Commercial Real Estate Market Posts Strong Start to 2018
Colliers International – Las Vegas Releases 1st Quarter Report
Southern Nevada’s commercial real estate market posted strong demand in the first quarter of 2018, with the professional office and medical office markets showing notable improvement.
Southern Nevada’s office market got off to a good start in 2018 with 182,070 square feet of net absorption. This extended the office market’s recovery – or perhaps we should start calling it an expansion – into a thirteenth straight quarter. Forward supply of office space jumped in the third quarter of 2017, and office inventory expansion should heat up next quarter. We think Southern Nevada will see approximately 600,000 square feet completed over the remainder of 2018. Build-to-suits make up 371,851 square feet of that total, so net absorption should be strong by year’s end, and we think vacancy will fall below 15 percent.
“After three years of positive net absorption, Southern Nevada’s office market has never been more ready for inventory expansion,” said John Stater, Research Manager of Colliers International’s Las Vegas office.
Southern Nevada’s medical office market followed up a strong 2017 with a solid first quarter in 2018. Net absorption was 108,228 square feet, an improvement over net absorption in the first quarter of 2017, though not the highest net absorption recorded during the current recovery period. We think medical office vacancy will decrease to near 10 percent by the end of 2018, just a bit higher than the average 8.6 percent vacancy in the market prior to the Great Recession.
Mike Mixer, Executive Managing Director for Colliers International Las Vegas said, “After a tumultuous run during the post-Great Recession years, Southern Nevada’s medical office market has made rapid strides over the past two years.”
After a small hiccup in the third quarter of 2017, Southern Nevada’s multifamily market got back down to business. Net absorption improved dramatically in the fourth quarter of 2017 compared to the third quarter of 2017, bringing vacancy down to 3 percent and boosting the average rental rates to over $1,000. Two factors should keep the multifamily market healthy over the next few years, population and home prices. While Southern Nevada’s population is not growing as quickly as it did a decade ago, it is still growing and is predicted to add over 4,500 rental households per year over the next five years. This growth in rental households is partially because apartment rents remain less expensive than monthly payments for new and resale homes, and the barrier of entry for apartments is substantially lower than for homes.
The first quarter of 2018 saw industrial vacancy increase to 5.5 percent as completions increased to 2.4 million square feet while net absorption decreased to (a still strong) 832,583 square feet. After a boisterous 2017, the lower net absorption experienced in the first quarter of 2018 might come as a shock, especially as it came with a post-recession record level of new completions. This is not necessarily the beginning of the end, as a surplus of vacant industrial space represents an opportunity for businesses the want to establish themselves in Southern Nevada on a short timeline. That being said, demand for industrial space must increase to keep pace with new supply entering the market in 2018 to keep vacancy rates from rising.
After three quarters of strong net absorption, Southern Nevada’s retail market experienced negative 25,803 square feet of net absorption in the first quarter of 2018. Net absorption often decreases when new completions are light, and new completions totaled only 18,237 square feet this quarter. Southern Nevada’s retail market continued to feel the impact of two long-term trends, the continued impact of e-commerce on brick-and-mortar retail (a national trend) and the demographic trend of people and wealth moving from the east side to the west side of the Valley. The overall retail vacancy rate and asking rental rate have shown little movement either way over the past five quarters, and we think this trend will continue in 2018. Vacancy might be lower at the end of 2018 than it is now, but the continued closure of large anchor stores in the Valley will act as a major head wind to lowering vacancy.
Southern Nevada’s hospitality sector has struggled over the past year with decreasing visitor volume and in recent months with decreasing gaming revenue. Despite these problems, sales of hospitality properties have rebounded since the second and third quarters of 2017, with four major properties sold during the fourth quarter of 2017 and first quarter of 2018. Aside from new property development, Southern Nevada is slated for $1.4 billion in property remodels and renovations over the next two years, including Park MGM, a rebrand and remodel of the Monte Carlo Resort & Casino and Palace Station Hotel & Casino. Conference center and convention center construction and expansions total almost $2 billion and include the expansion of the Las Vegas Convention Center, the new Caesars Forum convention center and the expansion of the MGM Grand conference center. Non-gaming developments slated for the Valley over the next three years include Area 15, a 146,000 square foot recreation attraction, Las Vegas Ballpark in Summerlin, Las Vegas Stadium, which will host the NFL Las Vegas Raiders, the All Net Resort & Arena, which will host the WNBA Las Vegas Aces, Madison Square Garden’s Sphere Arena and an expansion of the Showcase Mall on the Las Vegas “Strip”.
The general trend for land sales has been downward since 2014, with 2016 a notable exception thanks to large parcel sales occurring at Apex. Based on the land sales recorded in the first quarter of 2018, this year might reverse that trend. A rebound in land sales seemed likely in consideration of the high level of commercial, residential and industrial construction taking place in the Valley over the past two years. Every project that is constructed takes vacant land off the market, and more importantly, takes vacant land out of a developer’s inventory. If developers plan to keep on developing, they need to buy land on which to do it.
The full first quarter report of 2018 can be downloaded at: https://www2.colliers.com/en/research/las-vegas/2018-Q1-Las-Vegas-Market-Research-Report