A Good Year for Retail, But What Lies Ahead?

The fourth quarter of 2012 saw another quarter of positive performance for Southern Nevada’s retail market, the sixth quarter in a row and a sure sign that Las Vegas has some life left in it yet. While overall activity did not rise, it appears that fewer retailers are now downsizing or closing up shop, and that helped produce 117,731 square feet of positive net absorption. The vacancy rate has now decreased by 1.4 points over the past four quarters, reaching 10 percent in the fourth quarter of 2012. Asking rents have continued to slide, and there were no new completions of anchored retail this quarter.

Southern Nevada currently has 1.16 million square feet of big-box space available in the marketplace, representing a vacancy rate of 6.1 percent and at an average asking price of $0.94 psf NNN. Shop-space had a vacancy rate of 14.1 percent and asking rate of $1.41 psf NNN. While shop-space has a higher vacancy rate than big-box, the big-box’s hold about 24.6 percent of all the vacant retail space in Southern Nevada’s anchored centers. Net absorption (including vacant sublease space) in big-box space over the past quarter was 18,133 square feet. Shop space posted 291,470 square feet of net absorption over the same period. Filling big-box space could be a slow process, especially given the current trend in big-box retailing to downsize their stores in the face of “showrooming” by customers who browse in brick-and-mortal retail stores, but finalize their purchase online.

There is no denying that the retail market just finished up a productive 2012. Net absorption was positive for the year, gross absorption was up and overall vacancy is falling. Asking rents have not yet started to recover, but if demand for retail remains strong in 2013 that might change. Despite all of this positive news, there are concerns to be had about the future. Retail in Southern Nevada is overbuilt, and internet retail has the potential to put a damper on future demand for retail space even as consumer spending recovers. Much of the retail space that is now vacant was constructed at a time when making a project look good on paper trumped design considerations and, in some cases, common sense. As a result, much of the overhang of retail product will have a hard time ever attracting tenants, leaving Southern Nevada with two retail markets, one of well-located, well-designed centers commanding strong rents and boasting high occupancy, and another market of retail projects that languish on the margins. Despite these misgivings for the future, we still believe that the overall trajectory of the local retail market is positive, and will remain so in 2013 and beyond. The recovery we have been waiting for is finally here, and while it might not be stellar, it is real and appears to have legs.

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Industrial Looks to 2013 (‘Cause 2012 Is Better Forgotten)

Excerpts from the Colliers International Q4 Las Vegas Industrial Report ...

While the office and retail markets in Southern Nevada continue to improve, the industrial market appears to be the wallflower of commercial real estate. The culprit is most likely the construction sector, for other sectors of industrial employment are showing year-over-year job gains. After a positive year of net absorption in 2011, the industrial market gave back 268,000 square feet of occupied space in 2012. The vacancy rate increased to a new high of 15 percent, and asking rental rates dropped, year-over-year, by $0.03, to $0.48 per square foot (psf) on a triple-net (NNN) basis. For the industrial market, recovery remains elusive.

By any measure, 2012 was a disappointment, though not necessarily a surprising disappointment. The surge in industrial activity experienced in the middle of 2011 raised hopes, but the slow down experienced in late 2011 tempered expectations for the new year, and most people understood that there were head winds to overcome. Industrial employment growth was weak in 2012, and demand for industrial space generally followed suit. As people once again begin moving into Southern Nevada and the available housing inventory is slowly drawn down, the construction sector should find its bottom and then begin to grow. This could still be a two to three year process, but unraveling the problems created during the housing bubble is a tricky thing that cannot be rushed. Several build-to-suit industrial projects are slated to be completed in 2013, and this should help improve the numbers, at least temporarily, but it seems increasingly unlikely that Southern Nevada’s industrial market will really recover until the construction sector finally stabilizes and then begins to grow again. We think 2013 holds the possibility of slow growth, but it is more likely that 2013 will be another difficult year for the industrial market, with as many negatives as positives.

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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.

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.

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.