LAS VEGAS (April 21, 2020) – It was all going so well. January and February numbers pointed to a continued strong economy in Southern Nevada, and most commercial real estate measures were positive as well. Then came March and the business closures due to the COVID-19 pandemic. These measures will definitely have a negative impact on the national and local economies. For this reason, we are in the unenviable position of writing a report with relatively sunny numbers that have virtually no predictive power for economic numbers moving forward in 2020.
E-commerce and its hunger for warehouse/distribution space marched on in the first quarter of 2020, posting strong demand as well as stimulating the construction of new inventory. Record levels of new development have provided tenants with an ample supply of speculative warehouse/distribution product to choose from.
The current pandemic and the disruptions and changes to the economy that have come with it could either stimulate demand for this product, as e-commerce emerges stronger post-pandemic, or dampen demand due to supply chain disruptions.
Aside from the warehouse/distribution sector, other types of industrial products in Southern Nevada are experiencing more demand than supply and might benefit from additions to inventory. As things stand, we think industrial vacancy will continue to increase in 2020 due to continued speculative development and disruptions caused by the COVID-19 pandemic. Small business closures are possible in the quarters ahead and would primarily impact the non-warehouse/distribution sector of the market.
“The industrial market got off to a good start in the first quarter of 2020, but clearly there are headwinds ahead,” remarked John Stater, the research manager of Colliers International’s Las Vegas office.
Southern Nevada’s land market continued to see strong sales activity in the first quarter of 2020, improving on its performance in the first quarter of 2019 in every measure except price per square foot. While COVID-19 dominates the headlines and threatens the economic health of the United States in general, and Southern Nevada in particular in the near term, the land market operates on the long term.
If the impact of the virus and the precautionary measures meant to fight it last through much of the year, the demand for land will likely suffer. Otherwise, land buyers will keep their eyes on the future, and demand for land will not be noticeably reduced beyond the middle of 2020.
Given all those headwinds affecting the retail market, one could be excused for not expecting the strong performance posted by Southern Nevada’s retail market in 2019. This strong performance continued into the first quarter of 2020, as demand for retail space continued to increase and vacancy fell to just 6.4 percent. Unfortunately, the first quarter of 2020 is probably an outlier for 2020 as a whole, as numerous retail outlets have been shuttered in Southern Nevada due to the COVID-19 pandemic.
It is very likely that we will see the temporary closures of small businesses become permanent as the COVID-19 business closures continue. At this point, we cannot know how severe the impact of the business closures will be, but it is a good bet that retail vacancy will increase in the second and third quarters of this year at a minimum.
The first quarter of 2020 offered a refreshing change for Southern Nevada’s office market, with demand for office space up from one year ago and vacancy decreasing to 12.1 percent. Making predictions of future performance is never easy due to potential x-factors emerging that disrupt markets, and COVID-19 was such an x-factor.
Hopefully, the impact on markets of the preventative measures being taken to slow this virus’ spread will be temporary, but at this point the full extent of the impact cannot be known. One potential result of expanded work-from-home schemes this year might be to further reduce the average footprint of office workers moving forward. We think office demand will be weak through the middle of 2020, with the potential to improve slightly in the fourth quarter.
After a healthy showing in 2019, Southern Nevada’s medical office market got a quick start to 2020. Vacancy decreased to 10.3 percent on improving demand, reversing signs of a slow-down in medical office demand. Disruptions in employment and the medical supply chain could dampen demand for medical office space in 2020. For now, we can report a strong first quarter, but that it is reasonable to expect a weak second and third quarter in terms of medical office demand.
January and February hospitality numbers were generally good, but the impact of travel restrictions that were enacted in late February on future visitation numbers is as yet unknown. It was a strong quarter for hospitality sales, with two major properties changing hands at a sales volume nearly equal to that for the entire year of 2019.
The suspension of operations at several resorts, coupled with travel restrictions and the cancellation and delay of many conventions and meetings, will impact the local tourist industry gravely. The longer these closures and cancellations continue, the larger the impact. The impact of these events on hospitality real estate is another thing entirely. Lower interest rates could entice prospective buyers to purchase properties, provided they believe there is a brighter future waiting beyond the current crisis.
The full report is available for download here: https://www2.colliers.com/en/Research/Las-Vegas/2020-Q1-Las-Vegas-LVQR-Market-Research-Report
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