Industrial sector ‘darling’ of commercial real estate

Southern Nevada’s commercial real estate industry entered 2022 on an upswing despite lingering pandemic effects, threatening inflation and supply chain constraints.

As we traverse toward the end of the third quarter, headlines today are contradictory.

Inflation or stagnation? Are we in a recession or has the definition changed? The jobs report is healthy, but some companies are laying off hundreds and thousands at a time.

What is the outlook for the rest of 2022? Let’s review where we are today, and then speculate together toward the end of the article. Should you hit the gas, or pump the brakes?

■ High inflation caused the Fed to increase interest rates. In the short run, that has slowed down transaction sales volume, more so in the runaway residential sector, and for levered buyers in the commercial sector. Given limited supply of quality product and high demand to place capital, pricing should hold or be slow to decline until sold comparables have a chance to reset sellers’ expectations. But expect softened pricing over the medium to long term.

■ The local office sector started cooling midyear after experiencing significant expansion during the first part of 2022. Southern Nevada’s inventory expanded by more than 382,000 square feet of new office space. With 41 percent of this space pre-leased, this will add as much as 225,000 square feet of vacant space to the local market. Expect vacancy rates to increase, with the understanding that this is a healthy increase. Southern Nevada has not added quality inventory since the Great Recession.

■ The industrial sector is expected to remain strong as the “darling” of commercial real estate through the remainder of 2022. Spurred on by the exponential growth of e-commerce, Southern Nevada’s industrial inventory recently expanded by more than 753,000 square feet, while 1.3 million square feet of space was absorbed. This brought vacancy down to 1.3 percent, the lowest industrial vacancy rate ever recorded in Southern Nevada. Demand remains high, keeping developers busy and attracting capital sources to the market.

■ Southern Nevada’s retail market just had its strongest quarter since the fourth quarter of 2021, with net absorption surging to 459,545 square feet. Deliveries of new retail space were light, bringing vacancy down to 4.8 percent, the lowest rate since the Great Recession. Looking toward the end of the year, the local retail market should continue to do well, despite supply chain disruptions and high inflation.

■ Developers seem to be positioning themselves for an expanding market in 2023 and beyond. Local land sales remained solid in the second quarter of 2022, with residential land dominating among all land types and industrial land sales falling significantly (likely because parcels have been picked off). The average price per square foot for land in the Las Vegas Valley changed little to $497,891 per acre, compared to $500,069 per acre during the previous quarter. On a year-over-year basis, the average price of land increased by $108,464 per acre, showing the real trend.

■ Hospitality metrics for Southern Nevada saw room inventory increase by more than 3 percent, from 146,723 units a year ago to nearly 152,000 rooms through May 2022. Over the last year, Las Vegas saw the completion of Resorts World and the renovation/rebranding of Virgin Hotels Las Vegas, and the re-opening of the Palms Casino Resort. These properties added over 5,700 rooms and 540,000 square feet of convention space to the local inventory. Room occupancy averaged 83.3 percent through the second quarter of the year, an increase from 77.3 percent for the last quarter of 2021. Through May 2022, year-to-date visitor volume stood at 15.3 million people, representing 45.1 percent annual growth.

■ Business tourism figures are still down 34 percent compared to 2019. Las Vegas has not seen a complete return of its international business, which isn’t expected to recover until 2024. Despite these depressing stats, Harry Reid International Airport set a new record for passengers in June 2022 (4,683,156), a 22.9 percent increase from June 2021. By midyear 2022, the airport has seen 52.4 percent more passengers (24,279,867) than the same time last year.

If you only look at the economic numbers, you’d be hard-pressed to find a problem with Southern Nevada’s economy. At worst, you could point to growth being slower in 2022 than 2021. This isn’t surprising, given that 2021 was being compared to 2020, the year of lockdowns.

Over the past three years, we have matured and added capacity in many ways.

Newly completed projects include the West Hall expansion of the Las Vegas Convention Center, Resorts World, Circa Las Vegas and Allegiant Stadium.

Pending projects in the pipeline are MSG Sphere, Fontainebleau Las Vegas, Hard Rock Las Vegas, UnCommons and Durango Casino &Resort by Station Casinos. Formula 1 is coming for sure. Major League Baseball is still flirting, and the NBA is like an imminent speculation.

When I look at what’s happening and what’s to come, I like the odds. As Las Vegas continues to navigate the current economy, she will continue to do what she does.

Reinvent herself, bigger and better!

Hayim Mizrachi is the president of MDL Group and the 2022 president of NAIOP Southern Nevada. NAIOP Southern Nevada is a chapter of NAIOP, the Commercial Real Estate Development Association, and it comprises 635 members serving the Southern Nevada market.