Builders & Developers

Retreat or Advance?

April 01, 2010 - Like a bad dream that never seems to end, the economic outlook for builders and developers continue to remain in a slump that challenges even the best of the state’s entrepreneurs. “The construction industry in Nevada is experiencing depression-like conditions with construction unemployment at 28 percent and rising,” said Kevin Burke, president and CEO of Burke & Associates, Inc. Although a small number of enterprising business people have found niche opportunities in these hard times, none can ignore the lack of solid indicators that could signal a substantial turn-around in the very near future. “Our market was well-placed to take advantage of the boom from 2004 to 2007. The exuberant level of demand caused business and developers to respond,” says Brian Gordon, principal at Applied Analysis. “The music stopped in 2008. Some projects moved forward, but now we’re well down the path of a downturn.” As developers search for signs of an economic uptick, they also reflect on the possible role that the mere perception of poor economics might play in the market.

“To date Las Vegas is weathering the marketplace poorly,” explains Joe DeSimone, broker and owner of First Federal Realty DeSimone. “There’s a lack of confidence for lenders, developers and appraisers.”

“The irony is that the transition from a depression into a recession will actually feel like growth,” adds Burke.

Although Jeff LaPour, president and CEO of LaPour development company, sees hope in small gains that have been reported in visitor volume and DeSimone says he senses an increase in commercial activity, unfortunately statistics continue to paint a rather bleak picture of the economy. With 13 percent unemployment, the Silver State holds firm to its unwelcome high ranking in joblessness, according to recent figures provided by the Nevada Department of Employment, Training and Rehabilitation (DETR). Unemployment in the Reno-Sparks area is 13.5 percent while both the Carson City and Las Vegas areas are reported at 13.8 percent. As if these figures are not high enough, the real number of jobless workers is considered to be more since not everyone is included in the DETR statistics. In addition, Nevada has also reported a rate of underemployment that exceeds 19 percent.

More bleak news comes from the overall flat growth Southern Nevada is experiencing. “Around 4,000 to 5,000 people are still moving in {every month}, but the same number are leaving,” Gordon says. “The population has been stagnant.”

With growth the engine that fueled the boom, it’s no wonder then that the economy is in trouble. “The state has always relied on the growth of gaming, but now there’s a slowdown in it,” says Brad Schnepf, president of Marnell Properties.

Record High Vacancy Rates

In addition to unemployment and growth rates, builders and developers are especially cognizant of industrial, office and retail market performance as well as vacant land transactions. The demand for industrial space has continued to decrease with a negative net absorption of around 3.8 million square feet last year, according to Applied Analysis. This represents the first time in recent memory when more space was vacated than was moved into. The industrial inventory is around 103 million square feet with an average price per square foot of about 63 cents. The vacancy rate of 13.7 percent is a huge jump from 3.3 percent in 2005. For those few businesses who are looking for industrial space, a plethora of inventory awaits them, all offered at very attractive rates. With such a large amount of existing inventory, new construction is almost nonexistent. “I don’t believe there are very many projects in the pipeline,” Schnepf says.

With the Las Vegas Valley office market reporting its worst year on record, Gordon doesn’t expect much development in this sector for the next couple of years. Net absorption for last year was a negative 1.9 million square feet and the vacancy rate was around 23 percent, according to Applied Analysis. The retail market was also bleak, with a negative net absorption of around 70,000 square feet and a vacancy rate of 10 percent for last year. Although vacant land transactions were up by about 32 percent last year from the previous year (1,600 acres changed hands), these sales represent only a small fraction of what was sold during 2004. Gordon cautions investors from drawing conclusions about these figures because they don’t necessarily indicate a widespread trend for economic improvement. “Development is on the sidelines,” LaPour says. “There’s no demand for new product.”

Bright Spots

Amidst the doom and gloom, however, are some notable exceptions to the rule. DeSimone and a group of about 15 investors he describes as “established and prudent” have focused their efforts on building office buildings for professionals such as doctors, attorneys, Realtors and accountants. “It makes sense to buy an owner-occupied building,” he explains. “It’s a hedge against making less income.” One of the group’s current projects is Horizon Ridge Professional Park with 60,000 square feet, built for around $12 million. With so much vacant inventory already available, however, the obvious question is how it can be successful in an already over-saturated market.

DeSimone is confident that his group’s approach will result in financially sound development that will be attractive to buyers. “My firm is going to be part of the solution, not part of the problem,” he emphasizes.

Stating that “this is a period of opportunity,” LaPour says his firm is concentrating on leasing and managing the portfolio it already owns along with buying existing properties. Because purchase prices are less than the cost of reproduction, in many cases, it often makes good sense to buy existing projects. Emphasizing that real estate is normally cyclical, LaPour says it’s a time for companies to refocus. “Most development companies are looking to reinvent,” he says. “It’s a period of adjustment to values, expectations and business philosophies.”

Schnepf agrees that in today’s marketplace, business people need to sit back and reflect on their realities. “It’s time to rebuild and a time to analyze your strong and weak points. Then you can reinvent yourself from your strong points,” he explains.