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Since October, I have averaged one sale per month.  True, sales prices have been trending downward, but what was once a rapid pace of decline seems to be flattening.  I am fortunate to represent SAXA, Inc., the number one developer of small office buildings in Las Vegas.  They built a superior product in excellent locations around the valley.  While many developers and sellers have unrealistic expectations of market demand, SAXA is planted in reality and working with their lenders to sell what little inventory remains on the market.

By: Dean Willmore, SIOR

Two years ago, our industrial real estate market was completely out of control. Investors were ignoring all of the fundamentals (just so they could buy something); Cap Rates were at a 50-year low (perhaps the lowest of all time); Investors engaged in bidding wars to try and secure a property; Vacant buildings actually sold as “Income Producing Property”; Developers Pro-formaed small industrial buildings for sale at twice the price the same building would have sold for four years prior (and built 5 times more than we typically absorb in one year); Per-square-foot prices for shell industrial buildings were exceeding those for shell office buildings; Developers were paying more than $1 million per acre for industrial dirt, believing rents and building prices would continue to escalate; and The hi-rise condo craze pushed the price for industrial properties located near the Las Vegas Resort Corridor between $4,000,000 and $10,000,000 per acre. All of this was fueled by banks and other lenders making overly aggressive loans and Equity Dollars available everywhere. For some, those were the “good old days” of commercial real estate. As I have watched that real estate bubble burst and the market change I still feel that there is a great deal of opportunity in the Las Vegas industrial market.

Although our current market conditions are troubling for many, I am thankful that our market is correcting itself. The good news is that 2008 proved to be a relatively good leasing year. Preliminary estimates put our total 2008 absorption of industrial space in Las Vegas for around 5 million square feet. That is in-line with our average net industrial absorption during the past six years .

Industrial Trends

Even better, is the fact that over 80% of our 2008 industrial net absorption is comprised of tenants leasing space. That is good news for landlords, because in 2007 over 50% of net absorption was owner/user building purchases. As for 2009, I expect the percentage of lease absorption vs. owner/user sales to be even higher. I also believe that 2009 will present some of the best industrial real estate buying opportunities not seen in 20 years.

Since I began tracking this market in 1989, I have witnessed average industrial real estate appreciation of about 5% per year. My forecast is that in 2009-2010, we will see industrial property values drop 15% to 50% from where they were during the First Quarter of 2008, which is when our market peaked. Still, given the amount of appreciation industrial real estate owners gained during the past 5 years, few will get hurt, because most of the value lost was “phantom” and not real in the first place. In addition, leasing activity should remain strong in 2009 and most owners should, at a minimum, be able to cover their debt service.

Here are some other trends and observations I forecast for 2009:

1. Owner/User financing will be cheap and readily available to credit-worthy borrowers; Non- Owner/Occupied financing will remain very difficult to obtain;
2. The credit-worthiness of prospective tenants will be a much bigger issue than normal for Landlords;
3. Industrial vacancy rates will climb slightly and then level-off by mid-year. Expect lower vacancy and less landlord concessions by the end of summer;
4. Inflation will cause higher operating expenses and utility costs;
5. Rental rates will remain flat for most of the year;
6. Cap Rates will increase to between 9%-10% in order to move old inventory;
7. Operators of small bay, multi-tenant properties will fare the best in 2009 as tenants will migrate from bigger spaces to smaller spaces to save costs;
8. Operators of flex space with a high percentage of office and big box distribution will fare the worst because of plummeting office rents;
9. Industrial land prices are still searching for a bottom and will continue to do so;
10. Expect to see more sale lease-backs as companies search to raise operating capital

Remember that the FSLIC (Federal Saving and Loan Insurance Corporation) did not begin closing down the Savings and Loan (S&L) industry until 1986 and the Resolution Trust Corporation (RTC) was not created until 1989. The RTC’s involvement with the disposition of S&L assets finally ended in 1995, with total estimated cost to taxpayers of $160 Billion. Some of the reasons for the Savings and Loan bust in the 1980’s are the same reason Commercial Banks are failing today.

However, the commercial real estate crash we experienced in the early 1990’s was also sparked by Federal Tax breaks that encouraged over investment and over building. This time around, the real estate frenzy was fueled by cheap credit, which allowed investors and developers to bid up prices of existing properties.

How much of a correction will we see in 2009? The answer depends on how much “phantom” appreciation a particular property gained during the past 2-3 years, during the era known as “cap rate compression”. I call it phantom appreciation, because many Sellers were showing 50% to 100% gains in value within a 12 to 24-month time frame, which is just not real. Real appreciation comes from rent growth and operating expense containment.

I believe the adjustment in land values in Las Vegas will be very healthy for our market in the long run and keep it one of the most vibrant and healthy commercial real estate markets in the United States. I believe that now more than ever.

It is a fact that our Las Vegas economy and commercial real estate market has been one of, if not the most resilient economies in the U.S., generally speaking. Las Vegas has always been the last community in America to experience a slow-down and the first to recover. The high land prices we have experienced actually worked in our favor by keeping construction in check. Our industrial market is not over built and we may actually start to see a shortage of industrial space in 2010. Businesses still want and need to be in Las Vegas to take advantage of our geographic location, tax and business incentives, quality of life and service our expanding population and infrastructure needs. As for industrial real estate prices, now is the time to buy. Sellers, who a year ago were asking exagerated prices for their assets are no longer in a state of denial regarding current values and are now anxious to make deals. Many are also willing to carry first trust deeds, eliminating the need for buyers to obtain financing. Investors with access to syndicated, private equity sources will also be able to take advantage of this current real estate correction. The cost of financing will dictate CAP rates and therefore, prices. I believe true “buy” opportunities must be at least 1 to 1.5 points above cost of capital. Today, that would be about 8 to 8.75%. Also, the current income on a particular buy opportunity must match current market rents, as many existing leases are over-inflated. Remember that industrial rents today are about 10-15% less than they were a year ago.

Needless to say, these are interesting and exciting times. Every investment is subject to fluctuations in value and commercial real estate is no exception. Many of my clients made their fortunes during the Savings and Loan Crisis in the 1980’s and 1990’s. Those with the foresight and courage to take advantage of our current market correction in Las Vegas may have the same opportunity to make fortunes as well.

 For more information about the Las Vegas Industrial Market contact Dean Willmore, SIOR at 702-363-7600.

For those who were convinced that green building was merely a passing fad, a new survey by the National Real Estate Investor and its sister publications may prove otherwise. The survey reveals that not only is green building gaining momentum as a commercial real estate strategy, but it is also vying for status as the new industry standard.
In fact, the exclusive survey, which drew responses from 218 corporate users and 166 developers of commercial real estate, reveals that 52% of corporate respondents and 39% of developer respondents currently own, manage or lease at least some “green” properties.
Even more compelling is the fact that the focus on sustainable real estate is clearly on the rise with 84% of corporate users and 77% of developers expecting to own, manage or lease at least some green properties five years from now.
Survey results support the premise that corporations and developers are embracing green building practices. Respondents expect that green building ownership and management will increase dramatically in just a few short years. Corporate users anticipate that the amount of green facilities they own or lease will more than double from 9% to 21% in the next five years. Developers also expect the volume of green properties in their portfolios to take a similar jump from 9% to 20% by 2012.
Respondents are most likely to be involved in office and retail. Among developers, 55% own or manage retail, followed by office (48%) and mixed-use and hospitality (35% each). On the corporate side, 51% of respondents own or lease office space, followed by industrial (42%) and retail (25%).
Corporations ranging from Bank of America to Best Buy are incorporating green building as part of their real estate strategies, and developers are clearly responding to the rising demand for these facilities.
The desire to cut energy costs is the main force pushing green building into the mainstream. Four out of five respondents indicate energy efficiency is important to their company when selecting, acquiring or developing a green building.
When asked what the most important factors are when choosing green buildings to buy or lease, corporate users most frequently cite energy efficiency (81%) followed by water savings (53%) and indoor environmental quality (50%). Corporate users believe the most significant benefits of green building design are lower energy costs (78%) and that it has a low impact on the environment (75%).  Most developers also believe lower operating costs are the greatest benefit of green building design (79%), while being environmentally friendly also rated high (74%). The ability to differentiate in marketing followed at 46%.
Indeed, most corporate users say they would be willing to pay more for LEED-certified buildings, with more than one-third (39%) willing to pay 1% to 2% more; 27% would pay 3% to 4% more; and 23% would pay 5% to 9% more. Another 8% say they would even be willing to pay 10% or higher. The U.S. Green Building Council contends that green buildings have higher lease rates and occupants are healthier and more productive. The USGBC states that the average return on investment in a green building is 20%.

With the potential of the definition of “Class-A office space” meaning the building must be green within the next three to five years developers are now looking at green buildings as the new standard.  Green building practices are clearly becoming entrenched in the commercial real estate universe. In fact, nearly half of respondents — 51% of developers and 47% of corporate users — believe that green building is not only a long-term phenomenon, but also that green building requirements will become part of future building codes.

Now is an excellent time to sell or upgrade your industrial property. National and local trends are indicate that with a diminishing supply of developable industrial land and with the global thirst for consumer based goods in countries like China and India, end users, developers and institutional buyers are entering the industrial market once again with strong momentum.
I anticipate vacancy rates to fall gradually by the end of second quarter in 2009 and asking industrial leasing rates to climb at a steady pace. With the rising cost of energy and current fuel prices, I believe that rail served industrial land will be of extreme value for our national and local transportation needs. In addition, I foresee technology and energy businesses continuing to grow and they will require more industrial space in Las Vegas.
Our strong brokerage network and client relationships offers access to such affordable rail served and industrial land in Nevada either for immediate build- to- suit or for a long term investment hold.

Contact Art Farmanali, SIOR for more information: 702-363-7600

The fundamentals in commercial real estate remain healthy with only slight increases in vacancy rates expected for the office and industrial sectors during 2008. Recent credit restrictions have slowed overall investment activity. While vacancy rates remain relatively low for all sectors, they are expected to rise slightly in the office and industrial markets during the coming year because much of the space being absorbed is in high-quality buildings or are built-to-suit. Vacancy rates in the retail and multi-family sectors are projected to tighten in 2008 with rents rising in all sectors. Commercial real estate investment is at record-high levels, but tighter credit conditions will limit deals from moving forward because capitalization rates are low, it is likely that commercial property prices will ease. The era of rapid commercial property price increases has ended. Even with the low cap rates, the investment market is brisk. By the end of October 2007, a record $325 billion worth of commercial real estate had traded hands nationwide, with over half involving office properties prices will ease. The era of rapid commercial property price increases has ended. Even with the low cap rates, the investment market is brisk. By the end of October 2007, a record $325 billion worth of commercial real estate had traded hands nationwide, with over half involving office properties.

For more information contact Art Farmanali, SIOR: 702-363-7600