— By Jeffrey Swinger, Executive Vice President | Las Vegas, Multifamily Investment Sales, Colliers —
Las Vegas is on a roll right now, continuing to raise the bar year after year, and we are bullish on the long-term outlook of Southern Nevada’s future.
UNLV’s Center for Business and Economic Research predicts that Southern Nevada’s population will gain 41,900 new residents in 2023 and increase another 2.4 percent in 2024. This wave of growth, coupled with strong local economic activity and enhanced infrastructure investments, has created more jobs and more demand for housing.
With more than $8.12 billion of new major projects delivered in 2023, there is another $2 billion currently under construction with plans to deliver in 2024 and 2025. Additionally, there is another $17.25 billion of announced and proposed projects keeping Las Vegas’s momentum moving forward.
Significant projects that were delivered in 2023 include the Fontainebleau, the MSG Sphere and the inaugural Formula 1 Heineken Silver Las Vegas Grand Prix. The Fontainebleau is the latest hotel/casino along the Strip, valued at $3.7 billion, and will add 3,644 rooms to the hotel inventory count. The MSG Sphere is Las Vegas’s newest entertainment venue featuring the largest spherical building in the world with the world’s largest LED screen. The economic impact of the Sphere is estimated to be $730 million annually, hosting world-class live music and entertainment throughout the year. And finally, Formula 1 kicked off its first race in Las Vegas with drivers speeding down Las Vegas Boulevard topping 200-miles per hour. This competition will occur annually; however, the economic impact of this inaugural race is estimated to be $1.3 billion just in the first year, making it the “single largest special event in Las Vegas history.”
Consumers were also enticed with an extraordinary number of distinct events and high-profile concerts, as well as an abundance of collegiate and professional sporting events. Living up to its name as the “Sports & Entertainment Capital of the World,” Las Vegas will host Superbowl LVIII in 2024, estimated to bring in another $500 million to $1 billion in revenue to the city. Another exciting addition to the Las Vegas professional sports landscape is the relocation of the Major League Baseball franchise, the A’s. Las Vegas officially has three of the four major sports leagues in town, and we expect that a professional basketball team will be coming soon too.
An unmatched lineup of major events in 2023 resulted in remarkable visitation to Southern Nevada, breaking records for the average daily auto traffic count (I-15 at the Nevada/California border), and ranking Harry Reid International Airport as the seventh busiest airport in the nation. And despite high inflation and predictions of a slowdown in gaming revenue, Nevada’s casino industry has set single-month records as well.
Housing demand continues to be robust in Southern Nevada, both for multifamily and single-family residential. The supply and demand fundamentals of multifamily housing are strong and will continue to be strong in the foreseeable future. As of the third quarter of 2023, the physical vacancy rate sits at 7.19 percent and rents appear to be leveling off at $1.59 per square foot ($1,462/month). By comparison, rents in the Las Vegas market peaked during the third quarter of 2022 at $1.64 per square foot ($1,525/month), and the market experienced its lowest vacancy rate during the third quarter of 2021 at 2.58 percent. However, cracks are starting to emerge regarding delinquencies, lease cancellations and bad debt creating a much higher economic vacancy. We believe these problems will continue to persist throughout 2024 as we transition from a Covid economy to a more traditional economy without all the pandemic aid and stimulus programs. Because of the strong supply and demand fundamentals, we believe that the economic vacancy issues that we are currently experiencing should correct itself as we head into 2025.
There are ±10,737 multifamily units currently under construction. Approximately 4,025 total units are estimated to be completed in 2023, with another ±7,926 units scheduled to be delivered in 2024. To put this into context, Las Vegas averaged ±6,000 new multifamily units per year for the last 20 years, with 1989 being the high-water mark delivering ±18,000 units. There are over 12,000 units planned for future development (2025 and beyond), but the question remains if these planned projects will break ground given the current economic and capital market uncertainty that we are currently experiencing. Projects already under construction should be completed looking out through the end of 2024. Many of these projects have development completion guarantees with their lenders, so we are not likely to see many of these projects stalled that are currently under construction. Beyond 2024, it is questionable what will be completed. This presents a unique challenge as the pipeline of new supply will continue to diminish based on current capital market conditions. Because of this quandary, Las Vegas may find itself undersupplied with multifamily units. This in turn could cause rents to go higher eventually. Our projection is that rents will be flat to down in 2024 due to new supply coming on line, but beyond 2024, we expect rents to go up based on current low projected new supply and projected high demand.
According to Axiometrics, the Annual Net Inventory Ratio in Southern Nevada is 1.6 percent. This figure represents the number of net new units completed during a 12-month period as a percent of existing units. At 1.6 percent, Las Vegas has one of the lowest net new completions in the nation. The city’s development pipeline is severely undersupplied compared to our neighbors in Phoenix (4.10 percent) and Salt Lake City (6.40 percent). We are even below the national average at 2.10 percent, which makes Las Vegas an attractive market for developers.
Along with the lack of new supply for multifamily units, single-family homes continue to be undersupplied. Single-family developers have averaged ±972 permits per month over the past 12 months. However, the average number of residential permits pulled over the last 20 years annualized, amounts to ±1,275 permits per month. Single-family housing supply going forward will need to pick up in order to meet future demand.
Transaction volume in Southern Nevada has certainly stalled due to higher interest rates and uncertainty in the capital markets. There have been five sales (over 100 units) through the third quarter of 2023. This represents an 89 percent decline in transactions YOY, and a 90 percent decrease in transaction volume compared to the third quarter of 2021. Due to overwhelming transaction activity that occurred within the last two years, combined with severe cap rate compression, we experienced a very high-priced environment for multifamily sales. Many of those transactions used short-term debt loans that are due now or will be coming due soon. Because of the current capital markets environment, much of this debt will need to be restructured resulting in an abundance of capital calls, requests for preferred equity, and re-shuffling of existing debt. We do anticipate stressed and distressed sales in the near future. However, it is hard to quantify the amount at this point due to where we are at in the process, and how lenders will treat each situation.
Until the market corrects itself with a more stable economy, the widely used mantra we hear from investors and developers is “Survive until ‘25.” We believe that this is true for the Las Vegas multifamily market as well. We feel like 2024 will be a year of reset and repositioning. However, 2025 and beyond could create the largest supply and demand imbalance that Las Vegas has ever experienced, resulting in an unparalleled need for housing. Because of the city’s vigorous organic growth and business friendly climate, combined with forward-looking strong supply and demand fundamentals, Las Vegas will be one of the most attractive markets for investment in the United States.