Las Vegas has the distinction of having one of the worst housing markets in the country. But now that slump, along with job losses and high fuel prices, is infecting Sin City's commercial real estate market, sending vacancies in all sectors sky high.
The city's commercial sectors clocked the second-worst increase in vacancies in the past year, according to Marcus & Millichap Real Estate Investment Services, following only Orange County, Calif., where the main problem is too many empty offices.
“The first domino for commercial real estate was the loss of construction jobs. The second domino was the effect of job losses, foreclosures and lost home equity on the local economy. And the third domino was the national economic slowdown,” said Hessam Nadji, managing director of Marcus & Millichap.
Through May, Las Vegas had lost 5,000 jobs, “a significant turnabout” from only three years ago when 56,000 jobs were created, Nadji said.
The local housing environment is the main culprit. One in every 99 Las Vegas households received a foreclosure filing in June, RealtyTrac Inc. said Thursday. And home prices are in a free-fall, losing roughly 30 percent since the peak in August 2006.
Foreclosures aren't just a problem of homeowners. Dave Dworkin, a research analyst at Grubb & Ellis Co., said foreclosures on small industrial properties are on the rise in Las Vegas.
“Owners have taken out second mortgages on their homes to put it into buying an industrial building for their business,” Dworkin said. “And because of the state of the economy, they can't maintain both payments.”
The economic pain is also hurting small industrial tenants – those that lease under 25,000 square feet. They are reneging on leases, pushing the vacancy rate up.
“Definitely the smaller tenant is hunkering down,” said Garrett Toft, a senior associate at Voit Commercial Brokerage. He said the vacancy rate for industrial buildings is almost 8 percent, nearly double the rate two years ago.
Few are willing to gamble on buying their own industrial buildings, Toft said. Though these business owners can still get financing from the Small Business Administration, they won't because they fear prices will “fall off the cliff,” he said.
Meanwhile, office vacancy is also edging higher as mortgage brokerages, interior designers and other residential real estate firms retrench. Office vacancy hovers above 15 percent, compared with the national average of just over 13 percent, according to CB Richard Ellis Inc., and that doesn't include the subleased space coming back online.
Mom-and-pop retailers are also putting their plans on the back burner, said Nelson Tresslar, senior vice president at Grubb & Ellis. Many depended on home equity to fund new leases for startups or expansions, but that source of capital has dried up.
Pile on the number of retailers closing weak stores or going broke and you can see why the vacancy rate in Las Vegas has doubled to 6 percent from a year ago, said Kit Graski, a senior vice president at Voit.
“It's quite a dramatic increase,” Graski said, adding that major retailers are asking for lower rental rates on existing leases. And landlords, who were in denial last year about market conditions, are doing what they can to keep tenants happy.
Hotel rooms are still full because of cut-rate package deals, including dining coupons and gas rebates, said John Knott, executive vice president of CB Richard's global gaming group.
A handful of hotel and resort developments – including City Center and Echelon Place – are close to completion. Bets are they will bring more service jobs and families to the area.
“All those people will gobble up some of the homes that have been foreclosed upon,” Tresslar said, “and that'll give the Vegas economy the shot in the arm it needs.”