The Las Vegas retail market has taken a significant hit during the economic downturn, but amid the doom-and-gloom the city continues to attract retailers and visitors that eventually will help restore stability to the region.
Much of the declines are being driven by the general economy and, subsequently, joblessness throughout greater Las Vegas. According to the U.S. Bureau of Labor Statistics, the metropolitan area reported an unemployment rate of 13.8 percent in January 2010, compared with 10.3 percent in January 2009. With nearly 136,000 people out of work in metro Las Vegas, it has been difficult for the market to achieve consumer spending levels that could help turn the market around.
Recent retail statistics show worsening conditions for metro Las Vegas. According to a December 2009 survey conducted by Applied Analysis, the Las Vegas retail market had a vacancy rate of 10 percent, which is up from 7.5 percent in December 2008 and more than double the market's historical 10-year vacancy rate of 4.5 percent for anchored retail centers. Meanwhile, average retail property rents reportedly declined to $1.84 per square foot, down from $2.13 just 1 year prior. New development virtually stalled for retail properties in the market during 2009. Of the only 1.3 million square feet added to the retail base, most of the development had commenced construction in early 2008.
Surprisingly, the breakdown of the vacancy numbers in Las Vegas is not what one would expect with the number of large box national retailers that have failed in the recent past. The power center component of the Las Vegas retail property base, which is about 19 million square feet, only has a 6.6 percent vacancy factor, which is significantly lower than the 10 percent overall average in the valley at the end of fourth quarter 2009.
However, there has been a shakeup in the normally stable neighborhood center base, which comprises about 20 million square feet. With the economic downturn, shifting demographics and increasing competition from the final expansions of the Wal-Mart Supercenters and approximately 35 Tesco Fresh & Easy stores, the big three grocers — Albertson’s, Smith’s, and Von’s — have been significantly impacted.
All of these factors have caused a number of grocery and drugstore closings, as well as shop-space fallout. The neighborhood center vacancy factor was 13.8 percent at the end of fourth quarter 2009. One bright spot has been that Hispanic grocers have had a positive effect on the northeast valley. Larger chains such as Cárdenas and El Super Market have moved in to compete with more entrenched local operators and have occupied a number of once-vacant traditional grocery boxes. The neighborhood center segment of the retail property base probably will continue to be depressed during the next 18 months as these changes continue to take place.
Clearly, the overall numbers are less than ideal, but there are trends indicating that a retail comeback may be on the horizon. First and foremost, lower property prices and rents have caused several retailers to either enter the market or expand their presence in the Las Vegas Valley. This includes Kohl’s, Hobby Lobby, Staples, Ross, T.J. Maxx, Total Wine, and Chase Bank.
Additionally, Target has opened four new stores in the last year. This will allow for future development of the vacant land parcels adjacent to these newly opened stores, which should add 500,000 square feet of new development during the next 24 months.
There also are signs that the gaming and hospitality industry could see an upturn down the road. The recently opened $8.5 billion CityCenter is a game-changing addition to the Las Vegas Strip having added 12,000 jobs. According to the Las Vegas Convention Authority, Clark County's gaming industry revenue declined 9.8 percent from 2008 to 2009. However, visitor volume was up each month in fourth quarter 2009. While tourists may be spending less in Las Vegas these days, the fact that they are coming to the area in increasing numbers is encouraging.
The financial issues facing the commercial real estate industry are readily evident in Las Vegas. In many cases, these properties were financed through commercial mortgage-backed securities (CMBS), which have seen a high rate of default during the recession. Many developers are still struggling to make payments on these loans, and it's believed more defaults and foreclosures will be seen in the Las Vegas market through 2011.
General Growth Properties, which owns more than 3.5 million square feet of retail space in metro Las Vegas, defaulted on $900 million in CMBS loans backed by two local retail properties before it filed for bankruptcy in December 2008. Although GGP is expected to emerge from bankruptcy protection soon, the fallout from the company's loan defaults is still being felt today. Last year, the company halted construction on its west-side regional center project, The Shoppes at Summerlin Centre, and doesn't expect development to resume for several years.
Additionally, troubled financing for the Fontainebleau Las Vegas eventually caused the $2.9 billion development to be sold for $150 million to investor Carl Icahn. While the casino and hotel project was originally scheduled to open last fall, construction completion is now stalled for an indefinite period.
A true rebound for the metro Las Vegas retail market probably won't be seen until the national economy improves and subsequently adds to the visitor frequency and expenditures for Southern Nevada tourism.
— William F. Dunbar is the principal of Dunbar Commercial
and a Partner in X-Team International.