LAS VEGAS – Considering what Southern Nevada has been through in 2020, the local economy is doing pretty well. The economy appears to have hit bottom in April and has been on the mend ever since. The Valley has a long way to go to get back to where it was in January and February of this year, and without a vibrant convention business, getting back to normal will be very difficult indeed.
Looking on the bright side, numerous new entertainment venues remain scheduled to open in Southern Nevada over the next two years and the industrial market continues to benefit from the shift to e-commerce. The Great Recession was supposed to be Southern Nevada’s swan song – we survived that, and we will survive this.
Southern Nevada’s industrial market is in a strange place. Warehouse/distribution product is experiencing high levels of demand and warehouse/distribution inventory is rapidly expanding. Other product types have been less in demand. The industrial market relies on retail spending for much of its tenancy. Whether it is tenants manufacturing products to sell to customers, or logistics companies storing and moving goods for retailers, if retail falters, demand for industrial space will be negatively impacted.
Some elements of the retail sector are beginning to see improvement, but others continue to struggle, and this could affect demand for industrial space moving forward. Note that “lower demand” does not mean negative demand. There is clearly demand in the market for industrial space, but it is not keeping pace with new supply in Southern Nevada. This could keep vacancy rates elevated through 2021, and at some point, might move rental rates lower for industrial product.
“This year was going to have its work cut out for it to match the big industrial investment sales recorded in 2018 and 2019, even without the numerous headwinds impacting the U.S. economy,” said John Stater, the research manager of Colliers International’s Las Vegas office. “As it is, sales in 2020 might match 2017, but will not hit the highs seen during the last two years.”
Southern Nevada’s medical office market has been challenged in 2020 but has held up well. Southern Nevada’s healthcare sector has experienced significant reductions in employment over the past few months. Despite these losses, the medical office market has put up positive numbers, absorbing over 164,000 square feet of space so far in 2020. If the worst is over for the healthcare sector, and employment improves from this point on, we should see stronger real estate numbers in the coming quarters and could see the medical office market come through 2020 relatively unscathed.
Land sales in Southern Nevada continued to slow down from the pace experienced in 2019. So far in 2020, a total of 2,741.8 acres was sold with a sales volume of $770.7 million at an average price of $6.45 per square foot. Sales in the third quarter was 377.2 acres with sales volume of $177.4 million. The difficulty in predicting economic growth beyond the business closures and the looming election have probably contributed to this slump, and thus could be alleviated in the fourth quarter of 2020 and 2021.
With data from July 2020 available from the Las Vegas Convention & Visitors Authority, we are getting a better idea of the challenging recovery faced by the Valley’s hospitality sector. Room occupancy, average daily rate (ADR) and revenue per available room (RevPAR) recovered from the astounding lows recorded in April and May 2020 but remain low.
The road ahead is a tough one for Southern Nevada’s hospitality sector. Although the properties that have re-opened so far have been successful enough to inspire additional openings, the lack of convention business for the foreseeable future must dampen expectations for a full recovery of the hospitality sector until 2022.
With the massive disruptions that brick-and-mortar retail have experienced in 2020, there was no doubt that retail real estate would suffer. The second quarter saw negative 74,874 square feet of net absorption after a very strong first quarter. The third has now followed with negative 69,020 square feet of net absorption.
Given the increases in retail taxable sales and employment over the past few months, it is likely that net absorption will improve over the next few quarters, even if it continues to be negative in the near term. We will probably have to wait until 2021 to see robust net absorption in the retail market.
March’s business closures and the reduction in economic activity it created has impacted the office market in the form of 13 percent vacancy and negative 230,000 square feet net absorption. The office sector saw an increase in jobs between the second and third quarters, but office employment remains lower than it was two quarters ago and is currently at about the same level seen in 2017.
As the job picture improves, demand for office space should improve along with it, although perhaps not at the rate we would have expected a year ago. The office market is sailing into significant headwinds due to pandemic-related restrictions and the increased possibility for employees to work from home. We think the office picture will improve in 2021, but it could take until 2022 for the market to make up the ground it has lost in 2020.
The full report is available for download here: https://www2.colliers.com/en/research/las-vegas/2020-q3-las-vegas-lvqr-market-research-report
About Colliers International
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Maddie Skains, MassMedia