While some sectors of Southern Nevada’s commercial real estate market are still recovering from the Great Recession, others have thrived. The warehouse/distribution sector has shown such strong demand over the past three years that vacancy in that sector is now just 3.2 percent. This has stimulated new speculative construction on a level not seen in Southern Nevada since the early 2000s. The multifamily (i.e. apartment) market is also experiencing an expansion, again brought on by five years of strong demand and low vacancy rates. The hospitality market, on the other hand, is not so much expanding, but reinventing itself. In the past year, two resort projects have been purchased for demolition and redevelopment, and most resorts in Las Vegas are expanding their non-gaming attractions.
“New developments in industrial, multifamily and hospitality real estate are driving the recovery in the construction industry, which has long been an important employment sector in Southern Nevada,” said John Stater, the research manager of Colliers International’s Las Vegas office.
With warehouse/distribution product leading the way, Southern Nevada’s industrial market picked up steam in the second quarter of 2015. The industrial market posted almost 2 million square feet of net absorption, comparable to the pre-boom period of 2004-2005. Industrial vacancy is now 6.6 percent overall, down from 9.5 percent one year ago. By the end of 2015, we believe that Southern Nevada’s industrial market will be 1.7 million square feet larger, with an overall vacancy rate of 6 to 7 percent and asking rates nearing 60 cents per square foot. As difficult as it was to come to terms with the massive negative net absorption during the early years of the Great Recession, coming to terms with the sudden onset of strong positive net absorption is equally as tough. Many members of the commercial real estate community were taken by surprise by the Great Recession and now tend to shy away from being too positive. The question before us now is the sustainability of industrial growth.
The hospitality market has seen room inventory shrink over the course of 2015, and room occupancy rise, to 86.9 percent in the second quarter of 2015, according to the Las Vegas Convention and Visitors Authority (LVCVA). In addition, according to the LVCVA, the average daily rate increased to $121.49, which boosted RevPAR (revenue per available room) to $105.51. Hospitality sales in Southern Nevada at mid-year 2015 stood at 5,387 units sold, with a total sales volume of $685 million and a price per unit of $127,000.
“Reinvention is nothing new for Las Vegas, with the resorts of the 1950s and 1960s giving way to the themed resorts of the 1980s and 1990s, and now to entertainment-driven, often upscale resorts in the 2010s,” said Mike Mixer, executive vice president of Colliers International – Las Vegas.
Southern Nevada’s multifamily market has seen vacancy decline for several years. In the first quarter of 2015 – the most recent quarter of data available – commercial real estate research firm REIS indicates that multifamily vacancy in Southern Nevada is 5.1 percent, down from 5.7 percent one year ago. Rents continue to rise, but are still affordable. A new apartment’s monthly rent is lower than a mortgage payment on a new home, and only about 1 percent higher than the mortgage payment on a resale in Southern Nevada (assuming median home prices and a 30-year mortgage at 3.92 percent interest). More importantly, the barrier to entry – the difference between first and last month’s security deposit and the down payment on a home – makes renting a very attractive option to most Southern Nevadans, especially considering the financial struggles people have endured over the past decade.
Southern Nevada’s professional and medical office markets, in addition to other sectors of the industrial market, have experienced a slower recovery since the Great Recession. For the office markets, this slow recovery is partially attributable to the Internet and its expanding role in business. Cloud computing and the ability to work from home or on one’s mobile device has helped shave off the amount of office space companies require per worker, and thus has decreased demand. The professional office market ended the second quarter of 2015 with 18.5 percent vacancy and an overall average asking rental rate of $1.91 per square foot on a full service gross basis. One year ago, professional office vacancy was 19.1 percent, and the overall average asking rental rate was $1.87 per square foot. Average asking rental rates for professional office have hovered around $1.88 per square foot for the past three years, making the increase in the second quarter notable.
For medical office buildings, the transition being experienced by the health care industry is translating into sluggish demand for existing medical spaces, as independent doctors are replaced by medical groups, and some medical operations move from office space into retail projects. Medical office space in Southern Nevada had a vacancy rate of 17.4 percent, slightly lower than the 17.8 percent vacancy rate registered one year ago. Asking rates remained flat, at $2.15 per square foot on a full service gross basis. We think that if health care employment continues to increase in 2015, medical office vacancy will continue to decrease as well.
The retail market saw early recovery and a return to the normal business cycle. In 2014, demand for retail flagged for a few quarters, though that demand now appears to once again be on the rise. Retail vacancy remains higher than one would expect in a healthy market, though, and competition from online retail outlets may be among the culprits. Retail vacancy stood at 9.7 percent in the second quarter of 2015, a .1 percent increase from one year ago, but down from one quarter ago. Asking rents are rising and were $1.28 per square foot on a triple net basis in the second quarter of 2015, compared with $1.26 per square foot one year ago. Increased taxable retail sales and retail employment suggests that net absorption will remain positive. We think the market will end 2015 with net absorption in the range of 500,000 square feet, with vacancy approximately 9.4 percent.
The land market is again getting attention from developers and inventors, but land sales are slower in the first half of 2015 than in the past three years. This slowdown in sales is most likely due to the increase in asking prices, as land owners feel they have weathered the tough economic storm and are in no hurry to sell their properties, especially with the expected increase in commercial and residential development in Southern Nevada. In 2015 thus far, land sales volume totaled $262.1 million, with 1,224 acres sold at an average price of $4.92 per square foot.
