While most of the country grows based on the birthrate, Las Vegas has grown at almost six percent per year based on the tremendous influx of new residents. That growth fueled retail development matching the pace until the growth suddenly stopped in 2008. But today, a different scenario is beginning to emerge.
With many retail tenants going out of their spaces, beginning in 2008, the local retailers that had survived began a flight to quality. Key tenants in strip centers moved up to anchored centers. Other retailers that had been in the back of strip centers moved up onto pads.
The addition of new space has been in waves, with the first starting in 2009, as the local retailers that survived the prior year and saw rents decreasing began adding second locations. The second wave of tenants began at the end of 2009, as strong regional retailers began seeking additional locations. The third wave, which has so far been quite small, is the national tenants. With so many choices around the nation, the national retailers are still trying to decide if Las Vegas, which was hit particularly hard, makes sense regarding expansion.
The type of tenants that have been most aggressive in taking advantage of lower rents are the burger chains, the dollar stores, Ross and TJ Maxx, all of which flourished in the down economy as they served those on the lower end of the spectrum. Because their sales are beginning to improve nationwide, the mid-level retailers, which cater to less cost-conscious customers, are once again looking at sites for expansion.
In Las Vegas, the vacancy for retail space across the board is hovering at 10.4 percent. The vacancy is basically all due to the large number of big boxes that went dark and were not re-leased or re-sold. However, many of the big boxes were re-leased. Of the approximately 70 that went out as the recession began, half of them have indeed been re-tenanted. Big box spaces in well-established areas with strong car trips are still good locations for retailers.
The challenge is with the remaining 30-plus big box stores, many of which are located on the outskirts of Las Vegas. They were initially placed in the path of development, but the development didn’t come to those areas. The planned residential communities were never built, and the centers in those areas are extremely challenged. Therefore, while a majority of the retail market in Las Vegas is seeing movement, those large boxes on the outskirts are likely to remain empty for a long, long time.
Putting aside the huge drop in rents in 2008, the last year alone has seen rents drop dramatically. Average asking rents have fallen from $1.80 per square foot in 2009 down to $1.60 in 2010 where they have remained for the first quarter of this year. The actual rents, versus asking rents, are truly another 10 percent below that. That equates to a true rent rate drop of 20 percent after the initial rate cut in 2008. So while it’s not good news for landlords, there is good reason that stronger retailers are now beginning to take new spaces and additional locations.
It is not possible to overstate this — everyone is interested in investing. Developers, who can no longer develop, are out seeking centers to acquire. Funds are being formed by real estate professionals and other companies to invest in retail real estate in the Las Vegas market. Individual investors, thoroughly uninterested in residential investments, are now seeking opportunities in commercial real estate.
Slowly providing opportunities for all these investors are the banks. The banks are now placing some of their distressed retail on the market for sale. Other bank-owned properties are being marketed as note sales, which allow the banks to get the real estate off their books more quickly without having to go through the foreclosure process.
Both of these scenarios are creating value-add investment opportunities to the parties seeking retail real estate in the Las Vegas market. While not all the fundamentals are back to their old strength, there is now a significant appetite in the market.
Looking forward, as the smaller spaces fill up and centers change ownership, the rest of 2011 will be filled with transactions. Compared to the prior years, that is a positive sign for retailers, brokers and shopping center owners.
Kit Graski is a senior vice president for Voit Real Estate Services in Las Vegas.