Las Vegas should be among the U.S. cities primed for renewed investor interest in commercial real estate, but a new report from a national trade group shows the city may be missing some of the attributes it needs to compete for dollars.
The research arm of NAIOP, the Commercial Real Estate Development Association, released a Feb. 10 report pointing to secondary, or smaller, markets as the wave of the investment future. That’s because high-quality real estate properties in primary markets — mostly big, coastal cities such as Los Angeles, New York, Chicago, Miami, Seattle and Washington, D.C. — have pretty much recovered the property values they lost in the downturn. That means fewer bargains for investors looking to add value and reap big returns relatively quickly.
So investors are looking toward secondary markets, which include Las Vegas, Salt Lake City, Phoenix, Baltimore, Cleveland and Pittsburgh. But interest won’t spread evenly to all markets: The NAIOP study says money will favor secondary markets with “a high concentration of skilled workers and a track record of innovation.” What’s more, the report adds a caveat about economies dominated by a single industry.
Those investor preferences could be problematic for Las Vegas. Start with a skilled labor force: Clark County doesn’t really have one. Among county residents 25 and older, 22.2 percent have at least a bachelor’s degree, compared with 28.5 percent nationally, according to numbers from the U.S. Census Bureau.
And although the city’s tourism operators have a track record of innovation in the hospitality industry, the sector almost single-handedly dominates the economy. A March report from local research firm Applied Analysis showed that the tourism sector directly supported 223,200 local workers, or 28 percent of the region’s labor force, in 2012. What’s more, the total economic impact of Southern Nevada’s tourism sector in 2012 was $44.9 billion, or 48 percent of the region’s gross product. The industry also generated 41 cents of every dollar paid in local wages and salaries.
“Concentration in one industry implies volatility, with greater upside offset by a deeper downside,” the NAIOP study said.
Whether secondary markets can draw investment activity will depend as well on the availability of financing, the report said. Investors should also keep in mind that although investment returns will grow as recovery progresses, secondary cities are likelier to see faster declines in sales activity following a market peak.
Some secondary markets also may struggle to offer enough high-profile inventory for institutional investors in particular. In that regard, it’s important to note that some of Southern Nevada’s biggest commercial assets are off the market. A subsidiary of investment firm Blackstone bought The HC | Hughes Center — the crown jewel of the local Class A office market — for nearly $350 million in September. And in 2012, Houston investor Hines partnered with Oaktree of Los Angeles to buy General Growth Properties’ 1.1 million-square-foot Summerlin office portfolio.
Still, because recovery in secondary markets has lagged revival in major markets, there are opportunities for informed investors who time their buys right, the report said.
Source: Review Journal, by Jennifer Robinson, Las Vegas Business Press