Son of Boom

On the cusp of Southern Nevada’s economy returning to form – i.e. the Recovery Index is almost back to its 2005 level, it might be a good idea to examine the economy we’ve built over the past 10 years. The “Son of Vegas Boom” is a different cat than the “Vegas Boom”, and there are pros and cons to what we have become.

The recovery index above tells the tale. It shows numerous measures of the local economy, comparing their year-over-year performance. These indices compare current performance to an arbitrary date in the past, in this case January 2005. You can read the current level as a percent of the level in 2005.

On the positive side, we see Gaming Revenue, Employment, Taxable Sales and LA Port Traffic are all better than they were a decade ago (though not by much). Commercial Occupancy and Visitor Volume are nearly there. The takeaway – Southern Nevada’s gaming business is doing well. People are back to work and locals and visitors are spending money.

Two measures are well below where they were a decade ago – New Home Sales and, the driver of the home sales, In-Migration. In-Migration here is actually the out-of-state drivers licenses turned in at the local DMV. It suggests that Southern Nevada is no longer growing at the rate we used to. This population explosion was a key driver of the construction sector in Southern Nevada, one of the two pillars (with gaming) of the old economy.

Electric meter hook-ups tell a similar story of slower growth, and construction jobs, while they have in recent months shown improvement, remain well below boom levels.
This leads us to the two problems with the new economy. First and foremost, our eggs are truly all in one basket now – hospitality. We also can no longer rely on population growth to get us out of national (or global recessions). In the good old days, hundreds of new incomes coming to the valley every month created a buffer for Southern Nevada in times of recession – that buffer is effectively gone.

That means that when the next recession hits – likely within the next one to three years – Southern Nevada can expect to experience it in much the same way as the rest of the country (or planet). Keep this in mind as you advise clients in terms of expected return on investment properties, assuming they plan to hold them for fewer than four or five years, and on tenant renewals.

Almost There

When the Great Recession hit, back in ’08 (read that as “aught-eight” if you want to sound like an old pioneer), I decided to begin tracking the recovery that I assumed would eventually follow. I devised an index of economic measures that I thought had an impact on commercial real estate, and began tracking them. Month in, and month out, for eight years I’ve tracked these numbers, watching the index get worse, at first, and then begin to show some upward movement. Today, I am proud to announce that the index has almost returned to where it was in January 2005, midway into the boom.

Since historical context is valuable, the Recovery Index goes back to 1996. For that year, the index averages 68.5, which can be interpreted to mean that the local economic drivers of commercial real estate were about 69 percent as strong in 1996 as they would be in 2005. In 2006, the strongest overall year for the local economy, the index averaged 106.5. The highest index measure was in September 2006, when it hit 108.8. The worst year for the local economy was 2010, when the index averaged 84.7 – still well above 1996, but well below 2005. The lowest measures of the index came in April and May of 2010, at 83.3. Essentially, the Great Recession brought the local economy back to where it had been during the early 2000’s, erasing seven years of growth.
So far in 2015, the index has averaged 96.6, roughly equal to mid-2004. The highest recent measure was in September 2015, at 98.9. We’re at about 99 percent of where we were in 2005, a decade ago.

Of course, not all measures are increasing at the same rate. At this point, five of the eight measures are back over 100 – Gaming Revenue, Visitor Volume, Employment, Taxable Sales and LA Port Traffic. These measures range from 101.5 (visitor volume) to 120.9 (taxable sales), and suggest an improved commercial economy – people are buying more, making more and shipping more. Commercial occupancy is at 97.6 – nearly back to where it was in 2005.

The current weakness in the local economy comes from a lack of population growth. The Driver’s License Count is now at 73.9, indicating that migration into Southern Nevada is now at about 70 percent of where it was during the boom. The strongest migration into the area came during the winter of 2003 (and in fact, in-migration always seems to spike during the winter). More significantly, the Driver’s License Count averaged 89 during the mid-to-late 1990’s, so we’re now getting far fewer people moving into Southern Nevada. Migration was actually even stronger a few years ago, in 2012, than it is now.

When you consider the recovery we have seen in taxable sales without the influx of new people into the Valley, you realize how much the local economy actually has recovered, and how much stronger that recovery would be with continued strong immigration into Clark County. The real loser from this lack of population growth has been New Home Sales. That number now stands at just 22.8 – we’re selling approximately 23 percent as many new homes now as we were in 2005, and about a third as many as we were in the 1990’s.

The local economy has come a long way since the depths of the Great Recession, but new home sales and migration into Southern Nevada are still mired in the Great Recession. Perhaps this is the new normal. The key point is that despite population growth and the residential construction industry, two former pillars of the old normal, being so weak, Southern Nevada’s economy is close to reaching the strength it had before the Great Recession hit. This change to the “new normal” has been accompanied by changes in the demand landscape of the commercial real estate sector. For example, warehouse/distribution in particular and industrial in general is in high demand, while office and retail users are finding new ways to maximize their use of space (i.e., they’re doing more with less). Getting to know the “new normal” and what it means for your clients and their real estate needs is key to your success as a broker.

Art and Science

They say that economics is an art as much as a science. This is actually a fancy excuse for why economists have to spend so much time finessing and guessing – the truth is, there’s more information out there than we know or can know, and so we have to collect what we can, when we can, connect the dots, and present the most complete picture possible of the current state of the economy, and where it might be headed.

For the past seven years (!) I’ve maintained an economic index called the Commercial Real Estate Recovery Index. I use it to predict near future demand for commercial real estate in Southern Nevada. To look at now, you might not guess that Southern Nevada is kicking ass at the moment, economically speaking.

Looking at the index, we find year-over-year growth in most of the data points that make up the index, especially port traffic in Los Angeles (not a key data point, I grant you, but it does show 11.2 percent growth year-over-year, and some of that cargo makes its way to and through Southern Nevada), taxable sales (6.8 percent growth y-o-y), and employment (3.2 percent growth y-o-y). Only one measure is tanking at the moment, and it is unfortunately an important one: New home sales are down 21.8 percent from one year ago. Since 2010, the index has grown by an average of 0.2 percent per month.

We have positive growth, but not wildly positive growth. So why am I saying that the economy is kicking ass? Because the numbers do not show everything. The jobs data collected by the state, for example, is “establishment based”. This means that the data gatherers poll a variety of existing businesses and ask them whether they’re hiring or firing. Based on their responses, the state decides how many jobs were likely created and/or destroyed, and comes up with a number. What this process does not capture, of course, is jobs created in newly created businesses.

Using a new method of allotting jobs by industry into the different sectors of commercial real estate, we get the following job picture:

A few take-aways from this graph: 1) The recession hurt different sectors to different degrees, and those sectors responded to that pain in different degrees. The industrial sector took the biggest hit in terms of lost jobs, but the industrial real estate market is in much better shape than the office market, which already appears to have regained the jobs it lost during the recession. 2) Employment in the different sectors peaked at different times - industrial first, then professional office, and finally retail. Medical office employment flattened for a brief time during the recession, but didn't actually peak until 2013 - I can't imagine what might have caused that. 3) Industrial jobs - really construction jobs - have stubbornly stayed lost during the recovery, while professional office jobs seem to be back to their pre-recession level and retail jobs have surpassed their pre-recession level. Unfortunately, this job recovery has not been matched by an "occupied square footage" recovery - this suggests a transition in how space is being utilized. 

The problem with the paragraph above, though, is that it takes for granted that the employment picture it depicts is completely accurate. Alas, it is not.

What the graph above does not capture – the “known unknown” – is how many jobs are being created in newly created businesses. Here, I have to fill in the blanks with my own anecdotal knowledge of the amount of lease and sale activity I’m seeing while I update my database on a daily basis. I don’t have this information dropped into a spreadsheet and calculated and analyzed yet, so I cannot offer any concrete numbers, but my impression is that new business creation is high and it is this new business creation that is driving commercial real estate activity at the moment.

Thus, the numbers we have look pretty good, but I believe the numbers we don’t have look even better, and therefore, using a little finesse and guess, that Southern Nevada’s economy is in better shape than the current numbers suggest.

Of course, I sincerely hope now that I've said this that an “unknown unknown” doesn’t pop up and make me eat crow.

Bucking the Trend

A new year has dawned, following a year of uneven progress for the real estate market. The industrial market had its best year in five, retail kept its head above water and tallied up its third year of positive net absorption, and office managed a decent year all the while looking about as appealing as Mylie Cyrus with a foam finger.

The underlying economic fundamentals of 2013 were uneven as well, but positive overall. I’ve already written about the trend in Southern Nevada's Napoleonic economic cycle of attack in the summer and retreat in the winter (yes, I hate myself a little for that Napoleon bit, but my father paid for a history degree so I need to use it), so now we need to see if that trend is holding.

Economic data never arrives as quickly as we would like it (“we” being people who have to think and write about economics - I'm sure the compilers of economic data think it comes plenty fast enough), but the numbers for November 2013 are finally filing in to be counted and analyzed. If the trend we discussed last time holds, we should see the CRE Recovery Index leveling off or dropping off in November.

And now for the good news –

November’s index number was actually up! In November, the index reached 95. This is the highest number we’ve seen on the index since December 2008, and that was when the index was plunging (it would be 93 the next month, and 86 six months later). In general, 2013 saw the index take a small step back in February, level off for a few months, and then begin to grow in June, with that growth continuing through the summer, fall and winter. December numbers are not all in yet, but when we look at the numbers that are in, and if we assume those that aren’t in at least stay stable, the index number for December 2013 should remain at 95.

What does this mean? It means that 2013, at least the latter half of 2013, was a pretty solid year. It’s no surprise that it was a year that generated pretty strong performance in the real estate market. We might be seeing the winter lag coming in December and maybe January, but if the region is able to build in 2014 on its reasonably good performance in 2013, we should see continued recovery in the real estate market through 2014. Based on last year’s performance, the trajectory of the retail market is the one to watch. Retail went negative at the end of 2013 after three years of positive net absorption, and this negative turn is taking place just as speculative construction is returning to the retail market. Whether those new projects will stimulate or cannibalize the existing market will be very interesting!

Cycles

If we had been waiting for the “year of recovery”, the year local economy was finally going to turn around, 2013 is probably it (and I mean that the way it sounds – yeah, 2013 is probably about the best we can hope for). The year has been bery bery good to commercial real estate, and the wider economy has seen some improvement, though not nearly as much as we would like.

Looking at 2012, we saw a year with faster improvement in the first two-thirds of the year, and then a slow-down and fall that lasted into 2013, essentially erasing all of the year’s earlier gains. When things began turning around in 2013, the question was – will it last?

Now, economies work in cycles (and cycles within cycles, and cycles next two cycles that sometimes correspond, which in itself is another cycle), and cycles don’t necessarily work within the parameters of human defined time. After all, some day had be chosen as the first day of recorded time, and that choice was ultimately arbitrary. If you peruse the accompanying graph, you can see a pretty fair example of these cycles in the CRE Recovery Index (which I’ve now extended back to 1995). From 2002 to 2007, you can see the index peaking in October of each year, and then retreating from November to March or April, before rising yet again.

Even during the crash years from 2008 to 2010 you can see small peaks each October, though obviously during those years growth in the index never lasted for more than two or three months, followed by very sharp declines.

By 2010, the normal cycle had once again reasserted itself. Growth in the index was not as smooth and stable, but did generally follow the pattern outlined above, though with weaker growth and sharper declines than during those halcyon days of old.

What does this mean for 2014? Well, if the pattern holds, it is likely we will see the index begin to retreat in November or December. This retreat will last through the first quarter of 2014. In 2012, the measures that caused the index to tumble were Visitor Volume, New Residents and Los Angeles Port Traffic. In 2011, it was Visitor Volume and Los Angeles Port Traffic. In 2010, it was New Home Sales, Visitor Volume and Los Angeles Port Traffic. Do you see the pattern?

We can assume that Visitor Volume and LA Port Traffic are going to begin to fall in the very near future. At the moment, they remain strong. Their retreat is cyclical, and thus normal and nothing to fear. If they perform better than expected, then so much the better.

The questions we need to grapple with, then, are as follows: 1) Will there be other measures of the local economy that will suffer during the inter-year lag months? 2) Were the growth months in 2013 strong enough to keep us on a better footing after those months of retreat.

My guess is that we will not see any other measures of the economy enter into retreat along with Visitor Volume and Port Traffic, and thus when the Spring thaw reaches us in 2014, we will find ourselves in a stronger position than we had been in 2013, and well on our way towards what we might term a “complete recovery”. I think I see the light at the end of the tunnel.

What Exactly Do We Mean By Recovery?

Declaring that an economy has recovered, at least in the context of the latest recession (you might have read about it – it was in all the blogs), is a tricky undertaking. Are we counting “recovery” as a return to the economy at the peak of the bubble, at where it was before the bubble began, or at some guess at where it would have been without the bubble?

Aside from the timing, what are we waiting for to recover? If it was just a matter of visitor volume, Las Vegas finished its recovery last year. Since I'm a commercial real estate researcher working for a commercial real estate firm (Colliers International, to be precise), do I need commercial real estate to fully recover before I declare the local economy recovered?

For the purpose of this article, I offer two definitions of recovery. A recovery will:

• Bring the local economy back to a point before the beginning of the bubble (circa 2005)

• Use an index of the following measures of the local economy – New Home Sales, Commercial Occupancy, Gaming Revenue, Visitor Volume, New Residents, Employment, Taxable Sales, and Port Traffic in Los Angeles (this is the Recovery Index I have been using since 2009)

Using these definitions, Southern Nevada’s economy had an index value of 100 in January 2005. The index reached a peak of 109 in October 2006 and a trough of 83 in April 2010.

At this trough, Southern Nevada's economy reached an index value it hadn't seen since its last recession in 2001/2002 - essentially erasing 8 years of economic growth. It is entirely possible that the growth we might have seen during that period, had there been no economic surge, is gone forever. One could argue that, sans the surge, the economy would have an index value of 110 now, an index value we're about 5 years away from reaching at the current rate of growth, which isn't negligible.

If we look at index growth in 5 year periods, we see the following:

1996-2000 = 26.2% (5.2% average annual growth)
2001-2005 = 19.4% (3.9% average annual growth)
2006-2010 = -17.5% (-3.5% average annual growth)
2011-2013 = 9.4% (3.1% average annual growth)

Current index growth is about 80% of what it was in 2001-2005, and 60% of what it was in 1996-2000. Growth in the last three years is about at 90% of the negative growth experienced in the "plague years" of 2006-2010. If we wanted to erase the effects of the Great Recession, we would need to more than double current rates of growth, a situation unlikely without an explosion in construction activity in Southern Nevada.

Where is Southern Nevada today in terms of getting back to where it was in 2005, what one might call a "do-over recovery"?

In September 2013, Southern Nevada’s economy has an index value of 94, so not recovered yet, but not so far off. In 2012, the index value started at 89, increased to 93 by November 2012, and then it started to fall. From February 2013 to May 2013, the index value stuck at 91. Growth began in June and has continued since. If economic growth in the next few years matches the growth pattern of 2012/2013, Southern Nevada’ s economy should finish recovering by October of 2016!

Could the recovery move more quickly? Naturally. The economy was stronger in 2011 than it was in 2012 and has been in 2013, so it is certainly possible for the economy to recover at a faster pace. If we were to assume economic recovery on pace with 2011, Southern Nevada would have finished its recovery in July 2015 – better, but nothing to crow about.

Given the two possible rates of recovery described above, it seems reasonable to assume that Southern Nevada’s economy, and specifically its commercial real estate market, have at least two or three more years to go before they can be said to have recovered to a pre-recession level. Simply put, Southern Nevada is not currently making up the ground it lost during the Great Recession.

Vegas Enjoys the Spring Thaw

Waaaay back in November of 2012, the Las Vegas economy, which had been in growth mode for a good 10 months, decided to take time off for the holidays. What followed, in terms of the CRE Recovery Index I maintain, was a pretty rapid slide, from an index value of 91 (a value of 100 represents the economy as it was in January 2006 – i.e. the “good old days”) down to 86, roughly the value we had in December 2011 just before the 2012 growth spurt began.

In March, though, the index began to grow again, and in April 2013 it stands at an 89, not far from the 2012 high and well above the low of 80 recorded in March 2010 at the low-point of the recession.

On a year-over-year basis, the following components of the CRE Recovery Index have posted growth, going from the highest growth to the lowest: New Home Sales (76.6 percent growth), Clark County Taxable Sales (5 percent growth), Gaming Revenue (3.1 percent growth), Employment (2.2 percent growth) and Commercial Occupancy (1.8 percent growth). With the exception of new home sales, we’re looking at very moderate growth in the economy. Depending on who you speak to, new home sales are either going to maintain their dynamic growth, or they’re at the end of it, but for now they are definitely driving the CRE Recovery Index higher. If new home sales do slack off in the coming months, it is likely the index will either turn flat or begin to decline once again.

Components of the index that experienced negative growth over the past 12 months were New Residents (negative 12.6 percent growth), Container Traffic in Los Angeles (negative 7.1 percent growth) and Visitor Volume (negative 0.6 percent growth). While a small dip in visitor volume isn’t much to worry about, the much larger dip in residents moving to Clark County is, as a lack of new bodies could disrupt new home sales.

Get It Together, Vegas

Have you ever known somebody who just couldn’t get it together, at least not permanently? They would get their stuff together for a few months, and then slide right back into their old back habits. If you work in Las Vegas commercial real estate, the answer is yes, and the friend is the real estate market.

2012 was a pretty good year for our CRE Recovery Index. There were a couple small dips in the index, but overall, things were looking up. The market did pretty well, as the index is supposed to predict, with office and retail putting up good, though not great, numbers, and industrial lagging behind until the first quarter of 2013, when it showed some surprising life. 2011 was a year of peaks and troughs, with things better at the end than the beginning, but 2012 was a pretty smooth ride in the right direction. And then 2013 showed up.

Just as the market posted its first all-around positive quarter in 5 years, with the industrial, office and retail markets all showing positive net absorption, the index was heading down. December 2012 saw the index fall from 91 to 88, inspired by lower visitor volume and gaming revenue and a less traffic through the port of Los Angeles. This wasn’t too worrisome, though, since tourism numbers can fluctuate and port traffic is, at best, a minor piece of the puzzle for Southern Nevada. January remained at 88; port traffic dropped again, but so did the number of new residents moving into the Valley, new home sales and, once again, visitor volume. These were balanced, though, by higher gaming revenue and taxable sales. February saw another dip in the index, down to 86, where the index stood in January 2012. New home sales were down again, as was gaming revenue, visitor volume, new residents and taxable sales. Is it time to worry?

If the index is accurate, it predicts a slow second quarter for commercial real estate, and perhaps a slow third quarter as well. That doesn’t necessarily means negative net absorption, but just less positive net absorption than we would like. While the office market has had three quarters of positive net absorption, the numbers have been on the decline. Retail has also been positive but weak. Industrial has the benefit of strong build-to-suit activity now, and will probably do well through mid-year. But, in general, the way ahead for commercial real estate could be a little rocky for the next few months.

2013 - Are You a Good Year, or a Bad Year?

As we bid a fond farewell (or good riddance) to 2012 and usher in brand spankin' new 2013, it is natural to wonder just what we're getting ourselves into.

After all, 2011 was a pretty decent year for Las Vegas CRE, so it was a bit of a shock when 2012 hit us like a ton of bricks. Fortunately, 2012 got a bit sunnier at the end of the year, but will the trend continue? Will 2013 be a good year for Las Vegas CRE, or another washout year like 2012? Well, let's look at the index ...

The CRE Recovery Index was on its way up through most of 2012, predicting that positive movement towards the end of the year. But in September, the index began to go flat, and in November and December it began to fall. In and of itself, this is not odd – it usually does begin to fall towards the end of the year, and on the positive side, the decline in 2012 was not as severe as in the past two years. In general, the rise of the index in 2012 was more stable than in 2011, and there is every reason to believe that this slow and steady rise will be seen again when January and February numbers become available to us.

On a year-over-year basis, the December 2012 New Home Sales index and Taxable Sales were up sharply, and increases were also seen in the Commercial Occupancy index (finally), Visitor Volume and Employment. Port traffic in Los Angeles was down considerably on a year-over-year basis – a minor factor in the overall CRE Recovery Index – and Gaming Revenue was down as well.

In general, the cycle appears to be operating as usual. Growth was slower and steadier in 2012 than in 2011, and at the moment we can probably expect 2013 to look similar. Higher taxes and increased costs for healthcare and health insurance, along with the currency wars that are being fought between the industrialized debtor nations of the world, might hamper that growth, though, so keep your head on a swivel.

Gazing in the Crystal Ball for 2013

I'm going to start posting some excerpts from the Q4-2012 reports on this blog, but first decided I'd do a little forecasting with the CRE Recovery Index.

In general, 2012 had a decent close for office and retail, though industrial (and specifically warehouse/distribution) continued to show weakness, and in fact took a step back in 2012. While predictions for economic growth (national) in 2013 vary widely, few economists seem to think 2013 is going to be especially strong - perhaps better than 2012, but not stellar.

The CRE Recovery Index would seem to support that supposition for early 2013, as it hit a three month plateau and then dropped slightly in November. In all, 2012 showed steadier growth than 2011, which was a real roller coaster. A depressed index in late 2012 points to a depressed first half (or at least first quarter) in commercial real estate.

In November, the index components worked out as follows:

New Home Sales: +7 Y-O-Y - new home sales are showing a definite improvement in Southern Nevada, hitting a level we haven't seen since early 2009. They still have a really long way to go, but any positive movement here is welcome.

Commercial Occupancy: +1 Y-O-Y - it took a long time to get this index to move, but strong net absorption numbers in the retail and office markets finally got commercial occupancy to increase by a click in August 2012. These numbers are quarterly, and the fourth quarter saw no movement over the third quarter.

Visitor Volume: +0 Y-O-Y - visitor volume in Southern Nevada, despite being flat in November on a year-over-year basis, was in record territory in 2012.

Gaming Revenue: +1 Y-O-Y - in general, gaming revenue has not been as strong as visitor volume - more people, but less gambling - but it is showing recovery from the depths of the recession.

New Residents: +6 Y-O-Y - this is probably the more important index to watch. Many would hold that construction was the second pillar of Southern Nevada's economy, but they're only partially correct. Migration was the second pillar of our economy, with construction being a very visible component of migration into the Valley. People are once again coming to our balmy shores (okay, we don't have shores, but you know what I mean), and that should go a long way to helping the local economy to recover.

Employment: +1 Y-O-Y - employment has been only marginally better in 2012 than 2011 and 2010. The hospitality sector posted strong job gains in the early part of 2012, but has now settled back down. Government is hiring again (take that whichever way you want), as is the health services sector (though it isn't translating into increased demand for medical office space), while construction and financial services are still the big losers. In terms of local CRE health, new residents is phase one, new jobs is phase two. We're seeing movement in phase one, so we will hopefully see phase two light up in 2013.

Taxable Sales: +5 Y-O-Y - taxable sales is the other big mover for Southern Nevada in 2012. The taxable sales index went from an average of 79 in 2010, to an average of 83 in 2011 to 2012's average of 88. Definite progress, and probably why the retail sector is showing signs of being the first sector to post real, solid recovery in the market.

Port Traffic: -6 Y-O-Y - port traffic in Los Angeles is a minor part of the index, and overall is stronger than it was before the recession.

All in all, look for a slow start to 2013, with retail probably showing the most resilience. The office market did well in late 2012, but employment growth in office sectors is marginal and I frankly don't trust it. Outside of warehouse/distribution, industrial is doing well - it will unfortunately probably do more of the same in early 2013.

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.

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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.

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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.


JMS

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!

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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.

CRE Recovery Index Side Steps in April

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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?

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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:

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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.

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

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.

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.

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