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.

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