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.

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.

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 ...

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.

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.

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.