Q&A: Brian Gordon

By Buck Wargo

Friday, Feb. 12, 2010 | 3 a.m.

Brian Gordon is by no means shy.

But compared to his partner at Applied Analysis, Jeremy Aguero, he comes across as a quiet, behind-the-scenes player.

An accountant and financial analyst who was born in Las Vegas and attended UNLV, Gordon, 36, doesn’t mind his lower-profile role.

The energetic Aguero gives most of the company’s presentations such as Preview Las Vegas, but that doesn’t bother Gordon.

“We all do whatever it takes to make this company go,” Gordon said. “He is and has been face of the company and that has proved successful for our firm. I think Jeremy is much more visible. He has a tremendous amount of relationships in the community, and that has benefited our firm tremendously over the years. He does significantly more presentations. We are one firm.”

IBLV: How did you come to work for Applied Analysis?

Gordon: Directly from UNLV, I got a position with Arthur Andersen and worked there for about five years. I became a manager and transferred out to their Silicon Valley office for about six months, and that’s when Jeremy and I started talking about opportunities here at Applied Analysis, and I moved back in 2000.

How old is the firm?

He started it in 1997 on his own, and then I partnered with him. We have known each other since we were 5 years old. We played on soccer teams together and went to elementary school together. He had a tremendous amount of work at the time in 2000. I was in Silicon Valley for about six months, and the high-tech bubble was bursting at that time. It made sense to come back home, and the rest is history.

It was a good opportunity?

He was quite busy, and it made sense to join forces and use my CPA, accounting and finance background with the work the firm was already doing. We could continue to expand the business from there.

You both are so different in personality.

I think that’s why it works. We are both fairly reasonable people, but it’s good to have someone to bounce ideas off.

Do you wish you had that speaking style?

Nobody has Jeremy’s speaking style. He has a ton of energy. His insight and ability to think on his feet and present the information in a meaningful, understandable format is tremendous. I wish I had those skills.

What was the firm doing at the time you came?

A lot of the work was focused on the real estate market. The name of the company was Applied Market Analysis at that time. It was heavily focused on office, retail and industrial markets as well as residential markets. The firm was doing other work as well. When I came on board, we decided to change the firm to Applied Analysis because we were expecting to do much more than that. We were going to become more involved in public finance and hospitality and the gaming industry and a broad mix of consulting. We managed to expand further into the finance world and public policy.

What kind of work have you done in the past decade?

We have done a lot of research-related assignments from evaluating a potential site for a major gaming company to evaluating the feasibility of residential product type at a major project like CityCenter. Our work spans all market segments and product types. We have done analysis for major office, industrial and retail developers, financial institutions, appraisers. For state and local governments, we have done a lot of work forecasting and trying to project where public revenues are headed, where development activity is headed, where the trends are and evaluate general economics for those who are about to make investments in Southern Nevada.

How different is it today?

The work we do is the same, but the environment we do it in is much different. We are operating in an environment that could be considered the worst in our history in Southern Nevada. The market conditions have turned on a dime the last two years and it is just a different world. The level of effort and due diligence that is required — the processes that we employ — remain consistent over time. It’s the external factors that adjust as the market conditions shift.

What do customers want?

It could be anything from evaluating demographic data around a particular location and whether they are meeting all of their objectives for their customer base or trying to forecast where sales tax revenues are coming in and how that’s going to affect their ability to perform going forward. It is a mixed bag. The questions are different every day. They are not easy ones, but at the end of the day we provide the research behind it that provides the answers.

How many employees do you have?

We are up to 11. We were up to 13 or 14 at the height (of the boom years), and we have seen some attrition over the last year or so.

When companies have fewer projects, does that mean less work for you?

Yes. We see our customer mix shift based on market conditions. When the real estate sector was booming, we saw a ton of real estate-related clients. When things have tightly focused on government spending and performance in that sector, we have done a lot of public policy work.

Has the company achieved its goals?

We have been able to continue our growth through the last decade, which has been significant growth, and we are very pleased with that. We always think we can do better and gain market share, but we are very happy with where we are at.

What kind of new work do you think will come your way in the future?

It will be working with a lot of companies evaluating Southern Nevada as a relocation opportunity. The core of our business relates to economics and real estate and clearly the hospitality industry in Southern Nevada. Those things aren’t going away. While they may be slowing down or coming to a halt in terms of construction activity, people are still moving within the market, and people are still making decisions on whether they should or shouldn’t take action. Sometimes the answer is that they shouldn’t and a lot of times people want that help making decisions.

What about real estate work?

You have a ton of financial institutions holding property or going to be holding property. They want to know where things are headed and when the recovery will happen.

Who have been your biggest clients?

We have done work for almost every major gaming company in Southern Nevada to major development companies and every local government and at the state level.

What are some of your biggest projects?

We did a tremendous amount of work on the governor’s task force on tax policy focusing on the fiscal structure of ... Nevada. That was a pro bono effort that we conducted. We did all the technical analysis that went into the 1,200-page report. We did a significant amount of work for the county for its community growth task force several years back.

What else?

We did some work for CityCenter evaluating the luxury-condo market. We have worked on market-related research for MGM Mirage and almost every other gaming company in town.

Where does the luxury condo market stand?

It has shifted significantly from two or three years ago. It was flying off the shelf, and prices were escalating month after month, and clearly the timing of the boom in the luxury real estate market was particularly driven by excess consumption and expectations that price appreciation would continue. Clearly, that’s not the case and as the financial markets tighten, prices continue to decline, and there are just fewer users demanding these units. We have excess capacity on the market. Granted, CityCenter is a project of its own. There’s no other CityCenter, but the market as a whole is certainly facing some challenges.

How are CityCenter condo closings going to go?

MGM is starting its closing process now with buyers. It has been relatively successful to sell about half of the inventory in that project, which is significant considering all of the sales took place after the boom. Again, it was forced to reduce prices late last year by 30 percent, but I think that has a lot of buyers intrigued, and they see an opportunity to get into the market at a lower price point. Again, today is a different world, and we will have to see how those sales play out over the next several months.

Analysts are saying they don’t expect any new resorts anytime soon. Do you agree with that?

Clearly, today we have too much supply on the market. There are 150,000 hotel rooms on the market, and (the hotels) are reporting some of the softest room rates we have seen in several years. At the moment, supply exceeds demand and (it will be) several years (before demand catches up). We have a number of buildings sitting as shells today that could easily be opened as hotel rooms, whether it be the Octavius Tower at Caesars, the Harmon Tower at CityCenter. You have Echelon that has been stalled, and you have the Fontainebleau project that is half built on the Strip. You have a number of units out there that could move forward, but beyond those you are unlikely to see any major development come on the Las Vegas Strip in the next decade.

Is that the best solution?

Absolutely. Developers have been pretty proactive in responding to market conditions. Boyd Gaming being the first of many that had the insight to decide to delay (Echelon) at a time when it wasn’t popular. They really were later in the game in terms of development, but first in terms of deciding to shut things down. That move has proved to be a positive for that company.

Visitation has been down, but the average daily room rates have also been down. How is that rebuilt and how long will that take?

It is going to take anywhere from two to three years before we see full recovery in the tourism industry. That doesn’t mean we won’t see signs of improvement during the second half of 2010. We will start to see some stabilization in the room rates, particularly as the convention side of the business picks up and stabilizes midweek room rates. Some of those signs will start emerging in late 2010. Will it reach back to the levels of two and three years ago? Not in the near term, but we will. It will require several quarters of correction.

Did gaming companies make a mistake in building too many high-end properties?

When you look at the amount of construction activity that was taking place, everything had to be at the high end. The cost of construction was so high and so when developers bring projects like CityCenter, Echelon, Encore, Palazzo, the costs are so high, they are required to focus on the higher segment of the market to generate the returns they need. It is a function of the market conditions. It is difficult to build a mid-to-low-tier property in today’s environment.

Will future construction be high end?

It depends on where construction costs are in the future. Yes, developers will be much more cautious about the types of projects they build and the target audience they are catering to.

How long can these high-end properties charge such discounted room rates?

The question is: “Can they service the debt?” We have seen a number of companies looking to reorganize during this downturn, and they have been forced to. These properties will continue to move forward, the question is: “Who will be the owners and how will this ownership structure look?”

Are we going to see a boom like we have seen again?

In the tourism industry, we won’t see the level of investment development activity that we have seen over the past decade. One, we have learned lessons, and two, there is a limited amount of land on Las Vegas Boulevard. In terms of Las Vegas as a whole, certainly it’s struggling and facing all of the challenges that the national economy has and more. While 2009 was difficult and 2010 will be challenging, we have all of the elements in place to ultimately recover. Will we see price appreciation in the market that equates to 40 to 50 percent annually? No. Those days are long gone, and we are not likely to ever see those again. That may be a good thing for Southern Nevada.

How much of a difference would it make for Las Vegas to have an arena and professional sports franchise?

I think it is important for Las Vegas from a perception standpoint as well as a tourism standpoint and from a construction standpoint. The construction industry is struggling today, and a project of that magnitude would employ thousands of workers and have a significant economic impact. From a tourism standpoint, if you look at any of the major cities that have professional sports teams, you have a number of untapped markets where people are willing to visit Las Vegas to see their team play.

The mantra for economic diversity has been Nevada’s low-tax environment. Is it time to modify that to pay for education and infrastructure?

Yes. I think the whole model has to be rethought. You can’t continue to do those types of things on a shoestring budget. It just doesn’t work, but at the same time everybody needs to pay their fair share in terms of the revenue side of the equation. All of those needs must be rebalanced, and the state is looking at the fiscal structure as a whole. That is one step of many that needs to take place.

What is the best solution?

It needs to take a holistic approach to correcting the challenges that the fiscal structure is taking. The Band-Aid approach taken over the past two decades, while it has worked, it is probably not the best solution. When gaming represents a third of the overall economy, it is a significant player and needs to be part of that overall discussion. At the same time, you have 70 percent of the market in other industries. Looking forward, all sectors need to be part of the solution.

Can the state succeed in bringing in new business with the current level of support for education and government services or does it need to spend more?

We are well-positioned today to take advantage of potential businesses relocating here — probably better than we have been in the past decade when you think about how home prices have recessed for those employees that can potentially migrate here. We have millions of square feet of office and industrial space available for them to occupy. There is no delay or development period for them to move into some of these facilities. It is the perfect time for businesses to relocate. They need to be targeted and attracted and made aware of these opportunities.

But without spending more money on schools?

It all factors into the decision-making, but at the end of the day, a lot of times it comes down to dollars and cents for businesses and whether it makes sense to migrate from somewhere in California to Nevada.

Do you see a lot of migration from California this decade?

Yes. I think we have seen a lot of that since our inception, and I think you will continue to see that. To the extent our neighbor remains more costly, more challenging from a tax environment, they (businesses) will continue to see other places where it is easier to do business and more affordable.

But do we have the workforce?

We have 130,000 people looking for work today who can’t find it. Do they have right skill set to meet a particular company? Maybe some of them do, but a great deal don’t. They either need to be retrained or retooled or we need to start adding those skill sets in the local economy.

Some argue about so much money being spent to attract tourists, but very little to attract businesses. What do you think?

We don’t spend a lot of money trying to target them. Certainly, the Nevada Development Authority does a great job at what it does with the resources it has. We spend millions of dollars attracting tourists, but little is invested in trying to attract businesses here. We are not advocating reducing the amount of spending to attract tourists here. That is the lifeblood of the economy. But we need to spend more money trying to get those businesses here.

Health care employment has done well through the recession. Why is that?

The fastest-growing segment of our population is seniors. A lot of people are moving here for the low-tax environment, great weather and to be closer to family that has migrated out West. Las Vegas has been a great beneficiary of that migration. Seniors tend to demand a significant amount of health care services.

Can that be a big part of economic diversity?

Absolutely. We already see it with the Nevada Cancer Institute investing a lot of money and doing a lot of great things. The (Cleveland Clinic Lou Ruvo Center for Brain Health) downtown is trying to create these new segments in the health care industry. It is important that if you look at any major city, they have those types of investments.

Where is the housing market heading?

We started to see prices bounce around on what appears to be the bottom. Sales volumes have ticked up. But unfortunately, we still have foreclosures taking place every day. We are not out of the woods, but the expectation is we will see fairly flat home pricing continue through 2010, assuming volumes remain relatively healthy. We expect the worst is behind us.

When will prices start to appreciate?

We are not going to see skyrocketing prices like we saw during 2004, ’05, ’06, but we may return to a more normalized 2, 3, or 4 percent price appreciation as we get later into 2010 and 2011.

What about the new-home market?

We have a pretty significant overhang in the housing market and resale market today. We are looking at somewhere between 30,000 and 40,000 excess units in the market today and that will take some time to absorb. We have seen a couple of new-home communities pop up, but nothing significant at this point.

What about the commercial market?

We are just starting to see the worst of it. Office vacancy is 23 percent, industrial vacancy is 13 percent and retail at 10 percent. They are all-time highs, and they are essentially double the historical average. For us to work through that inventory, we have to see demand first. We have seen an out-migration of users, and we are looking at another 12 to 24 months of continued contraction in this segment. We are looking at several years before we start to see anything that looks like normal.

How long before the jobs come back?

Over the next 12 months, we are likely to see continued cutbacks in construction. We can see 15,000 to 20,000 jobs lost in that sector through the balance of the year. Other sectors may offset some of those losses. The leisure and hospitality industry might see some modest growth.

Will there be any construction in that sector?

The commercial sector has essentially come to a standstill at this point. We will probably continue to see that beyond 2010 as users look to fill the space that exists today.

So the economy will be weak for a while?

We will continue to see some softness this year. It will be beyond 2010 before we see some improvement.

Where are we headed with commercial foreclosures?

Certain lenders have taken the attitude that the fundamentals are what they are and they want to work with their borrowers and generate as much cash flow out of this that they can. Banks are not property owners. They are financial institutions first. Some of them will choose to work with their borrowers and some will choose to take the properties to generate more value for their shareholders that way. We will continue to see foreclosure activity happen, but I think we will see a number of workout situations.

How will Las Vegas look 10 years from now?

We will see continued investments in industries outside of the gaming sector. We will probably see expansions in industries that we may not have thought about yet today. We talk about the World Market Center bringing the furniture world to Las Vegas, and we may see other businesses or industries that migrate here because we have the infrastructure to support it. There are a number of things out there that will have us look a lot differently than we are today.

What have analysts learned from this deep recession?

That is kind of a tough one. Essentially, you use the information you have and you have to a focus on the big picture of what’s happening. I think we all saw the writing on the wall when we saw our home prices double and we saw tens of millions of dollars of commercial development taking place. Those trends can’t continue into perpetuity. Did we expect the level of recoil that we saw? Maybe not, but we didn’t expect it to last forever.

But many analysts had it wrong?

A lot of us had it right. Trying to forecast that level of downturn is difficult and nearly impossible when you are talking about the worst downturn in modern history.

So what lessons did analysts learn?

I think the lesson is that fundamentals are always going to be the overriding factor when you are evaluating market conditions. The unsustainable growth, the unsustainable price appreciation, whatever it is will not continue forever, and you have to see the other side of the curve when those things turn down.

What is the question most often asked today from people?

When do we turn the corner? That is a difficult question to answer. We have seen the worst of the downturn and certain sectors will feel it harder going forward. Real estate will continue to struggle, construction will continue to struggle, tourism will start to stabilize and the balance of the economy will come along.