Retail recovery around the corner

By Buck Wargo

Friday, June 4, 2010 | 3 a.m.

The Las Vegas retail market will remain weak through 2011, but it’s poised for a quicker comeback than the rest of the nation in part because of the near halt of construction and a recovery in California, according to a national analyst.

Hessam Nadji, managing director of research services at Marcus & Millichap, a real estate and investment brokerage, said he expects the retail vacancy rate in Las Vegas to rise 1 percentage point to 11.6 percent by the end of the year. Despite the increase, it’s less than the 2 percentage point increase in 2009.

The vacancy rate should remain stable in 2011, before dropping to 8 percent by 2012 once the economy recovers, said Nadji, who was in Las Vegas for the International Council of Shopping Centers convention.

“It’s short-term pain and long-term pain,” Nadji said. “That’s Vegas. What we are experiencing right now is the overhang from the extreme boom in 2005 to 2007.”

The firm projects local developers will complete 800,000 square feet of retail space this year — including Tivoli Village at Queensridge — down 56 percent from last year. Over the past five years, the market has added 3.8 million square feet a year on average, he said.

“It will come back a lot faster (than the rest of the country) because the construction has shut down,” Nadji said. “And Vegas depends more on Californians driving here, and California is coming back. That’s a positive sign.”

Consumer sentiment and jobs are the keys that will drive Las Vegas, Nadji said. The latest national survey shows Americans’ confidence in the economy rose in May for the third straight month. Marcus & Millichap, meanwhile, projects Las Vegas payrolls will expand by 0.3 percent this year.

“We are not getting the jobs yet, and you have an overhang in housing,” Nadji said. “There’s still lots of foreclosures going through the system, and tourism is not where it should be. You have to get all that back before the retail is going to take off. It will. We are just ahead of the curve. Two years from now, we will be talking about Vegas as one of the best markets in the country.”

During the second quarter, rents requested by shopping centers have fallen 6.1 percent compared with a year ago to $21.79 per square foot per year because of the rising vacancy rates. Because of concessions offered to attract and retain tenants, the effective rates are $18.52 per square foot per year, Nadji said.

Over the past year, that has cut into shopping centers’ revenue, which dropped 9.5 percent compared with the 8.2 percent in the previous 12 months, he said.

The rents effectively charged will fall 5.7 percent for the rest of 2010 to $17.62 per square foot per year, Nadji said. They should remain stable in 2011 and not rise until 2012 when vacancy drops.

Henderson, which has the highest effective rents at $21.26 per square foot, has the lowest vacancy rate at 9.1 percent. The southwest valley has the highest vacancy rate at 14.9 percent.

Tivoli Village has been the exception to the slowdown in retail development.

A project of Israeli-based IDB Development Corp. and EHB Cos., the center has pushed its opening from the fall until March. The center will have 225,000 square of retail, and 145,000 square feet of office as part of its first phase.

Patrick Done, executive vice president of Tivoli Village, said a March opening allows more time to complete tenant improvements and ensure the center opens with a higher occupancy.

Done said the development is able to proceed when others can’t because internal financing by the development partners and expectations of the project’s success.

“We think that market is tremendously underserved,” Done said. “On the west side of Las Vegas, there are approximately 600,000 residents within convenient drive time of our location.”

Many developers are unable to secure financing at this time, he said. Done said he expects the retail portion to be 75 percent leased when it opens and the office component 50 percent leased.

“We are going to enter the market at the right time when no one else is able to,” Done said.

The second phase, which won’t open until 2012, will have 275,000 square feet of retail, and 100,000 square feet of office.

Nadji said he’s not expecting many foreclosures of retail properties despite a large number of distressed loans. The reason is banks can’t afford to take a hit on their books by foreclosing and selling the properties and prefer to work out arrangements with the owners, he said.

Marcus & Millichap is forecasting sales of retail centers will pick up in 2010 in Las Vegas as investors focus on deeply discounted distressed properties and bank-owned properties. The strongest interest in properties is in Henderson and Summerlin because high-end demographics have kept vacancy rates lower, Nadji said. Sellers in those areas would rather hold than sell at a discount, he said.

The southwest valley, which has the largest supply of distressed retail properties, has many on the market for a discount but because of the oversupply in the area, buyers may be deterred from acquiring them, Nadji said.

The median price for multitenant properties has fallen 24 percent in the past 12 months to $160 per square foot, he said. That’s a decline of 40 percent after peaking in 2007, he said.

David Israel, executive vice president of Thor Equities, a New York-based retail developer, said nationwide the volume of sales has picked up in desirable properties in good locations, but problems exist for less-desirable properties.

“There still seems to be a disconnect between the bid and what is being asked,” Israel said.

More than 30,000 people came to Las Vegas for the convention that focused on retail development, an industry that has been hampered by the recession and the decrease in consumer spending.

Much of the discussion centered on redeveloping and acquisitions of existing centers.

Leo Ullman, chairman of Cedar Shopping Centers, and Michael Carroll, CEO of Centro Properties Group, said more capital is coming back into the industry to finance acquisitions and other deals.

Lenders shy away from funding new developments, industry officials said. The centers that are being built see anchor stores, such as grocery stores, with smaller footprints and less ancillary space for other retailers that have been hurt by the economy, they said.

Some large national retailers have requested reduced space to lower their costs, they said.

Staples and Old Navy are among those wanting to downsize, Carroll said. It’s about wringing out inefficiencies and reducing costs, he said.

Some retailers are trying to take advantage of the vacancy and lowered rents to move into markets where they haven’t had a presence, Carroll said.

Ullman sounded a pessimistic note about the viability of bookstore chains in the future, which would put a lot of space on the market. He said some sporting goods chains are vulnerable, too, and he is concerned about Kmart.

During the convention, former Labor Secretary Robert Reich urged shopping center developers to heed the demand of consumers who have been using the Internet more and more for shopping. There’s still an opportunity to capture those customers who are not only looking for value but for a shopping experience where they cannot only try on goods but also socialize, he said.

“That shopping experience has a value all its own,” Reich said. “Although consumers won’t be able to spend as much as they have over the past 20 years, they will be spending on shopping in places that gives them value and a sense of community and enjoyable shopping experience.”