical bankers and we do prefer owner-occupied. The regulations have changed to almost force that.
Keating: And to that regulation, CMBS (commercial mortgage-backed securities) debt made up 20 percent of the debt last year. In December, they made a rule, now called risk retention, where the originator of this debt no longer gets to pass the hot potato down the line and can sell out of their position. They have to own 5 percent of the debt that they’re originating. It’s just like if you sold a building and you had to own 5 percent of it. Not only do you have to hold back 5 percent of it, you have to own it until 80 percent of that pool of mortgage bonds is paid off. So you have a non-liquid asset. Before you could package it, sell it on and have no risk.
Dunn: These lenders are not loaning 70 percent loan-to-value on a conventional basis. Typically with conventional, it’s tough to get above 60 [percent] with them. You have more skin in the game and the banks have more skin in the game if they go the bond route. It’s a natural knee jerk reaction to what we went through and probably is appropriate because risk got really discounted on everything.
Do you have any staffing issues?
Mixer: It’s a tight-knit industry. It’s not super deep in terms of talent, so we all know each other and, by and large, we’re respectful to each other.
Cline-Ong: I’m glad you brought that up because I believe we’ve gotten back to, in the brokerage community and property management arena, that it’s okay to pick up the phone and reach across the aisle of our competitors and have a conversation. They can be real and they can also be transparent. That’s important because I care what you have to say. I think that makes us, as an industry, more relevant for the investors that are coming into this community.
Davis: Our industry has a very high barrier to entry just because of the commission structure. Somebody gets out of college and they can go work for a bank, law firm or even parking cars and get a salary of $40,000 to $60,000. Then you walk into a brokerage and we say, “we’ll give you a computer and a phone, and by the way, whatever you go earn is what you’re going to get paid.” Unless you have an “in” through a family member of somebody you know, it’s very hard to just walk in and say, “Hey, I want to be a broker.”
Emanuel: We didn’t want to be the lily pad brokerage where people are jumping from lily pad to lily pad. We try to do it organically with recruiting. We have internship programs with multiple universities including the University of Nevada, Las Vegas. I started with a computer and a phone and the world just opened up to me, so I’m going to try to give that opportunity to more and more people and try to deliver them great product and service and mentorship.
Dunn: It puts more pressure on the management of various firms to stay in touch with your people and be able to monitor if they’re happy. What are their frustrations? Why do they think the grass is greener with any number of the good shops we have in town? Some people just need a change.
How does cre play a role in economic development?
Dunn: We used to be a low cost alternative to California, Arizona and surrounding states. The cost of living is increasing, especially from a tenancy standpoint. Labor costs and construction costs are all much higher than they should be compared to surrounding states outside of California. Combine that with our education system here, we’re not going to attract, outside of the gaming industry, large relocations. That’s problematic. Our land values have jumped right back to where they were at the peak. It’s a giant circle here between the labor, construction and land costs.
Davis: We’re just hoping Nevada maintains our current tax structure in the sense of the incentives. We’ve seen a lot of companies relocate from California to get away from the negative tax structure there. I hope we can continue the good thing we have going here. We’re seeing a rise in construction costs, which are negatively impacting tenants when it comes to T.I.s. Talking with contractors, there’s seem to be a shortage of really skilled labor. With the downturn, we lost so many people and I’m concerned with all these big projects they talk about on the Strip. If something really big takes off, there’s going to be a vacuum where all those workers are going to head to the Strip and it will raise T.I. costs even more.
Richard Truesdell: On the positive side, we have a legislature that’s been willing to spend money on bringing business here. From Faraday to Tesla in the North and several other companies, they are planning. That has pushed up industrial values.