When the national economy soured, Las Vegas’ economy had no choice but to follow suit. The city’s dependence on the nation’s disposable income historically made it the country’s playground for anyone who had some extra change. But when the nation’s economy tanked and everyone began to count their pennies more closely, Las Vegas’ economy took a big hit.
“For many years, we were the fastest-growing city in the nation,” recalls Debra Kopolow, regional vice president of Pinnacle’s Las Vegas operations. “It’s quite a paradigm [shift] for us in Las Vegas.”
The metro is currently ranked the fifth-worst economy in the world, the lowest of all U.S. metros, according to a Global MetroMonitor report. “We used to be at the top of the list for all the good reasons, and now we’re at the top of the list for all the bad reasons,” points out Kathleen Raffinello, investment manager, Pinnacle, Las Vegas. Indeed, prior to the recession (1993-2007), Las Vegas was ranked number 14 in terms of strongest performers, the highest of any U.S. metro.
Nevada continues to post the nation’s highest foreclosure rate, with the most recent numbers showing one in every 35 housing units with a foreclosure filing—a 10 percent decrease in foreclosure activity from the previous quarter—according to RealtyTrac’s first quarter 2011 U.S. Foreclosure Market Report. From February to March, Nevada’s foreclosure activity increased 35 percent, after two consecutive monthly decreases. At the same time, Las Vegas-Paradise posted the nation’s highest metro foreclosure rate, with one in every 31 housing units receiving a foreclosure filing in the first quarter of 2011.
The latest unemployment figures from the Department of Labor show the Las Vegas-Paradise rate to be 13.7 percent, better than its high of 15.7 percent but still triple the rate of its 2005-2006 range, when unemployment remained between 3.9 percent and 5 percent (a one-month abnormality in July 2005).
Meanwhile, the Sahara Hotel & Casino, which, at press time, was scheduled to close in May, may add its 1,050 employees to this unemployment rate (though its owner, SBE Entertainment, has said it will try to place the employees elsewhere, so the true effect remains to be seen). However, Raffinello points out, “We are seeing that the casino industry cut too far into the bone when they laid off people” and that the industry is beginning to hire back slowly—though often at half the pay.
The investor of the stalled Fontainebleau, Carl Icahn, meanwhile, has no imminent plans to resume construction, but The New York Post recently reported that he partook in a fire sale of furnishings in what would have been the 3,800-room condo-hotel resort. Many believe this shows that Icahn is looking to unload the asset rather than resume construction. At the same time, Boyd Gaming suspended construction of Echelon for several years.
Any real construction won’t start anytime soon, “which is good for real estate but bad for jobs,” adds Spencer Ballif, senior vice president of CB Richard Ellis’ Multi-Housing Group in Las Vegas. At the peak of the market (June 2006), there were 112,000 employees in construction-related positions; as of March 2010, that number was 40,700, according to the Department of Labor.
The good news, however, is that hotel-room rates are slowly ticking up, points out Ballif. Hotel/motel room occupancy was 80.6 percent in February 2011, compared to 79.0 percent and 72.4 percent in January 2011 and December 2010, respectively, according to the Las Vegas Convention and Visitors Authority (LVCVA). Meanwhile, gaming revenue is up 1.1 percent month-over-month from January 2011 to February 2011, according to the Center for Business and Economic Research at the University of Nevada, Las Vegas. And while the leisure and hospitality industry certainly lost its share of jobs, the number of employees totaled 257,400 employees in March 2011 (compared to the 276,100 that was seen in June 2007).
“One of the challenges, from a marketing standpoint, is the jigsaw of the ownership and ownership’s objectives, and those objectives are not always consistent with what’s best [for] the overall marketplace,” says Nick Alicastro, regional vice president of Las Vegas for Western National Property Management (WNPM), which recently entered the Las Vegas market with six management assignments totaling 1,400 units.
Despite last year’s losses of approximately 13,000 jobs, vacancy rates in the apartment market declined, from 10.7 in 2009 to 10.15 in 2010; thus far this year, the market is experiencing vacancies of 9.5 percent, reports Ballif. “The best way I can explain that is there were more single-family homes that were in the rental pool that are being foreclosed, that were bought by investors that are being purchased. … People are less inclined to rent single-family homes than they were initially because they had bad experiences.”
However, many others continue to point to the shadow market as one of the greatest threats to the multifamily industry. “We’re back to prices from 1994. Median home prices are $115,000,” points out Pinnacle’s Raffinello. “Investors who are buying single-family homes can rent them for the price of [an apartment], and owners trying to cling on, who purchased during the peak time, cannot compete with those rental rates and still make their debt service.”
Additionally, she notes, many single-family investors have “loosened up their criteria to match multifamily,” she says. “So in addition to our normal 158,000-170,000 apartments in Las Vegas, you have to throw in 15 percent of our single-family homes that are vacant that could potentially be competition.”
Alicastro has observed market-wide occupancy in the high-80s to low-90s. “Right now we are still seeing a struggle to stabilize rents. In certain pockets of the Valley we see some strength, particularly in the mid- to higher-end properties, which tend to run higher occupancies,” Alicastro observes. “There are also pockets where we have seen concessions increase in the last few months.”
The difference in performance among asset classes is clear. Class A product is currently running 6.9 vacant, while Class C assets are more than double that, at 14.12 percent, according to CB Richard Ellis’ Vacancy Survey.
Most markets are burning off concessions, with average concessions down from two months to one month of free rent.
Average monthly rents, however, declined 1.76 percent from 2009 to 2010, compared to a 14.16 percent decline the year prior. Northeast Las Vegas, however, showed a 6.92 percent increase in 2010—but that is compared to the largest rental decline the year before: 20.89 percent, according to CBRE’s 2010 Market Review.
“On one end of the spectrum, you have people trying to maintain the value of their assets with a long-term approach. Their philosophy is to run lower vacancy with higher rents or fewer concessions in an effort to preserve asset value,” says Alicastro. “There are other owners that are focused on occupancy to maintain cash flow, which does not always equate to value from an asset standpoint and often adversely impacts the surrounding submarkets.”
Alicastro notes that there are a variety of opportunities in Nevada, particularly in Las Vegas, for multifamily investment. “There is great value for investors in Vegas right now. We think there are [acquisition] opportunities given the right product and the right area of town. It just depends on the investment criteria and how much risk someone is willing to take.”
The market is mostly dominated by private capital, but while this has been the historical trend in the Las Vegas market, Ballif observes that some institutions are starting to dip their toes in because of the affordability.
“The interesting anomaly is … the institutional buyers are the ones who will be first and foremost in grabbing these deals [in other markets]. In Vegas, that has not hit yet. … The problem isn’t the money right now; the problem is the product,” adds Kopolow.
But while there is not a shortage of buyers interested in the market, there is certainly a shortage of sellers. (Typically the market trades about 40 to 50 assets, over 100 units, annually; in 2009, only two properties traded, while 2010 saw 14 assets trade.) “There are plenty of people who believe in the market, believe in the long-term side of it, and especially like the discounts,” Ballif adds, pointing out that the market is about 60 percent off of the peak pricing seen in 2007.
“When they have a building up on the market … it’s like a bunch of piranhas to a piece of meat,” notes Raffinello. “We just don’t have the product, [but] there is money out there trying to buy in Nevada,” she adds.
“We would gravitate more toward newer or higher-end product,” says Alicasto. With the newer product, he adds, investors “have a little more protection from a capital standpoint and long-term asset preservation, as opposed to if you’re buying older product in Nevada. Although the price per door may be [lower], more emphasis needs to be placed on long-term and short-term capital needs.”
A product does seem to be the most desirable, agrees Raffinello. “C product, which you can’t put a cap rate on right now, is getting hit the hardest. A product seems to be the only thing that’s shuffling.”
Class A assets, she notes, are trading between $90,000 and $120,000 per unit, while Class C may be as low as $15,000 per door. For stabilized assets, CBRE’s Market View estimates that Class A assets would trade between 5.75 percent and 6.25 percent, while Class B would achieve between 6.5 percent and 7.25 percent. Class C product would trade at 8 percent cap rates—and higher.
Outlook for the future
While the market is still not in full recovery mode just yet, it appears to at least be at its bottom. In addition to the employment rate leveling off, Raffinello points to an increasing number of small businesses in the market and the fact that some home builders are gearing up to finish their once-abandoned product as positive signs of the market’s thaw.
“People aren’t as afraid anymore,” she notes. “We’ve seen the slow-down; we’ve seen the halt. The scare factors are gone; people are quite resilient in Las Vegas. I think whoever is gone is gone; whoever is going to stick it out is going to stick it out.
“You can go to Macau, Singapore, Pennsylvania,” she adds. “But it’s still not Las Vegas. You’re not going to get the glitz and the glam. [The recession] has slowed down international travel slightly because [casinos in] Singapore and Macau have opened … [but] I think people … are still going to come to Vegas.”
Meanwhile, much like many other cities around the country, the challenges to Las Vegas will continue to be employment, housing prices and the lending market for multifamily, Alicastro predicts.
“Years ago, Vegas used to be the affordable place for seniors to retire because it was cheap,” recalls Raffinello of Pinnacle, whose Las Vegas portfolio consists of 11,000 units, 30 percent of which is 55+ housing. “When the market spiked, we no longer were affordable. An affordable senior destination was Arizona, which always lags behind us.
“[Now] we are actually marketing to Arizona,” she notes. “It’s going to take a little [while] to get the reputation back that Las Vegas is once again an affordable retirement destination because we just got so blown out of the water.” Additionally, people are not retiring or selling their homes as quickly as they were at the market’s peak.
Meanwhile, the city is attempting to diversify. “It would be ideal if [the city could] create some more stability that’s not so predicated on how many people are moving into the state on a weekly or monthly basis and how many people are visiting on a weekly or monthly basis,” Ballif notes. “There needs to be some continued efforts in stabilizing all the job sectors, particularly increasing the institutional sectors that are non service-related, non casino-related and non construction-related.”
A new $600 million VA hospital, slated to open in 2012, he believes, demonstrates the city’s interest in expanding its medical industry, for example. Additionally, Ballif says, the city is trying to lure small companies, with 50 to 100 employees, from neighboring states.
“We have to do a better job diversifying our economy by bringing smaller companies out of California,” says Ballif. “If we can’t make the case that now’s the time to bring those 50- to 100-employee companies to Nevada because land rates are cheaper than they’ve been in the last 10 years, and leasing rates are cheaper than they’ve ever been … we never can.” He points out that, despite the state budget shortfalls, the tax environment—which includes no state income tax, no corporate tax and no inventory tax—hasn’t changed. “We haven’t thrown a lot of taxes at small business,” he notes.
Bright spots for the city include its relative low cost of living, Alicastro notes. “There need to be continued efforts to stabilize all job sectors and continue to make available entrepreneurial opportunities to outside markets, specifically catering more to the local economy versus the travel- or casino-related economy. Creating more of a solid backbone and more stability for the local core economy,” he adds, “is essential.”
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