LAS VEGAS (Jan. 28, 2021) – Southern Nevada’s economy took a major hit in 2020 with the closure of its retail and hospitality sectors. Prior to the Great Recession, Southern Nevada’s economy depended primarily on hospitality and construction.
The nature of the Great Recession and its housing collapse went a long way to knocking one pillar of the local economy, construction, out from under it. Fortunately, the hospitality sector roared back to life and helped the Valley continue to thrive. Now, pillar number two has been knocked out from under Southern Nevada’s economy, if only temporarily.
One element of the hospitality recovery is in progress, namely the re-opening of several properties. Two more elements must occur to kick Southern Nevada’s economic recovery into high gear – the return of nervous and pandemic-weary travelers to those re-opened properties, and the return of the Valley’s lucrative convention business.
Visitor volume remains low but is improving. 2021 should see the return of conventions to the Valley, though at what capacity and what attendance is yet unknown. We expect the recovery to continue in 2021 but are not betting on that recovery being swift.
The high expectations for the industrial market in 2020 were cast into doubt in March, when business closures were ordered due to COVID-19. Nine months later, some confusion still remains. Employment remains down year-over-year in most industries in Southern Nevada, including those industries most closely tied to industrial real estate, but net absorption remained strong in 2020 compared to earlier years, besting 2019’s net absorption, and coming in only 1 million square feet lower than the record net absorption set in 2017.
Strong net absorption for industrial product, however, does not tell the full story. Not including warehouse/distribution buildings, the industrial market saw 524,044 square feet of net absorption in 2020, compared to 1,144,649 square feet of net absorption in 2019. Warehouse/distribution buildings, on the other hand, saw net absorption increase from 3.7 million square feet in 2019 to almost six million square feet in 2020.
While the warehouse/distribution market doubled its demand, demand was halved in other product types. This corresponds to the way different industries have been impacted by business closures and the lack of tourism to Southern Nevada in 2020. Hopefully, the economy will re-open more fully in 2021, and these divisions will be erased.
This ultimately depends on government mandates and the willingness of people to follow them. Since people are difficult to predict, the rapidity of recovery for the industrial market as a whole, and for the industrial subtypes individually, is hard to know. We think that the industrial market will improve in 2021, even if we do not know the rapidity of that improvement.
When businesses were ordered closed in March, it appeared that brick-and-mortar retail was staring down the barrel of a loaded gun. By December, Southern Nevada retail had experienced only two-quarters of relatively mild negative net absorption, a negligible increase in vacancy and very stable asking rental rates suggests that there is more life in brick-and-mortar than most people thought even before the COVID-19 pandemic.
Restaurants continue to be the retailers most challenged by the government’s imposed business restrictions. We think the retail market will perform relatively well in 2021, possibly exceeding 2020’s performance, provided we suffer no new catastrophes and Southern Nevada’s hospitality market continues to improve and rehire the many people that lost their employment in 2020.
While land sales in 2020 were down from 2019, they were not down so severely as to suggest the pandemic and business closures had an impact on them. Sales in 2020 were roughly in line with sales in 2019 and were generally healthier than during the period from 2013 to 2017.
Development, especially of industrial buildings and residential units, continues at a strong pace, and should therefore continue to drive investment in land. We think 2021 will see improved sales over 2020, provided the economy cooperates.
It looks as though the worst is over for Southern Nevada’s hospitality sector, although that is not to say that tough times are not ahead. The industry has a significant amount of recovery ahead of it, and continued restrictions on the properties, especially in regard to dining will not make the recovery any easier.
The introduction of a vaccine is good news and will hopefully alleviate restrictions by mid-year 2021. One key to recovery, though, remains questionable – conventions. Convention attendees are important to mid-week visitation, and without them hospitality properties and their employees will continue to struggle.
We think the hospitality sector will continue to improve in 2021, though it is unlikely that it will have recovered completely by the end of that year. As the properties recover, interest by buyers in those properties will also recover.
With three-quarters of post-business closure activity under our belt, we can now report that yes, indeed, the office market is having a tough time. Net absorption has been negative for two quarters, and net absorption was negative for 2020 as a whole, the first year since 2011 that the market has suffered negative net absorption for the year. On the plus side, demand increased in the fourth quarter over the third, and thus might be on the path to positive net absorption in 2021.
In the early stages of the pandemic and business closures, many pointed to dramatic changes ahead for office space. While we will certainly see changes in 2021, especially for upscale, Class A office users that can afford higher rents, it remains to be seen whether other office users will change their needs dramatically.
Reports on productivity and employee satisfaction outside the office environment vary widely, and new information on COVID-19 and the existence of a vaccine are keeping the crystal ball hazy as to how office needs will actually change, rather than theoretically change. For now, we think demand for office space will improve in 2021, though negative net absorption may continue in the first half of the year.
The conventional wisdom in March that a major pandemic would be “good for business” for the healthcare sector was quickly proved wrong. Between March and April, 12,700 workers in the healthcare and social assistance industry lost their jobs. Fortunately, the reversal of business closures has brought people back to dentists, doctors and surgeons for treatment, and job losses since March now amount to only 2,500 jobs.
It took until the fourth quarter for net absorption of medical office space to turn negative, though net absorption had been trending down since the first quarter of 2020. If healthcare operations can remain open, the net absorption trend should begin to reverse itself in early 2021.
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