Commercial Real Estate Spring 2011

8/3/2019 Commercial Real Estate Spring 2011

1/15

MARKETIQ

Las Vegas NV

CommercialRealEstate

April 2011

Commercial Real Estate - Las Vegas, NV

Putting Commercial Real Estate Trends in Context

ColdwellBankerP

remierRealty

SUMMARY

Commercial real estate, like residential real estate, has experienced a

precipitous decline in values. The decline is based on a combination of

weakened fundamentals in the face of excessive debt and a retreat from

values that became detached from fundamentals during the bubble pe-

riod.

Distressed properties, reflect weakened fundamentals and deleveraging,

leading prices downward.

Industrial buildings are approaching the same price-per-square foot that

they were near the beginning of the decade.

Many office sector businesses have downsized or gone out of business

and the existing demand seems to be coming from building users al-

ready in the market place.

Retail vacancies have yet to show any sign of moderation and absorp-

tion has largely been negative for an extended period.

Visitor volume, a key gauge of the health of the local economy, has re-

gained some footing although gaming revenues have yet to demon-

strate a perceivable recovery.

The office using employment sectors have been declining since 2007.

Retail sales do appear to be showing signs of bottoming out. We are

measuring year-over-year increases.

Vacant buildings, many of which are in grey shell, must be bought with

deep discounts as the lease-up period is going to be prolonged.

Like residential, commercial real estate values are being driven to dec-

ade lows. As a result, national reports are listing Las Vegas as one of the

best places to purchase real estate.

TABLE OF CONTENTS

I.

II.

III.

IV.

V.

VI.

VII

VIII

AUTHORS

Brian Krueger, Senior Vice Preside

Strategic Services

John McClelland, Vice President,

search

Ron Opfer CCIM, Director of Comcial Real Estate

CONTACT

Coldwell Banker Premier Rea

Strategic Services

Phone: 702-939-5128

Email: [email protected]

Web. www.cbvegas.com

8290 W. Sahara Ave, Suite 200

Las Vegas, NV 89117

Introduction

Sales and Pricing

Leasing

Distressed Real Estate

Economic Fundamentals

Risks, Benefits and Returns

Development

Sources and Disclaimer

See copyright and disclaimer in section VIII. Reflects Q4, 2010 data and Q1, 2011 data if available.


2/15

pril 2011 Coldwell Banker Premier Realty Market IQ

. Introduction

n 2010, we noted that commercial real estate, like resi-

dential real estate, had experienced a precipitous de-

line in values. This has continued into 2011. The decline

ontinues to be based on a combination of weakened

undamentals in the face of excessive debt and a retreatrom values that became detached from fundamentals

during the bubble period.

There have been some indicators that a bottom in trans-

ction volume has been achieved, however we state this

enuously as lending continues to be weak and fuel

prices, geopolitical strife and other issues could offset

our expectations.

We believe that it is far too premature to declare a bot-om in pricing. National economic fundamentals are in

n apparent but tenuous recovery. Local economic

rends are mixed. None of the important economic sta-

istics impart a lot of courage, hence, investors as bullish

s they are on obtaining assets, are cautious in develop-

ng their strategies.

Overall, we believe the economic trough represents a

reat opportunity to purchase assets for buyers with a

ong view of money. We cannot expect that everything

purchased in this era is a good deal. We find that sev-

eral projects built during the boom were poorly designed

or located. Conversely, we have viewed several assets

hat are a great opportunity. Greater due diligence is

necessary to formulate these conclusions and we hope

o provide some intelligence in this report.

n this report we discuss the three main property sec-

ors: industrial, office and retail. We examine pricing,

acancy rates and the underlying trends that affect

hese factors. In addition, we offer a broad-based viewof the marketplace from high-level influences to the

treet level.

I. Sale Prices and Transaction Volume

ales prices in the Las Vegas Valley continue to decline

nd transaction volume remains historically low but is

ncreasing. Distressed properties, reflecting weakened

undamentals and deleveraging continue to lead prices

downward.

Owners appear to be becoming more realistic. Weak

rents have implied that lower prices are necessary in

der to encourage a buyer to make an offer. Owners a

not harkening back to the days of 2006 and 2007 wh

they cite their belief in what a property is worth.

On the buyer side, some investors continue to seedistressed as the only operative word in a statemen

regarding a property. While psychologically more stim

lating, this attitude has often lead to an overlooking o

well priced performing properties and there are fund

investors acquiring performing assets in greater quan

ties both nationally and locally. There are some reaso

able equity sellers out there, yet we do believe that d

tressed purchases will remain the key component of

sales even if we see some economic stabilization. The

are simply too many distressed assets in the pipelineOur message is simply that strategies of buying only d

tressed assets may not be the only strategy.

For investors searching for distressed properties nati

wide, we know it has often been hard. We expect mo

investors to flock to Las Vegas simply because we do

have distressed assets.

Since pricing is being led by distressed sales, it is wor

noting that many of the bank owned properties are o

ten considered to be poorer examples of the Las Veg

Valleys commercial property stock. This also may be

contributing to sharp declines in prices. A sample of

properties with high occupancy will necessarily produ

a higher figure.

The majority of end-users, whom we consider high-v

buyers, have appeared to possess a willingness to pa

prices that exceed that of most investors. This is due

narrow criteria-matching, such as location, size, visib

et cetera. In addition, many owner-users have signifi-cantly reduced their occupancy costs by purchasing a

building, while jointly expecting that the property wi

appreciate in years to come. They attempt to acquire

property while it is available and are often in a better

position financially than they were before.

We have noted some, but proportionately low busine

expansion, mostly in the office market and often by l

firms.

I-1


3/15


Accounting firms and family doctors have also either

purchased buildings or in some cases leased larger

pace. Conversely, professional and business services

ppear to be continuing their contraction. Counts of ac-

ive business licenses continue to decline.

We still find little evidence that end-users are new arri-

als to the Las Vegas office market, rather there is ten-

nt and owner-user churning occurring within the Las

Vegas Valley. A large example of this is Zappos. It is wellnown that Zappos intends to occupy space downtown

but Zappos is vacating space in Henderson to do so. For

Zappos this is being done for several reasons including

ultural ones. For others, this movement is often done in

order to lower costs by finding cheaper equivalent space

or smaller spaces, since regional trade, retail sales and

employment has declined in the past several years.

We have noticed expansion interest by firms such as

Carl's Jr., Fresh and Easy, a large expanding firm in the

past couple of years, has recently applied the brakes.Recently, Winco Foods, a grocer, has purchased land in

order to enter the Las Vegas Market.

A. Industrial

The overall industrial sector is experiencing increased

acancies, diminished absorption, and downward pres-

ure on lease rates. This translates into a downward

rend in pricing.

Industrial buildings are approaching the same price-p

square foot that they were near the beginning of the

decade.

The construction industry and tourism industry were

hard in this recession, and much of the industrial de-

mand of the past was driven by these industries. Con

sumer spending and the service type businesses that

provided support services to these industries provide

the rest. When consumers don't demand goods, busnesses reduce their warehouse needs.

Investors have been slow to rush into this sector of c

mercial real estate. Industrial remains low on the pri

ity list for distressed fund managers. In addition, inv

tors are not comfortable that the Industrial sector ha

bottomed out. When they try to work up a pro-form

that makes sense, they take into account a longer ho

period and a lengthy ramp up period to reach stabiliz

tion. The result is a price that is much lower than wha

buildings are currently selling for.

There is, however, end user movement in this mar-

ket. Tenants that survived the recession thus far are

desperately working on reducing their occupancy

costs. As the five year leases approach their end, te

ants are looking to either buy or lease for much less t

what they were paying just years ago.

Source: Clark County, Coldwell Banker Premier Realty.Note 1: The trendline is meant to smooth out the volatility in the series due to the heterogeneous nature of realtyransactions and does not represent a forecast and merely shows the shape of the boom/decline.

Large buildings (100,000 sq.ft.+) are restricted from the price series as they are infrequently transacted and do

$0

$50

$100

$150

$200

$250

$300

$/Sq.f

t

Transactions $/Sq.ft $/Sq.ft Inflation Adjusted (1982 dollars)

Source: Clark County, Coldwell Banker Premier Realty.Note 1: The trendline is meant to smooth out the volatility in the series due to the heterogeneous nature of rtransactions and does not represent a forecast and merely shows the shape of the boom/decline.Large buildings (25,000 sq.ft.+) are restricted from the price series as they are infrequently transacted and d

mirror the most common types of office buildings within the Valley.

0

10

20

30

40

50

60

70

80

90

$0

$50

$100

$150

$200

$250

#oftransactio

ns

$/Sq.f

t

Transactions $/Sq.ft $/Sq.ft Inflation Adjusted (1982 dollars)

Figure 2. Office $/Sq.ft. & Number of TransactionsFigure 1. Industrial $/Sq.ft. & Number of Transactions


4/15


B. Office

The Office sector is one of the hardest hit sectors of

ommercial real estate in Las Vegas. Many office sector

businesses have downsized or gone out of business and

he existing demand seems to be coming from building

users already in the market place. Active businesses li-

enses are declining and unemployment remains ele-

ated. Absent a real demand for office space, the funda-

mentals in this sector will remain weak.

The office market began to crash as Las Vegas was peak-

ng in new product delivery. As a result, there are sev-

eral hundred thousand square feet of unfinished office

product. These buildings are the least popular for inves-

ors and distressed asset fund managers because they

equire a high capital investment in a property typehere is excess supply. It just doesn't make sense to fin-

sh a product only to add inventory to an office sector

where the prices have already fallen below construction

osts.

ike industrial, the current demand for office space is

oming from users already occupying buildings. So when

move is made, it is a lateral move that does not absorb

product. The end users are motivated by occupancy

osts savings and that can vary from business to busi-ness.

nvestors are attracted to already finished office build-

ngs and they are targeting a price roughly 50% to 60%

below construction costs for office product located in

reas where other office buildings exist. To make the

nvestment pro-formas work, they need to generate in-

ome soon as possible.

We expect the investors in this market to remain ex-

remely cautious until the office fundamentals begin toeverse their trends.

C. Retail

Retailers are struggling with consumer spending and de-

mand. In order to get the consumers to spend money,

etailers are having to cut their margins and offer more

discounts.

Taxable sales have dropped approximately 40 percen

from the peak and with unemployment at an all timehigh, the market for retail products are much smaller

than they were before.

All this translates into retailers not able to spend the

same amount of money on retail space, thus causing

downward pressure on lease rates and building val-

ues. Nearly all sectors of retail are affected, including

restaurants, enclosed malls, pads, and grocery ancho

centers. While the vacancy in the grocery anchored c

ters remain far better than other segments of this maket, the re-tenant rates are much lower than they we

before.

In retail, its all about consumer spending. Until the f

damentals of the economy improve thereby increasin

consumer demand, consumer spending, and consum

confidence, retail will continue to struggle and will co

tinue to make concessions to tenants to keep them in

place.

Sales of retail buildings have been sparse and very heerogeneous, so we have not constructed a price inde

for this sector. Figure 3 shows the differences betwee

prices realized during several of the bubble years to a

tual closing prices today.

The commercial market has mirrored the residential

market in several ways; prices on commercial buildin

also escalated to levels that can be considered a bub

Once realized, transaction volume declined.

-49%

-68%

-37%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%1/1/ 1900 1/ 2/1900 1/3/1900

9-2004 7-2005 3-2006

Prior Sale Date

Big Box Retail

Retail Pad

Retail Pad

Source: Clark County Assessor, Coldwell Banker Premier Realty.

Figure 3. Sample Differences from Prior Sale PricesRetai


5/15

67.1%

3.8%

18.1%

1.2%

1.2%

0.2%

2.4%

0.1%

2.2%

3.6%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Vacant

Dup/Tri/Quad

Apartments

Mobile/Manufactured

Industrial

Hotel/Motel/Casino

Professional

Golf Resort

Commercial/Retail

Other


At the same time, owners had either failed to realize

where the market was going (and their tenants) or were

n a state of denial about further, harsh declines in

prices. This occurred in the residential market in 2007,

which was a low-point in sales.

The residential market has largely capitulated to current

prices and possible further declines. This is the one area

where the commercial market still has to catch up. This

has been made more difficult by extend and pre-

end (giving borrowers more time to repay loans) and

he lack of mark-to-market. While specific accounting

nd banking regulatory policies may have a goal beyond

llowing the commercial market to clear, the result for

he local commercial market has been weak sales, large

disparities between bid/ask prices and indecisive market

participants.

Overall, the probability of further declines in pricing ex-

sts in each sector of the commercial market. We believe

his will yield opportunities for both end-users and inves-

ors.

Figure 4. 2010 Clark County Property Transfers by Type

Source: First American Title.


6/15


II. Leasing

A. Industrial

Net absorption continues to be negative in the industrial

property sector, registering declines in 10 of the past 11

quarters.

As a result of business shrinkage and recently delivered

pace, for-lease vacancy rates are at their highest point

n the time series. The rate, while slowing, continues toexpand.

Asking rents are not a reliable guide as to what effective

ents are since there are a lot of months of free rent of-

erings, low introductory rates and other incentives. We

have noted Industrial lease rates in the mid twenty cent

per foot (monthly,NNN) for light industrial and light dis-

ribution. A few have been observed in the $.50 to $.60

ange and in the rarest of cases up to $1.50 for flex

pace.

B. Office

n terms of vacant space, this segment has suffered the

most. This environment has produced an upside for ten-

nts, many of which have significantly lowered their

osts. Negative absorption continues but at somewhat

of a lower pace than before. We are hesitant to call this

trend since fundamentals have not yet pointed to-

wards a recovery.

For the Valley, Class A properties have had the highe

direct vacancy rate, followed by C and B with medica

offices fairing the best overall.

Office asking rents remain above $2.00 per-square-fo

on a full service gross (FSG) basis, however we have

noted lease rates between $0.85 and $1.50 on triple

and modified leases. We have also recorded introduc

tory rates as low as $0.25.

C. Retail

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-$1,500,000

-$1,000,000

-$500,000

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

Absorption Completions Vacancy

Source: Restrepo Consulting Group LLC. -$1,000,000

-$500,000

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000


0

2

4

6

8

1

1

-$600,000

-$400,000

-$200,000

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000


Source: Restrepo Consulting Group LLC.

Source: Restrepo Consulting Group LLC.

Figure 5. Industrial Absorption, Completions & Vacancy

Figure 6. Office Absorption, Completions & Vacancy

Figure 7. Anchored Retail Absorption, Completions & Vacan


7/15


Retail vacancies have yet to show any sign of modera-

ion and absorption has been negative for three of the

ast four quarters.

n the mid-2000s, retail vacancies hovered around very

ow levels, falling to a minimum of 2.7%. Even some of

he poorly located and nearly obsolete spaces were be-

ng absorbed. Builders naturally responded to this but

were ultimately caught by dwindling retail sales and

lowing population growth.

Observed lease rates have fallen to around $1.50 (NNN)

or neighborhood centers (usually supermarket an-

hored) and $1.00 to $1.59 for community centers.

As illustrated in figures 3 thru 5, net absorption has re-

ently been negative or extremely weak in each sectornd has largely been negative for an extended period.

This is where we can see the largest impact on valua-

ions and the struggle by investors to come up with a

eliable guide to where values should be. Buildings sold

with a cap rate are actually quite rare as recent sales

have had zero or few tenants.

ike the office and industrial sectors, the movement in

etail is mostly due to retail survivors looking to lower

occupancy costs. Most retail businesses have felt thepending decline and have already cut other ex-

penses. A few are taking advantage of the lower rates

nd expanding their Las Vegas presence, however, a

quick look at the active business licenses and the retail

ector employment show contraction in the retail sector.

Movement/relocation/expansion in the Las Vegas retail

ector is coming from the following businesses: tutor-

ng/education businesses, restaurant space, health and

beauty, pet care, tavern/bar, gas station/convenience

tores, and art/paintings. When asked what is drivinghe movement/relocation/expansion, most describe a

truggle that led to cutting cost of goods, labor, and now

occupancy. They describe doing more with less employ-

ees and discover that they can open one or two more

tores without adding more management.

The advantage of retail is that it benefits from uptick

consumer spending immediately. Restaurants are cu

rently experiencing improved spending, but, those im

provements are from 2000 level spending and have

much more growth ahead before the economy retur

to the robust days of the recent past.

Map 1. Vacant Office Space

Source: Costar, Coldwell Banker Premier Realty.


8/15


V. Distressed Real Estate

he search continues for distressed real estate. We

re seeing more of these transactions, though they are

till relatively difficult to obtain and many buildings con-

nue to be off the market. As we noted earlier, extend

nd pretend has also tended to be standard operating

rocedure.1

This has served to keep some assets out of

each to investors but we believe this condition is mod-

rating.

oan restructuring, or workouts have been popular in

ecent months as lenders have often been willing to do

nything except foreclose on an asset. Extending a loan

ertainly may be beneficial for some lenders rather than

aving to sell the property and take the hit now. Never-

heless, the economic recovery in the region looks like it beyond the viewable horizon. Ultimately, lenders will

nd up owning a large number of assets and significant

write-offs will occur. Notices of default continue to be

ery elevated and most will eventually come to market.

While perhaps holding up banks balance sheets, which

as significant repercussions within the economy, in or-

er for the commercial real estate market to begin cor-

ecting, a perceived bottom in pricing must be obtained.

he continued low transaction volume, combined with aarge variance in closed prices and the amount of bank

wned but un-marketed inventory, indicates a bottom

as yet to manifest.

nvestors hope that the charge offs accelerate and more

properties become marketable. Recent anecdotal ev

dence suggests that banks are re-evaluating their

assets more consistently with market observations a

this should help to generate transactions by incentiv

banks to liquidate.

Observers of the economy would also like to see the

linvestment (poorly allocated capital) of the past dec

work through the system. However, this depends on

multitude of factors including FDIC supervision, othe

regulations, accounting changes and individual bank

board of directors.

Map 2. Before & After - Lender Owned Commercial in the Las Vegas Valley

Q2, 2009 Q4, 2009

Source: Clark County, Coldwell Banker Premier.

1. An FDIC policy statement can be found at http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf. It states: As a general principle, examiners should not adversely classify or re-

quire the recognition of a partial charge-off on a performing commercial loan solely because the value of the underlying collateral has declined to an amount that is less than the loan bal-

ance.

0

10

20

30

40

50

60

70

80

90

100

Q1 Q2 Q3 Q4Industrial Office Retail

Source: Clark County, Ticor Title.

Figure 8. Notices of Default by Property Type2010

Q4, 2010


9/15


We have seen an increase in the amount of properties

held by lenders with 145 projects in Q2, 2009

approx. 2 million sq.ft.). In Q2, 2010, we found 249 pro-

ects held by banks (approx. 3 million sq.ft). By Q4 2010,

we found 252 properties totaling nearly 4 million square

eet.

While the Valleys commercial space is estimated to be

nearly 300 million square feet, having nearly one per-

ent of that space held by banks is very significant (and

even more significant in some building types). Similarly,

banks currently hold about 1.5 percent of the Valleys

housing stock and most people are keenly aware of the

oreclosure problem within the Valley.

Bank sales are on the increase, especially in office, which

has been a sector highly impacted by the recession. As aesult, many of these have been foreclosed on earlier in

he cycle and are currently being liquidated.

As a result of increasing sales by banks, pricing in the

overall market will tend to gravitate towards the prices

ccepted by banks. Traditional sellers will have to matchhe prices accepted by banks or have very prolonged

marketing times.

Today, there is increased pressure on banks to take ac-

ion. As recently as the beginning of 2010, there were

only a few comps out on the market and appraisers were

hard pressed to come up with values that truly reflected

he buyers mindset.

Added inventory is helping price discovery. Today, th

are comparable sales in nearly all asset categories, an

as a result, the appraisals are much more reflective o

the transactions in the marketplace. As such, the ba

are forced to deal with their distressed assets and ba

on the Notice of Defaults, a wave of commercial fore

sures are coming.

These bank owned sales will keep downward pressu

on the market and negatively affect absorption and v

cancies.

Soon, the end users will have absorbed most of the

properties they intend on absorbing, and the investo

will be the predominant buyers of commercial real e

tate. When this happens, the investment fundamen

will once again have a greater influence on commercreal estate values than the current wave of end user

chases.

A search for yield does appear to be pushing larger fu

into heavily distressed areas such as Las Vegas. Dis-

tressed assets have been difficult to find in several of

major markets. 3.5% 10-year treasuries and other low

yielding investments are necessarily causing interest

gravitate towards commercial real estate. We expect

see continued interest in some of the higher-quality tressed assets by larger investors. They may find that

they must take down smaller properties because tha

what is typically available. Some of this activity is like

to be in triple net investments.

Overall, given the level of non-performing properties

lender records, there is likely to be more opportunity

2011 than there was in 2010.

0

2

4

6

8

10

12

14

16

Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009 Q1, 2010 Q2, 2010 Q3, 2010 Q4, 2010

Industrial Office Retail

urce: Clark County. Coldwell Banker Premier Realty.

Figure 9. Sales of Commercial Buildings by Banks


10/15


V. Economic fundamentals driving commercial real es-

ate.

Obviously, the Las Vegas Valley is highly dependent on

ts core industry, gaming. But to what extent and how

does this affect commercial real estate?

Assane et al (2000), have found that approximately sixty

percent of the Valleys employment is either directly or

ndirectly related to the leisure and hospitality supersec-

or. This figure has likely changed but remains high nev-

ertheless.

Given this dependency, we monitor changes in gross

aming revenues, visitor volume, retail sales and several

other variables in order to inform us on the ultimate

health of the commercial property market.

After a harsh period of weakness in 2008 and 2009, visi-

or volume has been on the mend and has posted year-

over-year increases since September of 2009. However,

olume has not yet returned to pre-recession levels. Ho-

els, gaming floors and associated buildings that feed theaming and hospitality industry have added significant

apacity since the pre-recession highs. This has resulted

n lower occupancy and strains on gaming operators

whom have had to reduce room rates.

While visitor volume has regained some footing, gaming

evenues have not demonstrated the same shape of re-

overy. Next to actually getting visitors to Las Vegas, the

mount of gaming win by casinos is one of the single

most important factors for the area economy and ulti-mately for every sector of real estate.

Several year-over-year gains have been posted since

major 2008-2009 declines but some of these have befound to be anomalous. The February 2010 spike is

thought to be driven partially by the large amount of

Asian play during the Chinese New Year and the Supe

Bowl1. Table games have done extremely well in seve

months, yet we prefer to see gains in slot machine re

nue since it is more predictable and easier to budget

against. Until we see a lengthy increasing series, we

dont expect a lot of hiring or other investments by g

ing firms.

The decline in average room rates has appeared to h

despite added room inventory. We have observed se

eral year-over-year gains in occupancy, but not nearl

a level we can describe as healthy.

-15%

-10%

-5%

0%

5%

10%

15%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Jan-03

Jun-03

Nov-03

Apr-04

Sep-04

Feb-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep-09

Feb-10

Jul-10

Dec-10

Year-over-Year Visitor Volume

Source: Las Vegas Convention and Visitors Authority.

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

Jan-03

Jun-03

Nov-03

Apr-04

Sep-04

Feb-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep-09

Feb-10

Jul-10

Dec-10

Year-Over-Year Gaming Revenue

Figure 11. Clark County, NV Gaming Revenue

1. http://www.lvbusinesspress.com/articles/2010/04/19/opinion/columnists/schwartz/iq_35329737.txt2. http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aMSF1QSrT4Rk


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-03

Jun-03

Nov-03

Apr-04

Sep-04

Feb-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep-09

Feb-10

Jul-10

Dec-10

Year-over-Year Occupancy


Figure 10. Clark County, NV Visitor Volume

Figure 12. Clark County, NV Hotel Occupancy


11/15


A full recovery in commercial real estate is unlikely to be

isible until each of these main economic data series

ontinues upward long enough to establish a trend.

or industrial property, Las Vegas differs greatly from

he port markets like Los Angeles-Long Beach and Oak-

and. These are largely driven by containerized freight

olume, with Los Angeles being largely import driven.

as Vegas is linked to the Los Angeles market, occasion-

lly finding use as a spillover area for imported goods.

However, much of the demand for space in the Las Ve-as industrial market is driven by firms supporting the

eisure and hospitality industry, housing food & bever-

ge, linens and various other related goods along with

ght manufacturing for slot machines.

Warehouse demand is shown to be related to the Path

of Goods Movement (Mueller and Laposa, 1994) where

demand for warehouse space is correlated with the path

of goods.

as Vegas is also on the path of a major freight corridornd benefits from this. However, weakened consumer

demand for goods continues to affect the local market.

n addition, much of the industrial space was occupied

by construction and construction material supply firms

engaged in both residential and commercial develop-

ment. Our research indicates a closer correlation be-

ween residential construction and space usage than

does import-export activity or industrial production.

Following the housing decline and the subsequent co

pletion of large projects such as CityCenter, The Cosm

politan, the Hard Rock expansion and other major pr

jects, demand for contractors and materials has decli

significantly.

A rebound in visitor volume to Las Vegas, a return to

velopment and the addition or expansion of new ma

facturing firms is necessary for a rebound in industria

space demand. Increased imports would also be help

although it is difficult for Las Vegas to compete with t

Los Angeles market for warehouse space. Until we serespectable gains in these areas, we will expect a re-

bound in the price of industrial assets to be very tem

pered and distant.

Figure 13. Major Freight Corridors

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

#ofPermits

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2005 2006 2007 2008 2009 2010

OfficeUsingEmployment

Office Completions Office Using Employment

Source: Nevada Department of Workforce, Training and Rehabilitation, Restrepo Consulting Group LLC.

The industries information, financial activities, finance and insurance, credit intermediation, real estate renand leasing, professional and business services , management of companies, administrative support and wamanagement, telecommunications, administrative and support services, other support services are used to aproximate office using employment. We do recognize that there are some issues with this since all of the Nsectors have an office using component, however we believe these industries capture a substantial and infotive portion.

Source: U.S Census.

Figure 14. Residential Permits

Figure 15. Office Using Employment & Office Completions


12/15

110,000

112,000

114,000

116,000

118,000

120,000

122,000

124,000

4Q

2007

1Q

2008

2Q

2008

3Q

2008

4Q

2008

1Q

2009

2Q

2009

3Q

2009

4Q

2009

1Q

2010

2Q

2010

3Q

2010 2


Office demand is known to be driven largely by office

using employment (Clapp, 1989), a proxy being informa-

ion, financial activities, finance and insurance, credit

ntermediation, real estate rental and leasing, profes-

ional and business services and several other industries

noted below Figure 14).

The office-using employment sectors have been declin-

ng since 2007. New office building deliveries overshot

he peak of office-using employment and completions

occurred despite significant declines in employment

11.7% decline from 2008 to 2009). This has further ex-

cerbated the vacancy rate for office. We are still await-

ng signs of a recovery in these employment series. This

mplies that office demand should remain weak for an

extended period. As we mentioned earlier, deals in of-

ice are obtainable; however, we are cautious of largerpaces since few firms are expanding.

Retail experienced intense demand during the mid-

2000s, squeezing into 2.7% vacancy in 2006, often into

ome space that was normally considered obsolete. Af-

erward, we entered an apparently overbuilt situation.

nstead of the old adage, retail follows rooftops, retail

nticipated rooftops. Many of these homes were never

delivered and tenants had little interest in occupying

hese retail spaces.

3

n addition to this stressor, retail sales have fallen sub-

tantially, reaching year-over-year declines of over 20%.

Notably, the number of active business licenses indicates

arge declines in overall business activity. Hence, there

has been less of a need for retail space.

Retail sales do appear to be showing signs of bottom

out, yet this is a tenuous recovery at best, and until e

ployment and visitor volume show repeated gains an

establish an upward trend, we should not expect reta

sales to increase substantially.

Another important factor is the overall increase in po

lation. Several estimates of population exist including

the State of Nevada demographer estimates, the U.S

Census (with a significant lag in reporting) and those

sented by the local municipalities and Clark County. R

cent estimates indicate a balance between in-migrat

and out-migration as well as some organic increases

(births minus deaths rather than workforce related).

As a result of even population growth, we do not exp

a recovery in prices anytime soon. Further, a broader

national economic recovery is necessary for a full rec

ery in the region. However, as banks foreclose on mo

properties and prices are reset to fundamental value

increased opportunities for investors should be re-

vealed. Consequently, we are identifying some buildi

that appear to be realistic targets for investors.

-30%

-20%

-10%

0%

10%

20%

30%

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

$1,600,000,000

$1,800,000,000

Jan-80

Jan-81

Jan-82

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Year-over-Year Change Taxable Sales

Figure 17. Business Licenses

Source: Nevada Department of Taxation. Seasonally Adjusted.

Source: City of Las Vegas, City of North Las Vegas, City of Henderson, Clark County.

date we know of over 16,000 finished/partially finished residential lots. Interestingly, the FDIC published a document in 1999 that noted Las Vegas at the top for risk of overbuilding. http://www.fdic.gov/bank/analytical/bank/bt9

Figure 16. Retail Sales


13/15


VI. Risks, Benefits and Returns

The picture of the commercial real estate market in Las

Vegas remains murky, with a mix of pricing due to dis-

ressed asset sales and an unclear picture as to any na-

ional and regional economic recovery. Analysis and in-

estment in distressed commercial real estate is a fron-

ier for the Las Vegas Valley so these activities must be

performed with caution. Nevertheless, we expect this

ycle to yield large gains on the exit from the trough of

he recession.1

Prudent investors will build more risk into their bids and

ince the deals are typically in distressed assets, the mar-

et must wait for banks to liquidate them at prices that

better reflect both near term fundamentals and the ex-

pectations of a slow recovery.

nvestors are driven by real estate fundamentals. They

want a cash flow that will at least cover the debt ser-

ice. While most of them are satisfied not earning a

profit from day one, they just don't want to bleed out

nvestment dollars each month.

What movement can we expect in commercial real es-

ate?

What we hope will occur is that investors can purchase

n asset at a deep enough discount to ride out weak fun-

damentals and that we do not see buildings re-trade sev-

eral times as we head out of the trough in this cycle. We

expect that bank pricing will gravitate toward fundamen-

als, although there will be a lot of rigidities and mis-

tarts heading into that direction.

Returns?

Vacant buildings, many of which are grey shell, must bebought with deep discounts as the lease-up period is go-

ng to be prolonged. We have observed some buildings

eflecting this condition sell at or below replacement

ost. This is one metric employed as a basis for value

when income streams are not present, yet a long-term

upside is expected.

Many of the buildings being sold recently are not sold

with a cap rate. Many listings also do not post a cap

rate because there isn't any income on the property

is very low. We have seen some cap rates for single t

ant retail within the 6-7% range and we have observe

some cap rate compression occurring in multi-family

well. When an asset class lacks investment activity it

often due to a lack of supply of quality product.

The level of due diligence and sensitivity analysis by i

vestors has necessarily increased. Investors pro-form

slow recovery and a long ramp up period. They targe

15 to 25 % return on their money and they prefer dea

that do not require a lot of capital expenditures to ge

the property to perform. Finishing a grey shell produ

does not make sense to these investors as the existin

finished buildings will have to be sold before there w

be a demand for grey shell.

Benefits to buying in commercial real estate in the L

Vegas Valley.

When adjusting for inflation, rents are typically flat2,

Therefore, for buyers a winning strategy cannot be ex

pected from rent growth to add value in a normalma

ket. The benefit of buying in a distressedcycle is that

can leverage this cyclical pattern and expect some re

growth when the economy rebounds. Further, value

be added to a project by prudently buying buildings wvacant space and leasing them up. Again, this must b

done with caution and is typically reserved for those

requiring a cash flow position.

Like residential, commercial real estate values are be

driven to decade lows. National reports are listing La

Vegas as one of the best places to purchase real es-

tate. Each month, more and more investors arrive lo

ing to place their investment dollars. Eventually, the

users will be placed in the market and investors will r

resent the greatest demand for commercial real esta

1. Refers to a local recession, not the NBER dates.2. Serguei Chervachidze of CBRE Econometric Advisors finds evidence that long-run real rents are flat. Chervachidze, Serguei. The Myth of Long-Term Rent Growth. About Real Estate Volume

11, Number 33. August 23, 2010. Investors can either time cycles, find areas with restrictive land-use or a lack of available land or other factors that would lead to increased demand or restric

tive su l .


14/15


VII. Development

There is some, however marginal, space still under con-

truction within the Las Vegas area. We estimate that

here is less than 80,000 square feet of industrial under

onstruction. This pales in comparison to previous quar-

ers but given the poor demand for industrial space, this

s not surprising.

Construction of office space largely stalled, although we

have recorded approximately 80,000 square feet of un-der construction office. Tivoli Village at Queensridge

Phase I (310,000 sq.ft) is now open and includes 725,000

quare feet of retail, restaurants and office space.

There are a number of stalled buildings throughout the

alley, largely in office and retail, along with some nota-

ble casino-hotels and residential such as Fontainebleau,

he St. Regis Condominiums and Boyd Gaming's Echelon.

n December 2010, the Cosmopolitan made its debut on

he strip. Completed by Deutsche Bank who took theproperty back when the original developer defaulted, it

will likely be the last mega casino opening we will see for

n extended period.

Currently most of the development is concentrated in

downtown Las Vegas where construction continues on

he new City Hall, street improvement projects, the

the Smith Center for Performing Arts and the Mob M

seum (originally a courthouse and post office). The R

gional Transportation Center has been completed an

active.

Overall activity remains low as we work through exce

sive inventory already in the market. Other than for s

cialized projects, we do not anticipate any significant

construction for a number of years.

On the horizon, Newland Communities Symphony Pa

and the Cleveland Clinics planned entry into Las Veg

appears to be the most realistic large scale project th

will be developed in the years ahead.

Figure 17. Commercial Building Permits and Valuation

Source: Center for Business and Economic Research.

Nearing Phase 1 Completion: Tivoli Village at Queensridge

Under Construction: The City of Las Vegas City Hall.

0

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20

30

40

50

60

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

#ofPermits

Valuation

# of Permits Valuation


15/15


ources:

Chervachidze, Serguei of CBRE Econometric Advisors

inds evidence that long-run real rents are flat. The Myth

of Long-Term Rent Growth. About Real Estate Volume

11, Number 33. August 23, 2010.

Clapp, J.M. Handbook for Real Estate Market Analysis.

nglewood Cliffs, NJ: Prentice Hall,

1987.

. Absorption Forecasts Using Employment and Popu-

ation Growth. In J.M. White (ed.).

orecasting: Market Determinants Affecting Cash Flows

nd Reversions. AIREA Research

eries Research Report 4. Chicago, IL: American Institute

of Real Estate Appraisers, 1989, 1428.

. Dynamics of Office Markets. AREUEA Monograph

eries No. 1. Washington, DC: Urban

nstitute Press, 1993.

Corcoran, P.J. Searching for the Bottom of the Office

Market. Real Estate Review, 1993, 23:1,

1521.

evitzky, Ina, Djeto Assane and William Robinson. Deter-minants of Gaming Revenue: extent of changing atti-

udes in the gaming industry. Applied Economics Let-

ers, 2000,7,155-158.

Rabianski ,Joseph S. and Karen M. Gibler**

Abstract: Office Market Demand Analysis and Estimation

Techniques: A Literature Review, Synthesis and Com-

mentary Journal of Real Estate Literature.

Terms:

Capitalization Rate: Annual net operating income di-

vided by the cost or value of a building. Used as an in

cator of the value and the rate at which investors are

willing to invest their capital.

Distressed Real Estate: Properties that have either b

issued a notice of default or has been taken back by t

lender.

Grey Shell: Building or unit that has no flooring or wa

coverings.

Gross Gaming Revenue: The net win from gaming ac

ties.

Notice of Default: A public notice of election to sell a

late payments. The borrower may restate the loan by

making up payments after the legally allotted period

our research, this has served as an indicator of bank

owned properties to come.

Quick Facts:

Property Type

Direct

Vacant Sq.ft.

Direct

Vacant % Total Sq.ft

# o

PropeOffice 11,021,743 19.3% 58,626,788

Industrial 16,138,746 15.2% 111,073,393

Retail 10,937,904 10.2% 115,994,583

Las Vegas Valley 2007 2008 2009 201

Population* 1,996,542 1,986,145 2,006,347 2,03

Housing Units 769,875 784,688 796,255 81

Employment** 916,807 916,286 841,212 79

Source: Costar.

**The third quarter of 2010 is the most rece nt reported.

*Source: Clark County. The 2010 figure may not match the 2010 census figure.

he information and opinions in this report are believed to be reliable and has been obtained from sources believed to be reliable. Coldwell Banker Prem

ealty makes no representation as to the accuracy or completeness of such information.

he opinions expressed in the report constitute the judgment of the authors only and may not reflect the opinion of Coldwell Banker Premier Realty. Thi

eport is provided for informational purposes only and does not constitute investment advice.

his report not be circulated or copied without our prior written consent.

Documents

Commercial Real Estate Spring 2011