Las Vegas usually strikes visitors as larger-than-life, in many ways outlandish, and even surreal. It's a place that keeps outdoing itself. Why else would 38 million tourists and conference-goers descend on this baking desert plain every year? [??] The most recent U.S. census pegs Las Vegas (population 1.8 million) as the "fastest-growing major metropolitan area" in the country. Others call what is occurring there the "Manhattanization of Las Vegas," and with land prices as high as $8 million an acre that doesn't sound unreasonable. [??] When Las Vegas-based MGM Mirage announced a $5 billion casino/ hotel/condo and retail/dining/ entertainment project in September--which it says is the largest single real estate development in U.S. history--it was no mirage. Especially not coming from a company with net revenues of $4.2 billion in 2004. [??] Several weeks earlier, the $3 billion Las Ramblas project, much the same kind of scheme but writ smaller (and with Hollywood actor George Clooney on board) was announced. It will be developed by Related Las Vegas, a branch of The Related Companies LP, New York, which built the Time Warner Center in New York, and local developer Centra Properties LLC, Las Vegas.
But there is more--a lot more, much of it commercial development. A report released in November 2005 by Boston-based Colliers International Property Consultants Inc. and Las Vegas-based Restrepo Consulting Group LLC indicated that in the Las Vegas valley since the first quarter of 2001:
* 8 million square feet of office space has been added, a 33 percent increase over the intervening four and a half years, bringing its current inventory to 30 million square feet.
* The industrial market expanded by 25 percent, to 87 million square feet.
* The retail sector grew by 10 million square feet, or 46 percent, to 35 million square feet.
The "valley" is basically Clark County, dominated by Las Vegas, where most of the development is unfolding, and a few other communities. The wave of new commercial space is the outcome of nearly 100,000 new residents arriving every year, according to municipal records, along with a demonstrably strong economy.
It takes two telephone books a year to keep with up all the new residents and businesses. (Clark County planners received three applications for mixed-use developments in 2003, up to 40 last year, and more were expected by the end of 2005.) There are also so many communities in the planning pipeline or in progress on the city's periphery that builders are hard-pressed to invent new street names.
What kinds of people are flocking to Las Vegas? Marie-Josee Lafontaine, a principal of Scollard Group International (SGI), Toronto, a residential research and marketing firm with clients in several southern and Midwestern cities, describes them as "opportunists, investors, entrepreneurs, dreamers, second-home buyers, the affluent and the retired ... seeking their fortune, a less-expensive place to live and a better quality of life."
Commercial space thrives in that environment, but there can also be too much of a good thing. John Restrepo, a principal of the firm involved in the Colliers/Restrepo research, notes that commercial rents should jump by 10 percent or more over the next two years to make up for relatively flat rental rates over the past four years in a tenants' market.
Higher rents should also help to recover some of the obscenely high land prices developers are paying--an average of $601,600 an acre this year, 88 percent higher than 2004, according to Applied Analysis, a local economic research firm.
Guy Asher, senior vice president, First National Bank of Nevada, Las Vegas, typically lends $5 million to $10 million on "bread-and-butter industrial, retail and some mini-storage," although the bank has approved $25 million loans. He expected to lend more than $350 million to developers in 2005, most of it for projects in Las Vegas and 90 percent of it for commercial projects.
"The national banks are here, but most of the commercial lending is done by local community banks like ourselves," Asher says. "Over the past five years the office market has been strong. The retail market has always been good.
"Industrial has slowed down because of the $8- or $9-a-square-foot price of industrial land, compared to $2 to $3 a square foot in 1991," he says. Developers are still buying industrial land, but they get it rezoned residential, to build far more profitable high-rise condos.
Asher says local entrepreneurs prefer to own the properties they occupy, although at some point higher interest rates could make financing costly, and leasing space could become preferred.
Forty- to 60-story hybrid hotel/condos and pure condos are popping up, or are included in the 100 or so projects in the construction pipeline, on and off the glitzy Las Vegas strip. Office buildings, so far, tend to be low- or mid-rise; Asher says the tallest building in Las Vegas is 18 stories.
This is definitely not a corporate town, but rather a sprawling supply-and-service sector that lives off gambling, conferences, entertainment, tourism and retirement communities, with light industrial and high-tech enterprises playing a supporting role.
Office parks are popular, much as they are in Miami and other Florida cities. Kenneth Smith is a principal with GSG Development Ltd., Las Vegas, whose track record across 70 years encompasses more than $2 billion worth of retail, industrial and office projects, much of it in Las Vegas. Smith says his company completed a 100,000-square-foot office park last year, has a 250,000-square-foot park under construction and started construction on a 120,000-square-foot park in November.
"The space is leased by a lot of smaller tenants, such as mortgage companies, professionals, real estate and advertising firms. There aren't a lot of 100,000- to 200,000-square-foot users," says Smith.
Who finances the GSG projects? "We use local bankers, who tend to understand the market best and are very aggressive in their terms. This [Las Vegas] is a town where you can still have a real relationship with your lender, even though the head office might be in another state," he says.
"Local bankers understand the area, its growth patterns, where it's going as opposed to where it's been, because the market is changing rapidly. They can't just look at statistics and trends, because those things vary from area to area," Smith says.
"The Vegas market has been growing and changing quickly over the past five years in terms of products, sophistication and where people want to be, geographically," he says. "A local bank is a great advantage, because you don't have to reinvent the wheel and explain everything every time you apply for a loan. You're talking to people who understand what you want, so there are no surprises."
But local banks aren't the only source of loans and financing. Jim Murray, who has been a commercial Realtor--in Las Vegas for the past 26 years, says, "It's amazing where financing for projects is coming from and investors we haven't heard of, from Israel, the United Kingdom, Florida, New York, New Jersey, California, Colorado and Texas."
He spoke of a transaction he's involved with where the owners would sell 35 acres of commercially zoned land for three times the value to developers who would get it rezoned residential to build high-end condos.
Murray Harrison, executive vice president and chief real estate officer, Bank West of Nevada, an affiliate of Western Alliance Bank Corporation, Las Vegas, says he will do $500 million to $600 million in commercial loans in 2005--individually, $2 million to $10 million loans, but $20 million to $25 million loans as well.
One of his transactions was a mixed-use project, for example, which included retail, an athletic center and a three-story $9.5 million, 60,000-square-foot office and parking garage. The total cost was less than $20 million, including the land.
Developers generally put in 20 percent to 25 percent equity in their projects, and not necessarily in cash; there might be some subordinated debt.
Harrison describes the Las Vegas valley commercial real estate market for the past 18 years as "incredibly healthy, with a bit of a dip in 2002." He says there are "opportunities in every facet of commercial real estate" related to casino expansion and broader diversification in the local economy, which has created 70,000 new jobs over the past year.
"A whole new city is being built every four or five years," Harrison says. "Retail is very strong, including neighborhood grocery store-anchored strip plazas, office buildings, medical and professional uses built around three new hospitals, and owner-occupied commercial developments."
Office properties, he adds, are often about 120,000 square feet, class-B type and suburban. Retail projects are typically 35,000 to 40,000 square feet and there is a kind of general "specialty" project category at 75,000 square feet.
How's this market for industrial real estate? "A bit dicey because of the cost of land," he says, but several million square feet of it are planned nonetheless. Industrial condominiums--typically low-rise, suburban light manufacturing buildings in which the occupants own their own spaces and share in the common operational and maintenance costs--are popular.
Las Vegas, Harrison says, is turning into much more of a national market because of strong developer influence from California and Florida, as well as from the Midwest. How about defaults? They are rare because of the credit quality of the borrowers, he says.
If raising financing for sound projects proposed by credible sponsors isn't difficult, is there some other aspect of that process that is challenging?
Brian Gordon, a principal with economics research firm Applied Analysis, says, "One of the major challenges facing lenders in the [Las Vegas valley] industry is the valuation of property as they finance new development. Land prices have tripled in the last two years, so valuations have become extremely difficult. Do lenders have the financing tools to react to rising construction expenditures, with steel, concrete, wood and labor costs well into double-digit increases? Margins have also become extremely tight as construction timelines become extended, so it is a major concern for lenders, and they must keep an eye on it."
There is more to keep an eye on all the time as the real estate momentum keeps building. Mark Brouchard, managing director of Los Angeles-based CB Richard Ellis' Las Vegas office, says the state has always promoted entrepreneurship, which builds strong markets that turn investors into developers.
"Banks or other lenders look at a project's sponsor," he says, "not as much their financial strength as how experienced they are at doing projects, their consultants and their experience. It all comes into play in the underwriting," says Brouchard.
Out-of-state investment is pouring into Nevada, more so than in recent history. "Las Vegas is probably one of the more astute markets in North America," Brouchard says. There is a need for "understanding international clients and how to keep Las Vegas at the top of the world's tourism destinations," he adds.
Albert Warson is a Toronto-based writer/editor specializing in real estate development subjects. He can be reached at email@example.com.
RELATED ARTICLE: A Winning Hand
Applied Analysis, a Las Vegas economic and real estate research firm, says Clark County (Las Vegas, North Las Vegas, Henderson, Boulder City and Mesquite) currently leads the nation in population and employment growth.
Moreover, according to Applied Analysis:
** Office, retail and industrial real estate inventory basically doubled in Clark County between 1994 and 2004.
** Nearly 100,000 people move to Las Vegas every year, on a net basis (there are more people coming in than leaving), which translates into population growth of about 7.6 percent every year.
** Leisure and hospitality is the No. 1 industry; construction-related employment is up 15 percent in 2005, compared with 2004; the growth-driven economy is reflected in commercial real estate expansion over the past several years.
** Vacancy rates are in check, indicating the commercial sector is relatively balanced.
** Rental rates for office properties started to rise during the second quarter of 2005.
** Retail sales during the 12-month period ending Sept. 30, 2005, were $33.2 billion, compared with $29.3 billion during the same period a year earlier.
The company's third-quarter 2005 report on the Las Vegas valley market indicates that:
** The office market grew to 35.9 million square feet of space, and the average vacancy rate was 9.6 percent. Some 621,000 square feet were added. More than 2.9 million square feet of office space are under construction.
** The industrial market hit its lowest vacancy rate--4 percent in 2005, compared with 7.9 percent at the end of the 1990s. At the end of third-quarter 2005, about 3.6 million square feet of industrial space was under construction.
** Of the 41.8 million square feet of retail space in anchored centers, about 1.2 million square feet was unoccupied, for an average vacancy rate of 3 percent. Some 1.6 million square feet of space is under construction.
Applied Analysis' second-quarter 2005 report on vacant-land transactions noted an average record of $601,600 paid per acre, based on 416 transactions for nearly 2,300 acres--up 88 percent over the second quarter of 2004.
Twelve percent of those transactions were for residential development; the price paid for those 20- to 50-acre lots averaged $890,000 per acre, including some plots of land that sold for $3.3 million and $8 million an acre.
RELATED ARTICLE: Nature's Finite Supply
The supply-and-demand dynamic has so much thrust that Las Vegas land for commercial or residential purposes is consumed at the rate of 2 acres every hour of every day, says Kenneth Smith, a principal of GSG Development Ltd., Las Vegas.
Depending on which analysis you accept, there is either seven or 11 years' worth of developable land left in the valley before it runs into the mountain ranges, at the current pace of home building, Smith says.
About 84 percent of the remaining undeveloped land is owned by the federal government, under the 2002 Southern Nevada Public Land Management Act, which defined limits for development in the Las Vegas valley.
But the government doesn't just hold onto it. There was a federal land auction in mid-November that put a 2,073-acre and nearby 601-acre parcel up for sale at the same time, with an opening bid of $522.4 million.
The vendor is the U.S. Bureau of Land Management, an agency within the U.S. Department of the Interior, which administers 261 million surface acres of America's public lands, mainly in 12 western states.
RELATED ARTICLE: A Hundred Years Later
Las Vegas celebrated its 100th anniversary of municipal incorporation in May 2005, and while the first 50 years--in development terms--were quiet, the next 50 were anything but. Here is a brief chronology, according to the official City of Las Vegas Web site.
1844: Explorer Captain John Fremont writes about Las Vegas and attracts the attention of settlers and missionaries. Brigham Young assigns 30 Mormon missionaries to build a fort in the Las Vegas valley.
1857: Minerals, including precious metals, are discovered and a mining industry is established. The main railway linking southern California with Salt Lake City is completed, making Las Vegas a railroad town.
1905: Las Vegas is founded as a city, and four years later becomes the county seat for the newly established Clark County, population 3,321 Gambling is legalized in the state of Nevada, and the city issues six gambling licenses. Divorce laws are liberalized.
1930: Las Vegas' population is 5,165. A year later, work on Hoover Dam begins, and with it comes a population boom.
1945: Following World War 11, resort hotels and gambling casinos offering top-name entertainment spring up. The tourism and entertainment industry becomes the largest employer in the valley.
1959: Las Vegas encompasses 25 square miles, with a population of 64,405. Clark County's population is 127,016.
1980s: Starting in the mid-1980s, the city's population almost doubles between 1985 and 1995, increasing from 186,380 to 368,360--a 97.6 percent increase. Clark County's population increases from 562,280 to 1,036,180, an increase of 84.3 percent.
2000: The U.S. census reports the population of Las Vegas at 478,434--the largest metropolitan city in the United States that was founded in the 20th century.
2005: The city of Las Vegas starts a year-long celebration of its 100th birthday.…