— By Geoffrey West, Senior Vice President, Investment Property Sales and Acquisitions, MDL Group/CORFAC International —
The Las Vegas retail market remains a tale of two cities with the tourism-driven Resort Corridor and surrounding MSA comprising two very different markets.
In the past, the stories of the “cities” were somewhat divergent with robust development, premium rents, and top-tier restaurant, bar, entertainment and retail tenants dominating in the Resort Corridor. In contrast, the primarily suburban MSA experienced decreasing rental growth rates, metered new development and fewer exciting new tenants.
However, looking at the past and current years, as well as into 2025, it appears the party isn’t just on the Las Vegas Strip anymore. Due in part to a statistical undersupply, the suburban Las Vegas retail market is poised to experience increasing rental growth rates over the next 12 to 18 months. The lack of new supply is expected to put continued upward pressure on retail leasing rates and downward pressure on vacancy rates, which are expected to be nearing record 2007 levels.
Economic Summary
The Las Vegas market saw the completion of more than $8 billion in development in 2023. Among these are the $3.9 billion, 3,644-room Fontainebleau Las Vegas, the $2.3 billion, 17,600-seat Sphere Las Vegas and the $780 million Durango Casino & Resort.
When combined with development activity from 2021 and 2022, this three-year period has resulted in:
• More than $13 billion in major development projects
• The addition of 11,000 hotel rooms
• The creation of more than 1.5 million square feet of additional convention space
• Development of numerous non-gaming amenities
Howard Hughes Holdings and Sony Pictures Entertainment also recently announced the upcoming development of a $1.8 billion, 31-acre movie studio project in Summerlin, bringing a major project to this master-planned suburban location.
As a result of last year’s activity, Las Vegas has experienced:
• The highest tourist volume since the pandemic at almost 41 million visitors, a 5.2 percent increase from 2022
• The highest occupancy post-pandemic at 84 percent
• Significant increases in key ADR and RevPAR metrics
• New record levels for gaming revenue, room tax revenue and airport passenger traffic
Within the past year, Las Vegas has also hosted numerous top events, including the Stanley Cup Finals, Formula 1 Las Vegas Grand Prix and Super Bowl LVIII. These events have contributed to the city experiencing record per-visitor spending as tracked by the Las Vegas Convention and Visitors Authority, with the biggest increase in the retail spending category.
Leasing
The Las Vegas retail market is currently 5.1 percent vacant, nearing record-low levels, according to CoStar data. The market saw 600,000 square feet of positive net absorption last year as demand continued to outpace supply. Limited supply in the development pipeline is expected to further tighten the market as tenants have difficulty finding suitable spaces, resulting in premium lease rates being achieved in high-income suburban areas.
Active tenants have included specialty grocers, typical power center tenants, and other specialty retail and restaurants. Meanwhile, the overall impact of the recently announced closure of all 99 Cents Only stores is still undetermined. With more than 20 locations potentially available in the market, this space could create a significant unscheduled increase in inventory. It will depend on how, or if, they’re made available to the market.
Development
Retail development has continued steadily at a metered pace despite higher interest rates and inflation, which have impacted other product sectors. There is only 1.2 million square feet of retail under construction. Nearly half of that is within the Resort Corridor alone.
Developers, meanwhile, continue to be creative. Some are expanding existing successful projects with additional multi-tenant pad buildings and phases. Others are pursuing adaptive reuse and redevelopment of commercial properties for strategic retail developments within strong retail corridors.
Investment Sales
The smaller retail sales — specifically the single-tenant net lease category — are not immune to the significant decline in activity levels experienced throughout the capital markets. Nonetheless, this category is experiencing strong activity, albeit at increased cap rates. Private capital investors seek these properties for stable, passive income, and as an inflation hedge for their investment portfolio with 85 percent of sales being less than $5 million.
Larger retail investors continue to be selectively transacting. Some sellers are still chasing legacy cap rates, but those who are willing to meet the market realities are the ones doing business. The 10-year Treasury rates could further impact cap rates and sales volume as investors await stabilization. These rates have recently pushed as high as 4.65 percent and generally show an increasing trend on a pace similar to July through October of last year.
The “wall of maturity” that has been widely spoken about is of little impact to this product sector. There are 122 loans totaling more than $2.3 billion that are due to mature in Las Vegas in 2024. However, only 19 loans totaling $260 million are within the retail product sector, providing limited potential to transact on either a refinancing or sale.
Outlook
Las Vegas remains isolated from many of the inflationary and distressed property headwinds currently impacting numerous other large MSAs. By avoiding overbuilding, the retail market is exhibiting healthy metrics that will continue into the foreseeable future. As the Resort Corridor and suburban “cities” continue to flourish side by side, Las Vegas will remain an attractive target for investors.