There are two trends that describe the current state of retail development in Southern Nevada: restaurants are expanding and some junior boxes are closing. Ecommerce competition and the consolidation of retailers nationally has caused junior box tenants to continue to struggle. It is odd to see a new development like the 1.6-million-square-foot Downtown Summerlin open on the affluent west side of the Valley in October 2014, only to see two junior boxes close since then. The Sports Authority shuttered its doors earlier this year, while Golfsmith just announced it would cease operations by the end of 2016. Other retailers in the development are doing very well, but it is an unfortunate sign of the times to see junior anchors close in good retail developments.
Brendan Keating, Logic Commercial Real Estate
When analyzing ecommerce vs. bricks and mortar, retailers are paying more attention to the facts listed in the table below. The example compares Amazon to Walmart — both great businesses but differing models. The reason is clear why it is difficult to compete when Amazon is able to produce 165 percent more per employee. This analysis does not include the difference in fixed assets, which only further exaggerates the advantage for Amazon when considering what a traditional retailer must factor into operating the asset.
The future holds great potential for retailers in Las Vegas. The famous Las Vegas Strip and its 42 million visitors per year has produced three landmark transactions for the city. These include the Crystals Mall at City Center, Fashion Show Mall and the Miracle Mile Shops at Planet Hollywood, all of which were sold in 2016 to institutional investors.
We also have several developments on the drawing board that would be a huge positive to Las Vegas should they come to fruition. Particularly on the north Strip, if you add up projects in the queue, which include Genting Group’s Resorts World, Alon, Las Vegas Convention and Visitors Authority expansion, Fontainebleau and Wynn Lake Project, the result would total more than $10 billion in new investments within a half-mile north of the Fashion Show Mall. Not only would that construction activity provide great fuel to an economy that has almost fully recovered from the recession, but it would also add about 12,000 new rooms. For comparison’s sake, that would be similar to adding the Wynn/Encore and Venetian/Palazzo on the north Strip, with construction costs that would be 20 percent more than the $8 billion MGM CityCenter. Couple this with the city’s NHL expansion team announcement in June 2016 and a potential NFL team with a state-approved $1.9 billion stadium and you can see a lot of anticipation over robust economic activity in the next few years.
Outside of Las Vegas Boulevard, we have seen sales of single-tenant, triple-net (STNL) investments set record marks. This includes Starbucks cap rates in the 3.5 percent to 4 percent range. Another example would be Chick-Fil-A’s entrance into the local market. A new Chick-Fil-A currently under construction at Sahara and the I-15 freeway has a reported ground rent of $250,000 per year, nearly double that of similar sites. It will be interesting to see where the STNL investments trade post-presidential election. Since the election, we have seen the 10-year Treasury raise 42 basis points, or 23 percent, in seven business days.
Multi-tenant retail centers are trading between 6 percent and 7.5 percent cap rates depending on the neighborhood, credit and occupancy. There is a substantial increase in buyers utilizing debt compared to a few years ago to achieve desired returns, though debt levels are still nowhere near the per square foot and loan-to-value we witnessed in 2006. When looking at development, new projects are selectively coming online only where they are needed. The reason being that banks are more restrictive on construction lending and developers are still cautious with the Great Recession in the rear view mirror.
There is much excitement surrounding Las Vegas retail when you also consider the new brands coming to market. In addition to the institutional investors committing to Las Vegas Boulevard, we have our first IKEA (351,000 square feet that opened this past May), Crate and Barrel in Downtown Summerlin (34,000 square feet opening in 2017) and Restoration Hardware in Tivoli (70,000 square feet that opened in October).
When analyzing retail data from CoStar, however, we have seen great volatility in the past 10 years. Retail occupancy in the third quarter of 2006 in Las Vegas was 4 percent, ballooning to 12 percent vacancy in the third quarter of 2011. Today, it is back to 8 percent. Thankfully, we have not seen much construction activity as we attempt to absorb the vacancy. Another interesting statistic is that the Valley has received only 4.8 million square feet of retail space since 2010. In 2007 alone, we received 7.1 million square feet of new space. When looking at rental rates across the whole market in 2006, Las Vegas came in at $18.85 per square foot triple net. That number was $15.77 in 2011. Today, it comes in at $15.76. However, that is painting the picture with broad strokes. The best retail trade areas are currently experiencing “peak level” rental rates. At the bottom of the recession, Las Vegas saw rentals rates depressed more than 50 percent. This good news brings renewed optimism to the Valley for 2017.
— By Brendan Keating, CEO, Logic Commercial Real Estate. This article first appeared in the December 2016 issue of Western Real Estate Business.