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April 24, 2019

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Vacancies, poor sales slow retail development

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Sam Morris

Several big-box retailers, including Circuit City, Wild Oats and Copeland Sports, closed during the recession at the strip mall at Stephanie Street and Warm Springs Road in Henderson.

Click to enlarge photo

A deserted Longs Drugs sits in a strip mall at Stephanie Street and Warm Springs Road in Henderson on Sept. 24.

Numbers showing retail sales in Clark County declined 21 percent in July are adding to the anxiety of those who are waiting on the sidelines when it comes to development.

Retailers have been reluctant to open new stores during the recession. Developers, already under pressure because of rising vacancy rates caused by retailers going out of business, have little appetite to open more retail space even if they could get financing.

The holiday shopping season, in which retailers generate much of their revenue, may be weak again because consumer confidence remains low. That could break some smaller retailers who have been seeking rent breaks from landlords, analysts said.

“I would imagine it is going to be a tough Christmas because of job losses, stagnant wages and the high level of debt consumers have,” said John Restrepo, an economist and principal with Restrepo Consulting Group.

That’s not good news for an industry that has a record 10 percent vacancy rate, a number that is still rising, according to the consulting firm Applied Analysis.

“There are a number of major anchors that decided to vacate space, and they have left huge holes in a number of centers. That has an effect on foot traffic in those properties,” said Brian Gordon, principal at Applied Analysis. “That has put a lot of pressure on the vacancy rate, and we haven’t seen a lot of demand from tenants looking to expand their operations in Southern Nevada. Many are taking the wait-and-see approach to see if the market conditions start to correct.”

Research firm Marcus & Millichap reported this week that rents have decreased for five consecutive quarters because landlords are struggling with businesses closing, especially in the outer reaches of the valley.

With rising unemployment and the troubled housing market curtailing retail demand, it doesn’t look promising, the firm noted.

John Vorsheck, regional manager of Marcus & Millichap, said more development and soft tenant demand will increase the vacancy rate to 11.8 percent by the end of the year. Landlords, looking for stability, will cut rents.

Vorsheck predicts rents will decline 7.6 percent this year to $19.20 per square foot.

Developers are expected to complete 2.3 million square feet of retail space this year, expanding the valley’s stock by 2.9 percent. In 2008, 5.9 million square feet were completed, the firm reported.

Once that space opens, development will slow considerably, analysts said. Gordon predicted it could be two to three years before any sizable projects are completed.

“I think that is the natural progression of the marketplace as supply outpaces demand,” Gordon said. “That allows the market to correct during this cycle.”

John Debrovner, regional development director for Weingarten Realty that has 43 million square feet of retail space nationwide including more than 500,000 square feet in 13 centers in Las Vegas, said it has held back on construction next to a Target at Las Vegas Beltway and North Decatur Boulevard. The firm did the site work for Target, which opened in July.

“It is doing well, but unfortunately it is going to be a Target (only) for a while,” said Debrovner who spoke on the issue during a Sept. 17 seminar in Las Vegas sponsored by the International Council of Shopping Centers. “We are not going to pull the trigger on any new buildings for a while. It is a great intersection, but there is no reason to make a dumb deal.

“We have the ability to sit tight. We are not a big debt user and that allows us to (move forward) when the economy is in great shape.”

Weingarten has a 94 percent occupancy rate in Las Vegas, mainly because it focuses on grocery-anchored shopping centers that are less affected during the economy than regional centers, Debrovner said. It hasn’t felt the fallout of retailers such as Circuit City going bankrupt.

Debrovner doesn’t see much movement by developers until grocery stores and other retailers start hitting their sales numbers, he said.

Jim Reynolds, real estate manager for Great Clips, a hairstyle salon that has 2,800 stores in North America including 27 in Las Vegas, said the economy has made retailers more cautious in opening new stores. Great Clips will open 350 stores in a good year, but it will limit itself to 130 this year and probably a similar number next year.

Reynolds said he’s not worried about the slowdown in Southern Nevada over the long term because the Sunbelt has led the nation in growth and he doesn’t see that changing. The short term is another matter, he said.

“I am pretty pessimistic over the next 18 months,” Reynolds said. “I don’t see a lot of retailers setting up plans to grow other than a few of these grocers taking advantage of cheap land prices. But that doesn’t mean they are going to build a store the next couple of years.”

Great Clips, which has been in Las Vegas for 12 years, opened two stores here this year. It targets supermarket-anchored centers in growing areas with high incomes. That contributed to its same-stores sales increasing 17 consecutive quarters even in the recession, he said.

Reynolds said Las Vegas remains on its radar, and Great Clips will be aggressive in following grocers willing to open stores. That, however, seems to have subsided, he said.

“We are not adverse to risk-taking,” Reynolds said. “We used to go out before roads were built, but we are not doing that now. We are waiting to see firm commitment from anchors and homebuilders. But Las Vegas is not a market where they are back in play, and that’s got me concerned a bit.

“I have not heard of grocers aggressively taking down dirt, and in a lot of other markets a lot can buy cheap and line up for the next several years, but I’m not seeing that in Vegas.”

Weak tenants are being weeded out of the retail business, and the industry is getting down to a couple of core tenants in each of retail category, Reynolds said. That means there aren’t enough retailers to fuel a bunch of shopping centers, he adds.

“They are going to be enough to fuel one shopping center. The next couple of years, it will be pretty tough,” Reynolds said.

But Reynolds said opportunities are out there for other retailers to take advantage of in this market.

“Right now is absolutely the right time to open a store,” Reynolds said. “Landlords are looking for long-term stable tenants and are willing to lower rents and give you more tenant improvement dollars.”

Restrepo said it will remain tough on retailers because of the home-value and job losses — 60,000 from August 2008 to this August. That will weigh on consumer confidence and spending.

“Consumers will to have to first be comfortable that the job market has stabilized, but they also have to see sustained job growth,” Restrepo said. “Second, they will have to rebuild their savings, which can’t happen until they start paying down debt in a meaningful way.”

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