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.

Tuesday, January 17, 2012

Office Dead Zones!

Last week we took a look at where all of the distressed office space was located in Southern Nevada, and discovered no real pattern.

Today, it's time to take a look at office activity in 2011 and seek out the dead zones - those areas of town that didn't show much, if any, lease or sales activity (i.e. gross absorption).

This map plots two different sets of data.

The first, in the large, grey dots, are the locations of available office spaces in Southern Nevada in 2011.

The second, in the smaller, yellow dots, are the locations of office buildings that saw their total square footage of available space decrease between the fourth quarter of 2010 and the fourth quarter of 2011. If I get some more spare time, I'll do this exercise on a quarter-by-quarter basis, but this map will have to do for now - and it does show the location of about 3.3 million square feet of lease and sales activity.

Click the image for a magnified view.

So, what do we learn?

At first glance, it seems as though there is no big pattern. Businesses are taking space all over town, and this probably indicates that the key driver is not location or age of property, but price. We are probably seeing a flight to affordability, rather than a flight to quality.

With a closer inspection, though, we do see a few small dead zones.

The first dead zone is on the southern portion of Fort Apache, near the "Curve" of I-215. While these projects are fairly easy to access via I-215, they appear to be just far enough off the beaten path to be struggling.

There are avails in North Las Vegas that are having trouble competing, but North Las Vegas, on the whole, appears to be doing fairly well in terms of leasing activity.

More interesting is the dead stretch on west Cheyenne, between US-95 and I-215. This is Summerlin territory, and traditionally highly sought after. This may bolster the case for "flight to affordability", but might also show the impact of distressed space on leasing. A few projects in this area were up in limbo until recently, and unable to effectively compete for tenants.

The final dead zone - and not a surprise - is located on Lake Mead Blvd in Henderson. It's a bit out of the way, and not an area known for its office product.

Other than those few zones, it appears that leasing and sales are taking place wherever there is space available - assuming the price is right.

Tuesday, January 10, 2012

The More Things Change ...

Nobody can deny that the past five years have been revolutionary for Southern Nevada's economy. The region took a trip from the economic heights down to the economic gutter, and along the way the very face of the region’s employment changed … well, not much, actually.

Let’s take a look at the employment picture in December 2005 using the numbers from NDETR. Assuming a group of ten workers, those workers would fall roughly into the following sectors:

They're smiling because they have no idea what's about to hit them.

And now for something completely different … Southern Nevada’s workforce distribution in November 2011.

They're smiling because they still have jobs.

Shocking, isn’t it.

Of course, this is just looking at the percentage of workers in each of these vaguely defined sectors. In essence, the workforce has made a very tiny shift from construction into healthcare. If we get a bit more precise, we see the following fields expanding - Government (+1%), Healthcare (+2%), Hospitality (+3%), Retail (+1%) – while Construction (-7%) and Office (-1%) - i.e. financial, real estate, professional and business services - shrank. Industrial employment didn’t budge as a percentage of the workforce.

The view is a bit less rosy when we look at actual jobs, of course, and that’s what really counts. From December 2005 to November 2011, Southern Nevada lost 92,000 jobs. The big loser was construction, which jettisoned 64,000 jobs (more than that, really, since construction jobs had not hit their peak in December 2005). The total number of jobs also declined for industrial, retail, office and hospitality (but only by 1,700 jobs). Two sectors managed to increase employment – healthcare (up 13,700 jobs – nothing shocking there) and government, which despite recent job cuts still employs 1,200 more people now than it did then with not many more citizens to serve and a bit less economic activity to support it.

In plain terms, jobs translate into bodies in warehouses, offices and shops, and bodies need a place to be productive. Thus, jobs equals demand for commercial real estate. If you want a crystal ball into the future performance of CRE, just watch for the next jobs report.

Monday, January 9, 2012

The Cold November Rain

After a 6-month rise in the Southern Nevada CRE Recovery Index between March and August 2011, the index went flat for 2 months and then took a step back in November 2011. Still, on a year-over-year basis, the index was 3 points higher in November 2011 than in November 2010, indicating that the local economy, especially in regards to potential demand for commercial real estate, is in a slow recovery.

Weak points in the index in November 2011 were visitor volume, new residents and container traffic in the Port of Los Angeles. Compared to a year ago, all measures were up except gaming revenue (down one point) and commercial occupancy (flat).

So – what does this mean?

For one thing, it suggests that the road ahead for Vegas CRE might be a bit more rocky than we would like, or would have expected at mid-year 2011. Things have been slowing down a bit, quarter-to-quarter, and we saw a similar cooling in demand for CRE in the second half of 2011. Investment sales have remained strong, though, and that suggests to me that investors are doing their homework and recognize that Southern Nevada has gone into an over-correction. Just the same, I’d prefer to see a stronger recovery underway in Southern Nevada given the potential for economic chaos (Europe, China, Japan, some-other-place-we-haven’t-been-paying-attention-to-that-will-surprise-us) and caution (the election cycle).

Prognosis: Meh

The Vegas That Could Have Been

With the close of 2011 and the (probably) turning of the recession corner for Las Vegas, it makes sense to wander about and survey the wreckage, so to speak. When the recession struck in December 2007 (arguably earlier for our fair city), there were 11.2 million square feet of commercial space that were planned and ready to go. As the economic situation worsened, these projects went into Limbo, and I think it’s safe to say that most of them are now dead and buried.

Over at the Neverland Files, you can take a stroll around Disney attractions and lands that never quite got out of the planning stages. From the view on top of 2011, you can now take a similar stroll through a Las Vegas that might have been.

How about a central core bordering the resort corridor that is flush with high-rise condominiums? That was the dream, pre-recession.

We would have a giant, new mall in Summerlin, complete with two office towers.

The 825,000 square foot World Jewelry Center would have broken ground Downtown (though Downtown is actually doing pretty well without it).

Mendenhall would have an almost 1,000,000 square foot facility completed out on North Lamb, and across the street there would be a shiny new office tower looking back instead of an empty lot.

When you look at the dreams that once danced in developer’s heads, it’s not hard to imagine Southern Nevada keeping those now-vanished 80,000 construction workers quite busy for the next decade. But it was not to be. Las Vegas broke Kasem’s Rule – we were shooting for the stars, but we didn’t keep our feet on the ground. But while we may not have what we thought we would have, Las Vegas has retained its potential. We used to live by the mantra “If we build it, they will come”, but the truth is, the people are coming to Las Vegas without the construction, as tourists and new residents. As the decade wears on and Las Vegas gets back to business, new dreams will be hatched in Las Vegas (water parks and giant Ferris wheels, anyone?), and this time, they might actually come true.


Image from the Jetsons' trip to Fabulous Las Venus, found at Yowp.

Job Creation and Other Fables

There are currently two competing theories on how jobs can be created to rescue the economy. Both of them are wrong. One side would have us spend more stimulus dollars to create jobs, dollars for infrastructure (mostly unneeded and hard to put your name on, so unpopular with politicians) and for “green jobs”. Spain undertook major government investment in green jobs a few years back and managed to drive their unemployment rate nearly to 20 percent as a result. About one trillion dollars of stimulus managed to create, well, nothing, but certainly a trillion more will do the trick. Why, just recently I hit myself in the head with a hammer ten times in order to learn to speak Spanish. It didn’t work, but another ten hits will probably get me there.

The other side believes tax cuts will stimulate hiring. If a company has more money to spend, they will naturally spend it to hire people because, you know, it would really help the politicians out. Less regulation and lower taxes could make the prospect of hiring less daunting, but taxes and regulation really aren’t the impetus for job creation. After all, most European nations have significantly lower corporate taxes than the United States, and they’re not exactly swimming in jobs.

Let’s get back to basics. Jobs are not “created” in the same way works of art or sandwiches are created. Jobs exist solely to serve a need. Necessity is the mother of invention, and she’s also the mother of job creation. Why does an employer hire an employee? To satisfy somebody’s demand for a good or service – and this next part is important – while making a profit. The employer hires an employee because they think will get earn more money from that employee’s labor than they have to pay the employee. Lowering taxes might help push a few potential hires over the line from “loss” to “profit”, but probably not on a large scale unless those tax cuts are significant. Stimulus funds might pay for an employee temporarily, but when the stimulus funds run out, so does the employer’s ability to pay his new employee.

Massive debts accrued over the past two or three decades by individuals, businesses and governments have caused what some economists call “The Great Contraction”. This boils down to less spending for goods and services than in the past. This reduction in spending, coupled with the need for businesses to increase efficiencies and hold their bottom line, means that there is less profitable work to be done. The one thing that will solve our current situation is time. This is cold comfort to the unemployed, who demand action. Politicians have little choice but to heed those calls to action, so they will keep on pushing the fable and leave future generations to pay the bill.


Illustration by Arthur Rackham from 1912 edition of Aesop's Fables.

Where is the Distressed Space in Vegas?

Sometimes, when you look into a thing you discover a pattern that you suspected would be there, or you discover a pattern that takes you by surprise and sends your thinking in a new direction. Sometimes, however, you find no pattern at all, which in itself can be informative.

Recently, I placed all of the distressed commercial properties we track in our database onto a map of Southern Nevada to see if there was a pattern I should be aware of. The answer was that there was no pattern at all. Distressed commercial real estate assets are not concentrated in any particular area of town, but rather follow the overall pattern of commercial real estate development.

This suggests that while over-building (i.e. too much supply, always a tricky thing to predict) may not have helped the commercial real estate market in Southern Nevada, it certainly was not at the root of our problems. Demand for product is hampered by the Great Contraction – our unsustainable debt to ourselves – and this contraction has struck everywhere without prejudice.

As the current distressed problem slowly works itself out, we may see the shrinking islands of distressed properties centered on older areas of town, but for now, properties both old and new are suffering.

How Well Have the Values Held?

I'm glad you asked. A week ago, I decided it might be interesting to look at the most recent crop of commercial sales and compare their most recent sales price to their last sales price - assuming they had one. The results were enlightening:

This graph illustrates the Sale Price in Q2, 2011 as a percentage of a properties last sales price, organizing it by the year of the last sale.

My Take Aways ...

Properties that sold pre-boom (i.e. 2000-2003) are now selling for about 70% of their last sales price.

Properties that sold during the boom (2004-2007) are now selling for about 45% of their last sales price.

Properties that sold post-boom (2008-2010) are now selling for about 65% of their last sales price. This suggests that properties purchased in 2008 (50% rate of return) and 2009 (65% raste of return) were still over-priced. Those few brave investors who entered the market then did not appreciate the scale of the slow-down.

Properties that sold in Q1-11 sold in Q2-11 for 143% of their last sales price. This suggests that prices hit bottom sometime in late 2010/early 2011.

Among property types, Industrial seems to have held its value better than office or retail. Industrial properties had an average rate of return of 70%, compared to 54% for retail and 49% for office.

Owner-user properties have sold, on average, for 63% of their last sales price, compared to 53% for investment properties.
Henderson properties have sold, on average, for 60% of their last sales price, compared to 59% for Las Vegas and 54% for North Las Vegas.

In terms of Q1 to Q2 property flips, the highest returns have been on investment properties (169%) and office properties (153%), and lowest on properties in North Las Vegas (54%). All categories other than "North Las Vegas" had a positive return.

When did each category show its lowest rate of return? For Industrial it was 2008, Office 2006, Retail 2006, Owner-User 2007, Investment 2006, Henderson 2006, Las Vegas 2006 and North Las Vegas 2010.
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