VEGAS INC coverage
The Las Vegas retail industry is faring its best since 2008 — in part because of less competition among retailers and restaurants — but analysts cautioned it could take another four to five years before it fully recovers.
“We’re in the best shape we been in three years, and the last six months is the strongest position we have been in as a shopping center industry in that time,” said Nick Hannon, senior vice president of Las Vegas-based Territory Inc., which owns 3 million square feet of retail space in Nevada.
Hannon, who spoke during a forum Thursday to members of NAIOP, the Commercial Real Estate Development Association, said his company has done 23 leases since the beginning of the year – a number that took two years to reach previously, he said.
The retail development industry in Las Vegas continues to have more than 10 percent vacancy in its shopping centers anchored by major tenants. That vacancy, however, is considered closer to 20 percent when factoring in smaller unanchored retail centers sprinkled in neighborhoods throughout the valley.
Territory Inc., which owns such centers at Cannery Corner in North Las Vegas, Centennial Center in the northwest valley and Eastgate in Henderson, has more than a 90 percent occupancy rate overall, which is a reflection of tenants gravitating to larger anchored centers that give retailers a chance to draw from one another, he said.
“Of our more than 200 tenants, unless they are bad operators, virtually every one of them has had an increase in sales over the last six months,” Hannon said. “That tells us consumers are starting to open their wallets.”
What’s helping retailers is not only an improvement in the economy but the survival of the fittest since restaurants and retailers have closed in the last three years.
In one example, people see in their own neighborhoods where they may have had 30 restaurants within a three-mile radius of their home, there may be only 20 today.
“The dollars being spent by people are spread out over fewer restaurants, because they aren’t competing with as many retailers,” Hannon said. “It’s a natural culling of the economy, and we’re seeing retail improving in this city.”
That is reflected by sales tax figures that show consumers spending more on retail goods and in restaurants.
Despite the improvement, landlords are finding it difficult to attract tenants they once did because of the 60 percent-plus decline in the Las Vegas housing market.
In the past, entrepreneurs borrowed equity from their homes to start a flower shop or yogurt store.
“That market is gone, because there’s no equity in their homes,” Hannon said.
Michael Kammerling, a senior vice president of the retail group with Grubb & Ellis brokerage in Las Vegas, said leasing has been the strongest in anchored centers. But centers of 50,000 square feet and less are where the bulk of the vacancy is, and they will remain a challenge to lease.
Those centers remain susceptible to foreclosure and only cash mom-and-pop buyers are showing any interest in them, rather than institutional buyers who don’t want unleased centers, he said. Some centers are selling for $45 to $70 a square foot on average, he said.
Even though leasing is up, it’s nothing like it was in the past, and Hannon’s numbers of 23 leases so far this year is probably a quarter of the number when the economy was stronger, Kammerling said.
“It’s directly tied to the economy, and our chronic problem in Las Vegas is unemployment,” Kammerling said.
“You need it to decrease for retailers to do well and grow. The good news is there won’t be any new developments for several years, and the existing space will be absorbed,” he said. “But I think for retail, considering the unemployment rate, it will take four to five years to get whole in this market.”
That means having an occupancy rate in the low 90 percent range and lease rates based on where values will ultimately be reset because of foreclosed real estate, Kammerling said.
Kammerling said there are plenty of unanchored centers that should never have been built and questions remain on whether they will ever be leased.
Those landlords are under financial duress and doing what they can with concessions and rents to lure tenants, he said. Some have gone as low as 75 cents a square foot in the first year to lure retailers, he said.
Analysts said there continues to be a lot of money on the sidelines ready to purchase distressed assets, and Hannon said he expects The District in Green Valley, which has been foreclosed upon, to quietly go on the market in the next month. There should be a lot of interest and Hannon said someone is likely to overpay for the mixed-use center.
Kammerling said he believe the buzz over mixed-use that combines retail, office and residential, in some cases, won’t be returning to Las Vegas anytime soon.
“All of the mixed-use attempts in Las Vegas have failed,” Kammerling said. “Many of them were half-built and I don’t think it will be something available for a long time. We have other issues and challenges to resolve.”
Kammerling said one exception is the stalled Summerlin Centre, but even that may take 20 years to complete, he said.
Hannon said 50 percent of the leases his company has done are restaurants, which may be a reflection that people are feeling better about the economy. Another factor is that when so many people are opting to live in their home and let it go to foreclosure, that gives them the money to spend eating out, he said.
While some restaurants are doing well, Kammerling said, a majority are just getting by because sales remain below their previous high and operating costs remain high.
“Many are struggling, yet people see them full on a Friday or Saturday night,” Kammerling said. “That doesn’t determine how successful you are. You need a solid lunch business and you have to have business during the week.”
Despite the slowdown in the retail industry, analysts remain optimistic about its future in Las Vegas.
Brian Wynne, a project manager with Forest City, which owns the Galleria at Sunset mall in Henderson, said people shouldn’t simply attribute the growth in Las Vegas in the last decade to subprime mortgages and the construction industry. The valley grew faster between 1990 and 2000, and those dynamics aren’t going away, he said.
“We’re bullish on that coming back,” said Wynne, who added that population growth will spur the need for more retail. But as for development, “the big regional mall lifestyle centers like Town Square; it’s going to take a while for that (to be built) for sure.”
Kammerling said he’s optimistic, too, that population growth will resume, because Nevada doesn’t need jobs to attract seniors looking to retire.
It will take job growth, however, to lure even more people to Las Vegas and foster future development, he said.
“The future is bright, but the question is how long will it take for the employment machine to kick in,” Kammerling said. “Gaming and tourism are picking up, albeit slowly, but the question is when does the construction industry come back. It’s not a question of if but when. Hopefully, it’s sooner than later.”