Tuesday, December 11, 2012

Whither Diversification?

Photo by Lasvegaslover, found at Wikipedia
Another meeting of economists and business people in Las Vegas, and another mention of economic diversification, the mirage of our desert home that always seems a bit out of reach. We rely too much on hospitality and tourism, it is said, and if our economy does not diversify, we’ll continue to suffer disproportionately from recessions as we have for the last 5 years. We must diversify.

Of course, this raises a few points.

First and foremost, we’re suffering more than others in this current Great Recession because of our (formerly) huge construction sector. Perhaps too much of our local economy was invested in construction and mortgage financing (though wouldn't that count as diversification? and didn't it exist because there was a demonstrable need for it to exist?), and the loss of 80,000 construction jobs has no doubt put a bit of a hitch in our giddyap. But through most of the city’s history, we’ve entered national recessions late, left them early, and suffered far less than other communities while the recessions lasted. This latest recession simply hit us where we lived.

Second – Diversification is, to some extent, a wild thing not easily raised in captivity. If we haven’t diversified yet, it might be because other than a permissive attitude to booze, gambling and questionable taste in the name of a good time, Southern Nevada has very few natural resources. We have a river close by, but that’s already been dammed. We had wide open spaces up north, but those are already filled with atomic bomb craters and UFO research facilities. What, precisely, does Las Vegas offer to the world that the world is not already aware of? If somebody can find the cure for cancer in caliche or find a way to squeeze power out of the sun without the need for massive government subsidies (sorry kids, it's a profit and loss system and that isn't going to change any time soon) we’re all set, but otherwise we don’t have much to work with.

Third – I know, in the age of the internet, many businesses can operate anywhere, so why not operate in Fabulous Las Vegas? Well, Las Vegas does have a few things to offer the modern web-savvy business – the greatest internet connectivity in the world, a tax structure that favors start-ups and gazelles and the presence of Tony Hsieh come immediately to mind. On the other hand, the density of people living on the coasts suggest that, if a person can live and work absolutely anywhere, they will probably choose San Francisco, Los Angeles or Seattle before they will set up shop in Las Vegas.

Some folks will point out that the reason we don’t get our fair share (there is no such thing, by the way) of tech companies is that we don’t have the greatest education system in the world. Of course, Steve Jobs and Bill Gates didn’t have the most stellar careers in higher education in the world and managed to do pretty well for themselves in the world of tech, but I concede the point. We could invest in churning out highly educated people, of course, but ask Iowa how well that’s worked out for them – wonderful higher education system, and tons of educated Iowans now living and working outside of Iowa. The problem for Las Vegas is that, like agricultural Iowa, it has no need for a highly educated work force right now. We would be faced with the problem of producing the supply to attract the demand, and the supply (educated human beings) couldn’t very well wait around for the demand to show up – once they’re out of school, they need a job, and I fear they would find that job elsewhere.

At the heart of the problem, I think, is that Las Vegas, as it exists today, should probably not exist as it does today. Given the resources of the area, Las Vegas should probably be about the size of Bakersfield or Barstow, California – a stop on the road for people heading out to the beach. A weird series of circumstances, including legalized gambling and a number of government construction projects (Hoover Dam, Nellis AFB, the magnesium plants in Henderson during the Second World War, etc.) have conspired to place a remarkable number of people in the middle of the Mojave desert, and this has created the illusion that this city of 2 million people is just another large American city. Of course, this is not the case – we’re a rather strange, large American city, and the economic diversification one finds elsewhere may be tricky to achieve in Las Vegas, at least in the way some folks want to achieve it.

Perhaps the greatest resource of Las Vegas is its laissez-faire attitude. New rules in California governing the adult film industry could send more film makers to Las Vegas. "Great," folks might say, "let's add porn to our resume of sin." But the adult film industry is an industry, and it might have a compelling reason to relocate some production to Las Vegas. Jobs are jobs, right?

Likewise, we’re seeing more and more holding companies springing up in Las Vegas, since people want to own California businesses, but they don’t want to own California businesses in California because of the heavy tax burden in that state.

Medical tourism seems to be a possibility, since it allows us to play off our strength – serving tourists – and perhaps there are other ways to spin our expertise in hospitality into other industries.

That being said, none of the above are likely to ever rival leisure and hospitality in terms of employment in the Valley, and maybe that’s okay. For all its diversification, Houston is still dominated by the energy industry. Maybe the best plan for Las Vegans is to relax and let nature take its course. Given the resources at our disposal, Las Vegas has beaten all the odds to become the city it is today, and the same human genius (i.e. greed and ambition) that inspired Bugsy Siegel to build a resort in the desert south of Las Vegas may well find a way to diversify its economy in the future without having to resort to the horrors of convening a committee of experts.

Thursday, November 8, 2012

Vegas CRE - Doing it Tortoise Style

All the various entities and institutions have their data in for August 2012, and the picture looks a bit flat. The August 2012 Recovery Index stands at 91, the same as in July, but better than in May and June. In general, things are improving, but they aren't improving by leaps and bounds just yet, and certainly there is a rocky road ahead.

Click to enlarge

The chart above shows that the trend is our friend (at the moment). You'll also notice that the previous cycles of sharp increase followed by sharp decrease seems to have ended. The trend is a bit more level now. If there is anything to be distressed about, it is the rate of increase. At the current rate, we're more than a year away from the index hitting 100, our starting point in 2006. If (or when) the country (or globe) slips into a recession in 2013, we can expect this recovery will take even longer.

On a year-over-year basis, we're still in positive (i.e. growth) territory.

Click to enlarge

When we look at the individual measures in the index, on a year-over-year basis, we see the most impressive growth in new home sales. New home sales reached 922 homes in September 2012, compared to 396 new home sales in September 2011. This gives one a warm, fuzzy feeling until you note the 3,217 new home sales (on average) in 2006. Still, new home sales are improving, and that helps us clear the inventory and pave the way for new construction (and construction jobs) in the future.

The index is also growing on a year-over-year basis in Commercial Occupancy, Gaming Revenue, New Residents, Employment and Port Traffic in Los Angeles. The only slide was seen in Visitor Volume.

Given this improvement in the third quarter of 2012, one can expect to see continued improvement in Southern Nevada's commercial real estate market into the first half of 2013 - slow and unsteady progress, but progress nonetheless.


Tuesday, October 9, 2012

Economy Improves - But For How Long?

As the local economic slowly trickles in (is it me, or is it taking longer these days?), Southern Nevada is showing continued (though not steady or quick) growth in August 2012. The strongest growth has been in New Home Sales (will this last? – it just might) and New Residents (makes sense), as well as Taxable Sales. The only ding on the numbers in August was Visitor Volume. Currrently, the Recovery Index stands at 91 - the highest level yet since hitting a low of 79 in March 2010. If the current growth rate continues, the index could reach 100 in the course of 16 to 20 months.

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In 2010 and 2011, growth was stronger during the first three quarters of the year than in 2012, and then dropped off sharply in the fourth quarter of the year. Growth in 2012 has been slower than in 2010 and 2011 – which may mean the growth was more realistic and will continue into the fourth quarter, or that when the winter chill sets in it will erase what growth we’ve seen so far. Hey – this is economics – we always have to look for the black cloud within the silver lining.

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Just the same, given the decent growth seen in the third quarter of 2012 – especially since that growth appears to be in one of the key “industries” of Southern Nevada, population growth – there is the distinct possibility of a Merry Christmas and Happy New Year, i.e. continued improvement in the commercial real estate market. Only time will tell – cross your fingers!

Click to enlarge

Monday, September 3, 2012

CRE Crab Walks into July...

The latest CRE Recovery Index numbers (for July 2012) show Southern Nevada making a sidestep. If only inconstancy was a virtue!

After taking a dive between  July 2011 and June 2012, the index has been taking a bumpy ride. Though movement has generally been positive, it has show stops and starts, and in July 2012 has taken a decisive step sideways.

Unfortunately, this is a pretty good representation of how CRE has felt in Southern Nevada over the past 12 months. It's been tough to get one's feet beneath them and traction is sadly lacking. The employment is not altogether positive, nor altogether negative ...

The slope looks vaguely positive (if you squint your eyes and cock your head to the side), but what we're really looking at is an job market that simply is stuck in neutral. The looming November elections will probably do nothing to help this situation, as business owners hunker down to wait things out and see what 2013-2016 might hold in terms of taxes and regulations.

Perhaps more important is the New Residents Index. Population was always a major growth factor for the local economy, not only in the way that it drove the construction industry, but just in the way it brought people (many of them seniors with built-in incomes) into the region to spend money in grocery stores, locals casinos, department stores, etc. Population in Southern Nevada suffered its first reverse in 30+ years during the Great Recession, and has been flat for the last few years. Greater in-migration could go a long way in curing the region's economic ills.

Visitor volume has generally been improving, and for the most part has reached pre-recession levels. These numbers only really matter if they impact Gaming Revenue and Taxable Sales ...

Fortunately, Taxable Sales appears to be an upward trajectory, though it is a gentle slope and given to some ups and downs. Gaming Revenue, on the other hand, is a more mixed picture. By and large, it appears to be as flat as employment growth, with a Chinese New Year spike earlier this year that has settled back down again as the year has worn on.

So - a mixed picture that is made more worrisome by the mixed picture that is emerging globally. It is unlikely that the second half of 2012 is going to produce the growth the economy needs, and at this point, 2013 isn't looking to be as dynamic as we would like. Hunker down, ladies and gentlemen.

Friday, July 27, 2012

It's the Population, Stupid!

Integral to understanding where the local CRE market is heading is understanding what brought it to its current lowly condition. This isn't too tricky really - the obvious answer is the bursting of the housing bubble. Housing went away, took 70,000 + construction jobs with it, and here we sit.

Does that mean the current residential construction is what's holding us back? Well, probably. Gaming has shown some signs of recovery over the past year and half, including expanded employment, but gaming does not appear to be acting as the catalyst for full-scale recovery.

Construction alone, though, is not what Southern Nevada needs. Home sales, like every other "retail" sector have to follow demand, and Southern Nevada currently has enough supply to meet that demand (though this may not be the case in another year or two). What was driving the Southern Nevada economy before the crash is what we are really lacking after the crash ... Population Growth!

You can see from the above table that Nevada's population (most of which is in Clark County) grew steadily since the 1970s - and probably before the 1970s. But around 2009, the unthinkable happens - the population actually drops. Probably not for the first time ever, but for the first time in almost 40 years, Southern Nevada ceases having a steady stream of new residents (net) to buy new homes or rent apartments and go to the stores to buy all the things involved in setting up house, not to mention eating out, shopping for clothes, etc.

Steady population gains, as much as, or quite possibly, more so than gaming, was the engine driving the economy in these parts. Naturally, gaming played its part in providing a source of employment for new-comers, and in-migration itself created the inducement of employment for more folks to put down roots (often very temporary roots) in Las Vegas - though this, of course, proved a double-edged sword.

Where does that leave Southern Nevada now?

As of 2011, the population has leveled, but is still not rising. That's bad news. Possible good news, though, is that in-migration, at least in terms of out-of-state driver's licenses being turned in at the DMV, is showing some signs of recovery from the lows hit in early 2010.

Much of this migration is probably in the form of retirees, since the job market here is still pretty weak (though the Valley is probably suffering from a lack of suitable applicants for many of the available jobs, so some of our new citizens may well have come here to take skilled or professional jobs). Retirees are a welcome sight in Southern Nevada, as they were a key component to growth in the good old days, and will likely be a key component of growth again. Retirees come with their own built-in income, and that income stimulates job growth, especially in the retail and health sectors. Along with the renewed gains in gaming (slow going, though, and remember to watch gaming revenue and taxable sales more than visitor volume), the renewal of migration to Southern Nevada may prove to be what the region needs to begin a serious recovery, especially in terms of commercial real estate.

Tuesday, July 24, 2012

Still Arguing About Taxes ...

Via Wikimedia Commons

Some things never change, huh? I'm wondering what the other paths represent?

Of course, Congress will probably end up compromising and using them both ...

Monday, July 23, 2012

US Population Expansion, 1770 to 1900

I found this neat little video today on Wikimedia Commons of the expansion of settlements in the United States between 1770 and 1900, apparently based on the locations of post offices, and thought I'd share it with folks.


It is the work of Derek Watkins, and was originally posted at his blog HERE.

Wednesday, July 11, 2012

Top 100 Retailers for 2012

NRF Stores has compiled a list of the Top 100 retailers in 2012. You can see the full list here, but here's a quick recap of the top 10:

1. Wal-Mart
2. Kroger
3. Target
4. Walgreen
5. Costco
6. Home Depot
7. CVS Caremark
8. Lowe's
9. Best Buy
10. Safeway

Of note, I think, is Amazon's position of #15. One might interpret that in two ways, the first being that they didn't really exist a decade ago, and are now beating out some old heavyweights like J.C. Penny's and Burger King. On the other hand, it is interesting that the world's biggest online retailer is only #15, though to be fair just about every retailer these days is an online retailer to some degree. Still, brick and mortar retail certainly isn't dead yet.

Southern Nevada's latest retail numbers, for the second quarter of 2012, are now available to download and enjoy (if you're into that sort of thing). Here's an excerpt:

 We can happily report that our predictions for the second quarter of 2012 concerning the retail market were wrong, as retail turned in a surprisingly strong quarter. Even without new construction to bolster it, net absorption of retail space was not only positive, but surpassed net absorption in the first quarter of 2012 if one discounts net absorption from new completions. Vacancy declined to 11.1 percent in the second quarter of 2012, 0.6 points lower than one year ago. Asking rents for retail space increased this quarter to $1.40 per square foot (psf) per month on a triple net (NNN) basis, though they remain lower than they were one year ago.

Friday, June 22, 2012

CRE Recovery Index Side Steps in April

Click to Enlarge

The April figures are all in, and the CRE Recovery Index took a step back.

The last two years have seen the index follow a pattern - growth in the spring and summer, decline in the fall and winter, but overall more growth than decline. When the index began to slip last year and then showed some growth in the first quarter of 2012, it looked like the pattern was going to hold, and it still might. April saw the index move back a point, but May data looks like that step back is due to be reversed, assuming new home sales and taxable sales cooperate.

An index in flux would suggest a bumpy second half to 2012, while one that returns to growth could mean 2012 might be salvaged after all for commercial real estate in Southern Nevada.

Looking at that graph, though, it isn't hard to imagine that it will take at least 2 more years before Southern Nevada's CRE market is once again firing on all cylinders. What's holding us back?

Click to Enlarge

I'm not positive, but it could be the construction employment, or the lack thereof. While most employment sectors are better off than they were 10 years ago, despite the Great Recession, construction employment is well below where it was 10 years ago, and those construction jobs were important job creators in the Valley.

The larger problem for Southern Nevada, though, is illustrated by this graph:

Click to Enlarge

How many recessions did we go through from 1970 until today, and during none of them did Nevada's population stop growing, even for a year until the onset of the Great Recession. Whether the Great Depression had the same effect, I don't know, but it seems likely.

As it stands now, we still haven't worked our way back up to the population level we had in 2007 - and that indicates a real estate market, both commercial and residential, that can make lateral moves, but will find renewed growth a tricky thing to achieve.

Keep your eyes on the in-migration into Clark County, because that could be the ultimate key to recovery in Southern Nevada. It looks like the flow of people is beginning to return, though it isn't close to the peak of migration in 2005-2006. My guess is that most of the new residents to the Valley are retirees, as the job market in Southern Nevada, though showing signs of recovery, continues to be weak.  As these folks move in with their preexisting incomes, they should help stimulate job growth in the Valley and thus absorption in the residential and commercial markets.

One last graph - commercial forward supply (i.e. planned and under construction space) - just because I like it.

Click to Enlarge

Enjoy your weekend, and if you can spare a dime, go spend one.

Friday, June 8, 2012

Obsolesence ... My New Favorite Word

Hey, the reporters seem to like it, and I like attention. What can I say?

Actually, obsolescence in commercial real estate could be Las Vegas' friend. I stress "could be". Southern Nevada took a major hit in the past decade in the form of construction employment.


Yes, letting the construction line actually drop off the graph was a bit dramatic of me, but without doing it the other lines flatten out quite a bit. What we see here is the Southern Nevada job market split into three categories - Construction, Leisure & Hospitality (L/H) and "All Other Sectors (AOS). Since the beginning of the current recession, job losses in L/H have leveled and are now recovering. Normally, we would expect to see jobs in AOS begin to do same after a couple quarters ... but we're not. Why? Perhaps it is because construction jobs have not just fallen off, they have fallen well below where they were before the boom, and they aren't done falling yet (though they did level off quite a bit). Construction jobs pay pretty well, and might have had a bigger impact on AOS than L/H.

This is why obsolescence could be a good thing.

As we currently stand, given the vast amount of vacant space on the market, and given the slow employment growth and thus slow growth in demand for that vacant real estate, getting the market back to a place where it would normally be rational to build could take a very long time.

That's a lot of years of supply!

Obsolescence, however, offers the proposition that some product in the Valley will simply remain vacant for a long time without negatively impacting the market going foward.

What are the signs of obsolescence? Well, the age of a building doesn't seem to be a major factor, at least not yet.

Almost as pretty as a double rainbow!

The graph above looks at the average time on the market (in months) of availabilities based on the age of the building in which those availabilities are located. The dotted lines are trend lines. While office suggests that newer is better, industrial and retail refute that, and in all three sectors buildings constructed in the past 5 years (about 20 million square feet worth, which also have the highest vacancy rates among buildings based on age categories) are among the least popular.

Some of this can be attributed to properties built during "irrational exuberance" of the boom - buildings meant to please lenders more than tenants.

The obsolescence that Southern Nevada is now facing is largely a matter of a disconnect between what prospective tenants want, and what we have available on the market. Just as there is a disconnect between available jobs and the skills of available jobless, the product that could be moving rather well right now is space we do not have. As a result, Southern Nevada is losing some business to other markets, and those companies that want to be here badly enough are going the route of build-to-suit. Land costs are quite low, as are construction costs, and the idea of designing a building seems to have caught on with a few industrial users, though BTS will probably not be as prominent in office and retail.

BTS projects are not, of course, going to turn the construction sector around - that's going to take a resurgence of the residential market. On the other hand, the construction sector can use all the help it can get.

Monday, June 4, 2012

May Activity Improved Over April

Database activity in May points to a somewhat brighter picture for Q2 of 2012, after a pretty dismal Q1.

The task of compiling vacancy numbers is a bit on the arduous side, so I only do it once per quarter. Tracking database activity, on the other hand, is a bit easier, so I do it monthly to get an idea of how the quarterly numbers might pan out.

Admittedly, totals like these can be deceptive. If I take one 100,000 square foot availability out of my database and then add in three 5,000 square foot availabilities, the market is better off, even though my database activity is going to show a net of 2 added availabilities, but since I'm dealing with hundreds of records flipping each quarter, the data seems to pan out pretty well in terms of predicting performance.

Click on the graph to make larger

The graph above tracks the percentage of availabilities removed (either as sales, sub-leases, leases or, in some cases, an availability simply being withdrawn from market) to the total number of availability updates that quarter. On average, I update over 9,000 availability records every quarter (which means that some availabilities are updated multiple times each quarter), so if the percentage of availability removals rises, it often correlates to stronger performance in the market.

You'll notice above that there was a spike of availability removals in the second quarter of 2011, which did in fact correspond to better net absorption numbers. The percentage of removals then dipped in the third and fourth quarters, and has risen significantly in the second quarter of 2012. This suggests that net absorption will be improved in Q2, 2012 (knock on wood). More importantly, the trend does suggest a slowly improving market. It also shows, over the past three years, a pattern of increased (positive) activity in the second quarter of each year, followed by a lull in the second half of the year.

Click on graph to enlarge

The total number of availabilities tracked in the system declined in May after having risen in March and April. In the graph above, you can see the rapid rise in total availabilities from July 2008 to September 2010, then the slower rise from September 2010 to May 2011, and the very gradual downward slope (so gradual it almost looks flat) beginning in May 2011 and running to the present figures.

Click on graph to make larger

Breaking the "new availabilities added" down by product type, you can see - well, actually, you can see quite a mess. Month to month, availability additions can vary quite a bit, but the general trend has been downward, with office and industrial showing the steepest slope. Again, this is the total number of availabilities added, not the total amount of available square footage added.

You'll also note that the number of availabilities added increased for every property type in May 2012; fortunately, the number of availabilities removed was even stronger.

The overall trend seems to be favoring Southern Nevada - with fewer new availabilities over time, and fairly steady, though not rising, removals of availabilities over time. This actually sums up the market pretty well, with recovery being more a situation of "less bad" than "more good". As the wreckage of the Great Recession is gradually cleared, slow (perhaps very slow) and steady will win the race, even if it isn't very sexy.

Monday, May 7, 2012

Don't Page the Fat Lady Just Yet

The last couple months of 2011 were a bit sobering. After those heady days of mediocre growth in mid-2011, Southern Nevada was once again reminded that the post-recession hangover wasn’t over just yet.

In January, the slide in our Recovery Index ended, and the index has sat at 89 for two months now. Flat, but marginally better than December and a clear improvement over Jan/Feb of 2011, 2010 and 2009. Unfortunately, the index is about 10 points lower than it was in Jan/Feb 2008 (when the recession essentially began).

The bright spots in February 2012 was the fact that almost all of the components of the Recovery Index were up year-over-year, with the big boosts being in New Residents (very important for the local economy), Gaming Revenue and Taxable Sales (is retail ready for some growth?) Only one measure was flat – Commercial Occupancy – which is linked to Employment, which was only up 1 point (or 2,200 jobs) year-over-year, and most of those jobs were in Leisure & Hospitality, not in industries related more directly to the occupancy of commercial space.

The good news is that the local economy is, in a slow, measured way, improving. The not-so-good news is that it could still be a while before we really see that improvement in commercial real estate. Jobs is the thing (I might have mentioned that about 3,000 times since 2007), and right now we’re waiting for jobs in the Resort corridor to translate into jobs in the suburbs. The best model I could construct suggests that we should already be seeing that suburban job creation – the lag should be about 6-9 months and hotel/gaming employment began rising about mid-2011. The fact that we’re not suggests that Southern Nevada, like the United States in general, is experiencing a drop in labor force participation related not only to the Great Recession, but to long-term demographic trends and a skill set mismatch between unemployed workers and available jobs.

Demographically speaking, we could be seeing an ebb in the tide of of “two-worker” households. Much of the decline in labor force participation is in the male demographic, so it could be that women are simply displacing men in the job market now, rather than supplementing them. More worrisome is the extension of “childhood” (i.e. living at home and playing video games) into the mid- to late 20’s. A similar phenomenon can be seen in Japan and Europe, and this lack of productivity in the young does present a major problem for nations that seek to redistribute wealth from the young to the old. It might also represent a rational decision by the young, who don’t see much benefit from participating in a society that redistributes money from young folks in the bottom quintile of earners to old folks in the upper quintiles of earners.

Thursday, April 26, 2012

A Few Thoughts on Today's Auction

Last year, Auction.com held an auction that included quite a few commercial pieces located in Las Vegas. The general feeling was that the auction was a success - many properties moved, prices were set, and in the months after property sales increased dramatically in Las Vegas. By the fourth quarter of 2011, though, sales were flagging, and they were downright pathetic in the first quarter of 2012.

For this reason, a few people were hopeful about today's online property auction. They needn't have been.

Today's auction was significantly smaller than last year's auction, and the properties far less stellar. By the time I gave up on watching it, only one property had sold (i.e. auction closed and reserve met). Most of the other 9 finished without the reserve being met, and at final bids a bit higher than one would have expected. The inside dope is that most of those bids came from sellers either trying to juice up interest in their properties (alas - they weren't very convincing shills) or maybe set new "market prices" on their properties. One of the "final eight", Stephanie Paseo Verde, seemed to be a genuine item, and most agreed it was the pick of the litter.

Where does this leave us?

Well, clearly today's auction is not going to spark off a new round of buying in Las Vegas. Oh, sales may improve, but it won't be because of the auction. Another auction is being held in a few weeks, and perhaps that one will fare better. In the meantime, we keep slogging through the Great Recession, waiting for bluer skies.

Tuesday, April 3, 2012

The Employment Coaster ... Buckle Up Vegas

Just thought I would share this graph with you. It shows total employment in all industries (blue bars) in the Las Vegas MSA from 2010 to Feb 2012. According the NDETR, the Las Vegas MSA has lost about 21,000 jobs since Nov 2011. Under most circumstances, this would be worrisome, especially when combined with the weakness experienced in commercial real estate since the third quarter of 2011, but given the weird, bumpy trend we’ve seen over the last couple of years, I’m not so sure. A simple linear trend line (in black) shows that employment is gradually rising, and the series of peaks and troughs might just be an artifact of the process used by NDETR to gather the job numbers. The red line represents net absorption of industrial, office and retail combined. This graph suggests that the trend will be higher net absorption and employment by mid-year. Let’s hope there’s some truth to that.

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Wednesday, March 14, 2012

A Closer Look at January's Vegas Jobs Report

When I compiled the draft numbers for our first quarter reports last week, I was a bit stunned. I had been expecting a weak quarter, but not that weak. Now that I’ve seen the new employment numbers from the Nevada Department of Training, Education and Rehabilitation, I’m not so shocked.

I’ve seen some stories touting the drop in the unemployment rate, but a real delve into the numbers reveals a job market that started the year off by shrinking, with weak numbers across the board, not just in retail where one might expect a drop after the temporary hires for the holiday season.

For Las Vegas, the traditional important numbers have been Leisure & Hospitality - the engine of growth - Construction and Retail. Those are the meat and potatoes.

Leisure & Hospitality (L&H) saw a big boost in employment towards the end of last year which boded well for some more substantial recovery in mid- to late 2012, as those new jobs increased hiring in the wider retail sector, which creates jobs in other sectors, etc. Along come the January 2012 numbers and we see L&H taking a slight breather and giving back a few jobs. Until we see some February numbers float by, we can't call this a trend, but a continuation of the boost would have been more welcome.

Construction is an old story by now, fit for a VH1 Behind the Music episode. A meteoric rise as cheap money drove people into new homes and then an equally meteoric fall in 2008. The last few months, however, have seen the fall become less meteoric, and there were even a couple months in there where month-over-month construction employment increased. And then, once again, we see January numbers and we're back to the bad old days. Again, we can't call this a trend, but it's a painful development when one's optimism was just beginning to return.

The employment sectors that are most important to commercial real estate were universally bad when looking at quarter-over-quarter numbers (okay, except for Wholesale) ...

But not entirely bad when looking at year-over-year numbers, with Retail showing some strength, along with Transportation & Warehousing (linked with retail sales), Wholesale (linked with retail sales) and Manufacturing. The office sector is getting killed, though, and a cessation of growth in the Healthcare sector is a little distressing.

Still, when you look at the employment index (Jan 2006 = 100), you really don't see a recovery you can write home about.

As I’ve said many times, jobs and net absorption are tied pretty close, as this graph illustrates.

All in all, not the best way to start a year that already has some significant headwinds to throw against our sails. Let's see what February's numbers teach us.

Monday, February 27, 2012

Hot & Cold - Mapping Asking Rents in Southern Nevada

My project today was to map asking rents in Southern Nevada using a rent index.

Click for a larger map

The key with rents, of course, is that are highly variable between different product types. While Class A Office product can pull in $3.00 per square foot (psf) on a monthly basis, warehouse pulls in maybe $0.30 psf. To smooth out the differences, I decided to index asking rents for each product type based on the weighted average for that product type in the fourth quarter of 2011. Thus, a warehouse space that was asking the same as the average asking rent for warehouse would be indexed as a "1"; anything asking more would have an index number of higher than 1 and anything lower would have an index number lower than 1. By indexing the availabilities in the database, I can compare different product types on the map above.

The map above ignores anything at or near an average asking price. For the purposes of this map, they are just added noise. Screening them out, we can see some regions of Southern Nevada in terms of how much landlords are asking for rent.

The highest asking rental rates appear to wrap around the west and south portions of the Valley, while lower asking rents predominate in the east, center and north portions. This makes sense. The west and south feature newer construction, while the center and east feature older construction. One might deduce from this map, then, that newer properties command higher rents than older properties, and perhaps they are right. Then again, perhaps they are wrong.

The values on this map are based on "asking" rents, not actual rents. The proof in the pudding is in the taste, and the proof in the asking rents is in the absorption. The question, then, is this: Are those high asking rates scaring prospective tenants away, or are tenants still willing to pay more for the more expensive, newer buildings?

On a submarket basis, combining office, industrial and retail properties, net absorption in 2011 broke down as follows:

Positive Net Absorption (2011 YTD): Airport (197,000 SF), Downtown (325,000 SF), Henderson (234,000 SF), Northwest (31,000 SF), Southwest (342,000 SF)

Negative Net Absorption (2011 YTD): East Las Vegas (-263,000 SF), North Las Vegas (-386,000 SF), West/Central (-294,000 SF)

Lo and behold, we're seeing more positive net absorption in the expensive parts of town than in the inexpensive parts of town. Two exceptions pop out, though. Downtown is seeing big positive net absorption in a fairly reasonably priced part of town, but much of this is due to the completion of the Las Vegas Metropolitan Police Department's new headquarters, which is owned by a private development entity and leased to the LVMPD. The other exception seems to be the Northwest submarket - pretty expensive, but fairly weak net absorption. This, however, may be more of a case of zombie properties, in particular office product owned by General Growth Properties, being unable to compete with other product for tenants.

In the near term, pricing still seems to be a major concern of businesses. There's still plenty of recession to go around, and everybody wants to make it through to the other side. Still, location and age of product clearly play a role in the desirability of space, and though newer properties are more expensive than average, they are still quite affordable compared to rates they were asking two or three years ago. Apparently, tenants are taking the opportunity to move up in the world.

Tuesday, February 21, 2012

The Winter of Our Discontent

For the past three months, the arrow has been pointing down on my Southern Nevada CRE Index, indicating a chilling of the economic climate in Southern Nevada since things ramped up a bit in mid-2011. While most measures still look pretty good when compared to one year ago, the index seems to be predicting at least one, maybe two quarters of lackluster performance for commercial real estate.

Looking at 3-month rolling averages in December on a year-over-year basis, we find the New Home Sales are flat (and disappointing), as is commercial occupancy (effectively flat since Jun 2010). All other measures show improvement year-over-year, with the biggest improvements being in the Gaming Revenue Index (3 point climb), New Residents Index (5 point climb) and Taxable Sales Index (7 point climb).

So, where are the jobs? Although the economy is moving now, it doesn’t appear to be hitting escape velocity. The Employment Index was up by one point, but remains in the same range it has been in since July of 2009. No major drop, but no real climb.

Of course, not all employment sectors are experiencing the same distress. On a year-over-year basis, the Financial Activities sector has taken over the top spot in job losses from Construction, which, by the way, is back to being a “job loser” after showing a little pickup in mid-2011. Wholesale and Manufacturing have also gone over to the dark side, leaving the immediate future of the industrial market looking gloomy. Retail is flat in terms of jobs – and this is a key sector, given how much the economy depends on consumer spending. Retail showed some improvement last year in terms of jobs, but the fourth quarter – the big holiday quarter – was flat, and that leaves 2012 in question. On the office side, the aforementioned trouble in the Financial Activities sector is evened out with job gains in Professional & Business Services and Health Care & Social Assistance. Office might not have too bad a quarter to kick off 2012, but it won’t be anything to write home about.

At the moment (and given how the numbers bounce around, "at the moment" is the best I can do prediction-wise), I predict a poor showing in the first quarter of 2012, with perhaps a slight improvement in the second quarter to give commercial real estate a fairly “meh” first half of 2012. While there has been some crowing over the “improving” job numbers nationally, the fact is that fewer people are working and incomes are not on the rise. Much of the nation’s success has been in the manufacturing sector from, believe it or not, exports. Given the fragile international economy and potential problems in Europe, China and Japan, a manufacturing export economy does not appear to provide a stable foundation for predicting good times ahead. The second half of 2012 may be an improvement over the first half, or it may be its identical twin. If you’re in the market to buy good properties and hold them, you’re probably okay. If you’re a landlord looking for a speedy resolution to your problems, you’re probably out of luck. If you’re a tenant, the market is still yours, and though a few properties have seen their asking rents rise, the majority are still struggling.

Wednesday, February 8, 2012

The Looming Shadow of CMBS

Kevin D. Williamson of the National Review just wrote a piece on the looming CMBS bonanza/Armageddon awaiting us all in 2012. As he points out:

"In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP."

You can read the entire article HERE.

Southern Nevada is, of course, no stranger to the world of distressed commercial real estate. In fact, we're probably in close competition with Sacramento for the honor of being the poster child of distressed commercial real estate. I've been tracking the area's distressed CRE since Q3 of 2009, when we had 4.1 million square feet of distressed space, most of it retail. In Q1 of 2012, we've jumped to 15.4 million square feet of distressed space, most of it now in the industrial sector.

The growth was, of course, astounding early in the recession, but has since calmed down to a trickle.

What we're now waiting to see is ... how will things shake out in 2012. Sales of distressed space had a big boost in the second quarter of 2011, notably after Auction.com's auction of around twenty CRE properties. Auction.com has another auction set for a couple weeks from now, and that might produce the same jolt to the system.

We had better hope that it does. After just one month of Q1, 2012, distressed space has grown by 4.9 percent. If we continue at that rate, we will see the gradual slide in distressed growth make an unwelcome U-turn. If distressed space keeps mounting at the same rate, Y-O-Y growth for the first quarter of 2012 will be in the neighborhood of 16 percent, the worst number we've seen since the first quarter of 2011, and the first increase

How will this potential flood of CMBS affect the local commercial market? It will drive the value of real estate down even further than it already has, which has the perverse side effect of pushing properties that otherwise would be in decent shape underwater in terms of their loan-to-value ratio, thus perpetuating the cycle. As these properties are snapped up by canny investors, they'll be able to undercut their competitors on rent, which to date is proving the key factor in many of the leases being signed these days.

In a nutshell, the cycle of re-valuing commercial real estate is not over by a long shot. You have to forgive property owners for thinking that the 50 percent plus haircut they've taken on the value of their properties has to represent the end of the cycle, but the looming wave of foreclosures and short sales suggests that it is not. Commercial real estate in Southern Nevada is already selling at below replacement cost, and it looks like those values, and prices, are going to be compressed a bit further before all is said and done. The lesson here - there are deals to be had in Southern Nevada, but only if you want to hold them for the long term. While quick flips are not impossible, especially for properties bought at an absolute premium at an auction, they will probably be the exception rather than the rule for the next few years.

Thursday, February 2, 2012

Like Molasses in January

I know, it's supposed to be February ... but the going has been slow this January, with strong indications that January was a negative month for Southern Nevada commercial real estate.

December employment numbers finally popped, and the year turned out to a bit weaker jobs-wise than November had made things appear. Looking at my database activity in January, this does not come as a surprise for me.

Overall, the trend is still positive, but the climb is so gradual that it isn't hard to miss it. The graph above shows the number of avails removed from the database as a percentage of the number of availabilities added. Now, this is not scientific by any means because it doesn't take into account the size of the leases, but it does give an idea of which direction the market is going. I can say, as they guy who has to enter and remove all of these records, that the trend right now is the new availabilities are bigger than the removed availabilities.

You can see that there have been a few months (July 2010, October 2010, January 2011, September 2011 and November to December 2011) where availabilities removed exceeded availabilities added. Between Jul 2008 and July 2010, there was a pretty steady improvement in this number. Once we hit mid-2010, though, the needled started jumping, so to speak, as though there was an earthquake. Several strong months, several weak months. This is one of factors that is making predicting the next 12 months of the Southern Nevada commercial real estate sector's performance difficult.

If we drill down a bit, we can see how different types of availability are shaking out.

The number of direct lease comps added to the database showed distinct improvement in 2008/2009. Since then, the trend has flattened out, and January 2012 has bent things in the wrong direction. Perhaps February numbers will change that, but for now, it looks as though leasing activity has "topped out".

The picture is more promising for sales comps. They hid a nadir in early 2009 and have improved since then, but still we see the gaps between "good months" and "bad months" getting very wide in 2011.

What does it all mean? That's the big question. Either things are mellowing out for a month or two before they begin to climb again, or 2011 was our big "recovery" year and 2012 is going to come in a bit weaker. Personally, I believe it is the former rather than the latter, but I'm not counting the latter out.

February will give us a better idea of what lies ahead in 2012. If February is weaker than January, then all bets are off on 2012 being any stronger than 2011 and you can probably flip a coin on whether any given product type posts minimal negative or positive net absorption by year's end.

On the other hand, if February reverses January's course, then it appears that we're in a gradually improving market in 2012. Let's hope for a strong February! Either way, things have grown quite volatile, so keep your seat belt fastened.

Tuesday, January 24, 2012

Digging Into the Office Data

Aside from my normal analysis for the quarterly reports, most of my analysis comes about due to my mind wandering while I'm updating my database (a three to four hour task every day of the week).

Yesterday, I began to wonder about where the net absorption had been going over the last decade in the office market - sort of looking back to look forward.

So, today I put together some numbers comparing the share of office net absorption claimed by the different classes of product and the different submarkets here in Fabulous Las Vegas (or Fabulous Southern Nevada, to be more precise).

Share of Net Absorption by Class, 2001-2011

No surprise here. Southern Nevada is a third tier office market that leans heavily on its Class B and Class C product. If we look at this same graph, but leaving out the last 4 years of recession-era data ...

Share of Net Absorption by Class, 2001-2007

... we see that over the last four year a tiny shift from Class C to Class A and Class B product has occurred, most likely a result of lower rents allowing businesses to "move up in the world" and take better space.

Share of Net Absorption by Submarket, 2001-2011

The recession has been felt most keenly by the older submarkets of East Las Vegas and West Central, with both turning in negative net absorption for the decade. The Southwest and Henderson submarkets appear to have been the key benefactors of this flight.

Share of Net Absorption by Submarket, 2001-2007

Screening out the recession data, we see that East Las Vegas and West Central turn positive, but not by much. More interesting, perhaps, is the switch between Henderson and the Northwest submarket. Pre-recession, Northwest was firing on all cylinders. Unfortunately, a great deal of its office space was caught up in the restructuring of General Growth Properties, and languished in the form of "zombie buildings", unable to offer tenant improvements and thus compete with non-distressed office space elsewhere.

Henderson has done well, but they're about to lose a significant tenant in the form of Zappos.com, which is moving to the Downtown submarket by 2014.

Moving forward, one might want to focus on Class B and Class C office product in the Southwest and Northwest submarkets, and perhaps in the Airport and Henderson submarkets as well. All of these classes of office have fairly high vacancy rates in these submarkets at the moment ...

... so there's probably little need for development over the next few years. Class B product in the Airport submarket looks the most promising, but it is worth remembering that there isn't much vacant land on which to develop large office products in the Airport submarket - most of that sort of development will probably be shifted south into the western reaches of the Henderson submarket if it occurs at all.

I'll leave you with the following graph, which tracks quarterly office net absorption by class over the past decade. It's been quite a roller coaster ride, but at least things look to be heading up, assuming we can weather the deleveraging storm on the horizon.

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