The darling industrial sector of commercial real estate
Southern Nevada’s commercial real estate industry entered 2022 on a recovery despite lingering pandemic effects, threatening inflation and supply chain constraints.
As we cross towards the end of the third quarter, today’s headlines are contradictory.
Inflation or stagnation? Are we in a recession or has the definition changed? The employment report is healthy, but some companies are laying off hundreds and thousands of people at once.
What is the outlook for the rest of 2022? Let’s review where we are today and then speculate together towards the end of the article. Should I step on the accelerator or pump the brakes?
■ High inflation prompted the Fed to raise interest rates. In the short term, this has slowed the volume of deal sales, more so in the runaway residential sector and for indebted buyers in the commercial sector. Given the limited supply of quality products and strong demand for capital investment, prices are expected to hold or be slow to decline until sold comparables have a chance to reset sellers’ expectations. But expect lower prices in the medium to long term.
■ The local office sector began to cool mid-year after experiencing significant expansion in the first part of 2022. Southern Nevada inventory increased by more than 382,000 square feet of new office spaces. With 41 percent of this space pre-leased, this will add up to 225,000 square feet of vacant space to the local market. Expect vacancy rates to rise, with the understanding that this is a healthy increase. Southern Nevada has not added quality inventory since the Great Recession.
■ The industrial sector is expected to remain strong as the “darling” of commercial real estate through the end of 2022. Boosted by the exponential growth of e-commerce, Southern Nevada’s industrial inventory recently grew by more than 753 000 square feet, while 1.3 million square feet of space was absorbed. This brought the vacancy rate down to 1.3%, the lowest industrial vacancy rate ever in Southern Nevada. Demand remains high, keeping developers busy and attracting sources of capital to the market.
■ The Southern Nevada retail market just had its strongest quarter since the fourth quarter of 2021, with net uptake reaching 459,545 square feet. Deliveries of new commercial space were light, bringing the vacancy rate down to 4.8%, the lowest rate since the Great Recession. Looking to the end of the year, the local retail market is expected to continue to do well, despite supply chain disruptions and high inflation.
■ Developers appear to be positioning themselves for an expanding market in 2023 and beyond. Local land sales remained strong in the second quarter of 2022, with residential land dominating among all land types and industrial land sales declining significantly (likely because parcels were picked up). The average price per square foot for land in the Las Vegas Valley was little changed to $497,891 per acre from $500,069 per acre in the prior quarter. Year over year, the average land price increased by $108,464 per acre, showing the real trend.
■ Hospitality measures for Southern Nevada have seen room inventory increase by more than 3%, from 146,723 units a year ago to nearly 152,000 rooms through May 2022. During of last year, Las Vegas saw the completion of Resorts World and the renovation/rebranding of Virgin Hotels Las Vegas, and the reopening of Palms Casino Resort. These properties added more than 5,700 guest rooms and 540,000 square feet of convention space to local inventory. Room occupancy averaged 83.3% during the second quarter of the year, compared to 77.3% in the last quarter of 2021. Until May 2022, the volume of visitors since the start of the year amounted to 15.3 million people, representing an annual growth of 45.1%.
■ Business tourism numbers are still down 34% from 2019. Las Vegas has not seen a full return to international business, which is not expected to recover until 2024. Despite these depressing statistics, the Harry Reid International Airport set a new passenger record in June 2022 (4,683,156), an increase of 22.9% from June 2021. By mid-2022, the airport handled 52, 4% more passengers (24,279,867) than the same period last year.
If you just look at the economic numbers, you’d be hard-pressed to find anything wrong with the Southern Nevada economy. At worst, you might indicate that growth is slower in 2022 than in 2021. This is not surprising, given that 2021 was compared to 2020, the year of lockdowns.
Over the past three years, we have matured and increased our capabilities in several ways.
Recently completed projects include the expansion of West Hall at the Las Vegas Convention Center, Resorts World, Circa Las Vegas and Allegiant Stadium.
Projects pending in the pipeline are MSG Sphere, Fontainebleau Las Vegas, Hard Rock Las Vegas, UnCommons and Durango Casino & Resort by Station Casinos. Formula 1 is definitely coming. Major League Baseball is always flirting, and the NBA is like looming speculation.
When I look at what’s happening and what’s to come, I like the odds. As Las Vegas continues to navigate the current economy, it will continue to do what it does.
Reinvent yourself, bigger and better!
Hayim Mizrachi is the President of MDL Group and the 2022 President of NAIOP Southern Nevada. NAIOP Southern Nevada is a chapter of NAIOP, the Commercial Real Estate Development Association, and has 635 members serving the Southern Nevada market.