Snapshot: Las Vegas Commercial Real Estate
US News & World report
The worst of the housing bust might finally be over, but another real estate tsunami is about to swamp many American cities. This time, it will be office buildings and retail space going vacant and facing foreclosure.
Like housing, commercial real estate goes through booms and busts, and the coming wipeout is likely to be a doozy. Commercial developers went on their own spending spree earlier this decade, racing to cash in on the hot economy with new office towers, hotel complexes, and retail projects. Banks supplied hundreds of billions of dollars in loans, often assuming that rents paid by tenants would keep going up. "The assumption was that the good times would go on forever," says Victor Calanog, director of research for REIS, a real-estate-research firm.
Commercial rents have begun to plunge as companies downsize, warehouses empty, merchants go out of business, and huge retailers like Starbucks and Macy's close underperforming stores and demand rent reductions. Office and retail vacancy rates are near record levels and going higher, and developers are about to face crunch time as billions in loans come due for repayment or refinancing over the next three years. Like homeowners who are "under water" on their mortgages, many of those developers owe more than their buildings are now worth.
Las Vegas: What happens in Vegas depends on the rest of the American economy, and until Americans start to feel wealthy again, travel (and gambling) budgets will remain crimped. Southern Nevada already suffers from one of the worst housing busts in the nation and a 12.3 percent unemployment rate. Vegas had a hot hand earlier this decade, which led to lots of commercial construction. But nearly one fifth of Sin City's commercial space will stay vacant until tourists, conventioneers, and their cash start to return.
Las Vegas Sun
A tsunami of commercial real estate foreclosures is on the horizon and is threatening banks and undermining developers who are already struggling with high vacancy rates
New York-based Real Capital Analytics’ recent report ranked Las Vegas second behind New York and ahead of Los Angeles when it comes to troubled commercial properties. The value of troubled loans has grown from $4.7 billion in early 2008 to $6.4 billion, said Jessica Ruderman, a senior market analyst with the firm.
That’s 26 percent of the commercial market either in default or that has been foreclosed upon. That includes office, industrial, retail, hotels, casinos, condominiums and apartments, Ruderman said.
Brokerages are reporting record office vacancy rates as high as 20 percent to 25 percent, when including subleases. Retail vacancy is approaching 10 percent and in some cases has doubled over the past year. One brokerage reported industrial vacancies have surpassed 11 percent.
Consulting firm Applied Analysis reported a vacancy rate of 65 percent of offices opened in the past year, many in the southwest valley.
“We have seen it occur in the residential market, but we have yet to fully face it in the commercial,” said Jeremy Aguero, a principal at Applied Analysis.
Las Vegas Sun
Unemployment and the recession are taking a toll on Las Vegas’ commercial real estate, driving up vacancies and prompting landlords to trim lease rates.
Three brokerages agree that the office vacancy rate passed 20 percent at the end of the second quarter.
Retail and industrial vacancies, although much lower than office, are rising sharply as well, according to the firms.
CB Richard Ellis reported a retail vacancy rate as high as 12.6 percent in the second quarter.
“Given that we are losing jobs right now, we are probably going to continue to see occupancy decrease through the rest of this year,” said Stater, who added, “we are dealing with more than just the problem of the recession ... We have a lot of issues to work through in Las Vegas. It will probably be two to three years before we have any major new development.”
The problem with commercial real estate is too much supply, Stater said. There is a supply of 3.3 years of industrial, 7.9 years of office and 2.7 years of retail space. A normal level would be eight to 10 months, he said.
There is an excess of 6 million square feet of industrial, 4.7 million square feet of office and 2 million square feet of retail space, Stater said.
There are 850,000 square feet of distressed anchored retail space that increases to 2.2 million square feet when malls and other specialty space are added, Stater said. There are 900,000 square feet of distressed office space of which 450,000 square feet are owned by banks or the Federal Deposit Insurance Corp.
This distressed space will be sold at low prices and when it comes on line, that will push down rents, Stater said.
Las Vegas Sun
Analyst: LV keeps spot at top of list of distressed properties.
The number of commercial properties facing foreclosure tapered off over the summer, but that hasn’t prevented Las Vegas from holding onto its No. 1 ranking for distressed buildings and development.
In its August report that tracks the market through the end of June, New York-based Real Capital Analytics said Las Vegas had 168 troubled assets valued at $9.2 billion. That is down from $9.4 billion in its July report and $9.7 billion in its June report.
The slowdown comes after distressed properties rose 52 percent during the spring.
“It has been consistent, but I still think it gets worse before it gets better,” said Jessica Ruderman, a senior analyst at Real Capital Analytics.
Of the distressed properties, about $1 billion or less than 10 percent have been resolved, Ruderman said. Resolving them means they have been sold, refinanced or a new tenant has been found, she said.
John Restrepo, principal of Restrepo Consulting, said he has heard reports about lenders trying to work with developers and property owners because they know there are no buyers for those properties.
“If they take the properties, they have to manage and maintain them and get them leased up or finished if they are under construction,” Restrepo said. “They are finding it’s better to work with an established good developer.”
Restrepo said that may not last. As the job market worsens, vacancy rates are likely to increase and banks will face more pressure from federal regulators to dispose of underperforming assets. He said the market won’t know until 2010 how big the commercial foreclosure wave is.
“All bets are off if the economy worsens,” he said.
Las Vegas’ No. 1 ranking from Real Capital Analytics is based on the percentage of commercial property in distress rather than raw numbers. Detroit was No. 2.
In its August report, the firm breaks down the $9.2 billion in distressed properties to $6.5 billion in commercial properties that are “troubled,” $692 million are having loans restructured or extended and $2 billion in properties foreclosed by lenders.
Development properties fared the worst with $4.6 billion in distress. That was followed by $1.8 billion in retail properties and $1.5 billion in hotels. Retail distressed properties have grown by about $100 million to 6.7 million square feet, up from 5.8 million in the last report.
Other distressed properties include 37 apartment complexes at $907 million; $51 million in industrial and $72 million in miscellaneous commercial.
I recall a post - back in Feb 2006 (LINK)- where I stated that this bubble too would one day pop