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CRE January 2010


Economy takes toll on growth in Henderson

By John Restrepo, Principal, with Maria Guideng, Economic Researcher, Restrepo Consulting Group LLC

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John Restrepo

A lot has changed since we last reported on the state of Henderson’s commercial real estate markets in January 2008. What a difference 24 months make. Unfortunately, the last two-plus years (Q3, 2008-Q3, 2009) have been very rugged for Henderson’s commercial markets and the Southern Nevada economy. And it goes without saying that the markets’ performance, like the rest of the Valley, was deeply and perhaps inalterably impacted by the recession, now in its 25th month (December 2009).

The Clark County economy lost nearly 70,000 jobs when comparing September 2007 to September 2009 (the 3rd quarter’s last month), and 80,000 jobs compared to November 2009. In September 2007, the county unemployment rate was 5.1%. It soared to 13.9% this past September and it stood at 13% this November. Clearly, 2008 and 2009 were very traumatic for the Southern Nevada economy and its workforce.

The recession has also had a major impact on Henderson’s population growth. This past July, the Henderson Community Development Department calculated the population at 275,134 (14% of the County population of 2,006,347), a rise of 1.1% from the department’s July 2008 estimate of 272,063 persons. By October 2009, the city approximated its population to be 275,958. And by July 2010, Henderson is projecting that its population will grow to 278,400 residents or by 1.2% (3,266) from July 2008. In comparison, the city’s website notes that Henderson grew by an annual average of 6.3% or 12,123 persons per year between July 1998 and July 2007.

This past July, the department also recorded 112,093 housing units in the city, 69% of which were single-family residences. Henderson also contained 15% of the housing units in the Valley as of July. The city’s residential vacancy rate stood at 5% and was 3 points lower than the Valley’s at the time.

During the 10 years ending December 2007, Henderson’s industrial, office and retail markets grew along with the city’s population and housing market. The expansion of the commercial markets are reflected in the wide a variety of companies that opened new or expanding existing operations in the city during the last 10 years. The attractiveness of Henderson as a place to do business can also be measured in the strength of the commercial market indicators in the years prior to the recession. The last 2-plus years have been a departure from this heady period … at least for the next couple of years. In the following paragraphs, we’ll cover the performance of Henderson’s commercial markets for the nine-quarter period ending in Q3.

Industrial market

Henderson’s industrial market comprised 12,731,281 square feet (“sf”) or 12% of the Valley’s inventory at the end of Q3, 2009. It is the Valley’s 4th largest industrial market. The Valley average at the end of the third quarter was 14.1%.

As illustrated in Figure 1, Henderson’s industrial vacancy rate has tended to be higher than the Valley average during the last nine quarters. This is a result of the type of tenant mix that has predominated in the city for a number of years. Many tenants have tended to be small- and mid-sized entrepreneurial, professional services and development/construction-related firms, which have been some of the worst hit by the recession.

The most critical indicator of the challenges facing Henderson’s industrial market is its vacancy rate. At end of the third quarter, 18.2% or 2.3 million sf were directly (space in buildings that are unoccupied and offered for lease by the owner) vacant. In Q3, 2007, the rate stood at 6.3%. So, in essence the city’s current vacancy rate represents a nearly 189% spike in just nine quarters, with the biggest rise (119%) occurring between Q3, 2007 and Q3, 2008. If there is any good news, it is that the rate of increase in vacancy declined to 32% between Q3, 2008 and Q3, 2009.

The cause of the spike: Besides the rapid decline in the Valley’s job market, can be explained by the large amount of industrial space that entered the Henderson market since Q3, 2007. By the end of Q3, 2009, the city experienced 1.6 million sf of industrial completions. These completions represented 18% of the 8.7 million square feet of industrial space brought on line in the Valley during the period. At the same time, demand or absorption in Henderson and the Valley plummeted with -255,000 sf feet and -1.8 million sf, respectively.

At the end of Q3, there were no industrial buildings actively under construction in Henderson. There was also no space in the planning stages (to be built within the next 12 months), largely due to the cancellation of many projects because of the recession. In fact, there were only 590,000 sf of industrial product under the construction in the Valley and no planned space in the third quarter of 2009.

Average monthly rents (based on the advertised/list rents as reported by owners and brokers) in Henderson for industrial space remain competitive (See Figure 2). By the end of the 2009’s third quarter, the average industrial rent in the city was $0.56 per square foot (“psf”). This was five percent lower than the Valley average ($0.59 psf). Henderson’s industrial rent dropped 16% over the nine quarters, while the Valley saw a 25% decrease. The largest declines were experienced during the second half of the period, with the Valley average falling 24.4% and Henderson dropping -29.1% at the end of Q3.

During the third quarter, incubator space in Henderson recorded the highest rent (at $.72 psf) as these buildings are generally more research oriented, with more jobs per 1,000 square feet and tend to include a higher proportion of office space. Large warehouse/distribution space offered the lowest rent at $0.40 psf.

Our latest forecast, based on the average of the last 20 quarters’ absorption rate, is that it will take the Valley’s industrial market approximately 4-5 years to reach a stabilized vacancy of 10%.

Spec office market

The Henderson office market, at the end of Q3, 2009 had expanded to 5,642,592 sf (buildings with the 10,000+ sf), comprising 14% of the Valley’s 41.2-million-square-foot market. The city currently is the Valley’s 4th largest office market. And, like the industrial market, the office market became a victim of the recession. In fact, the Valley’s office market, including Henderson, is the recession’s biggest commercial development casualty as measured by the vacancy rate.

As illustrated in Figure 3, by the end of 2009’s third quarter, Henderson’s office direct vacancy had reached 24.9% (not including sublease space), or 1.4 million sf, three points above the Valley-wide rate (21.6%). Henderson’s Class A market was the worst performing in Q3 with a vacancy of 30% (Valley Class A average – 28%).

The city’s vacancy rate had risen 115% since Q3, 2007 (11.6%), while the Valley’s had risen 93% from 11.2%. Like the industrial market, the biggest increase occurred during between Q3, 2007 and Q3, 2008 when Henderson and the Valley’s vacancy rates jumped, 52% and 55%, respectively. During the last nine quarters, the city’s office market trailed the Valley. For example, the average quarterly vacancy rate during the period was 18.8% in Henderson versus 16.9% for the Valley.

Office completions (939,000 sf) in Henderson during the last 2+ years exceeded absorption (64,000 sf) by a very wide margin, contributing significantly to the ramp-up in the vacancy rate, along with the job market bust noted previously. During the period, net absorption in the Valley was a -222,000 sf. Additionally, completions in the city represented 20% of the 4.7 million sf added to the Valley’s office inventory during the period.

The same can be said for monthly office rents, albeit to a lesser degree. At the end of Q3, 2009, the average Henderson office rent was $2.33 psf – $.05 higher than the Valley average of $2.28 (see Figure 4). During the last nine quarters, the city’s rent dropped by 11%, while the Valley’s dropped by 9%. The biggest slump occurred during the last half of the period, with the Henderson office market seeing a 10.7% decline and the Valley, a 6.2% decline. The quarterly average rent in Henderson during the period was $2.55 psf and the Valley’s was $2.44 psf.

At the end of Q3, there were no office buildings or projects actively under construction in either Henderson or the Valley, again a sign of the economic times the region is in.

Our current projection, based on the average of the last 20 quarters’ absorption rate, is that it will take the Valley’s office market approximately 5-6 years to reach a stabilized vacancy of 10%.

Anchored retail market

The demand for anchored retail space in Henderson and the Valley has been more impacted by the recession than the industrial and office market, as measured by the rate of increase in the vacancy rate. While all three markets are affected by the health of the job market, consumer confidence and spending most directly influences the retail sector, two indicators that have been severely damaged by the economic downturn.

Henderson is the second largest retail market (centers with 40,000+ sf) in the Valley with a 20% market share. Anchored retail centers in the city contained more than 8.4 million sf of rentable space at the end of Q3, 2009. Of this amount, nearly 3 million sf were in Power Centers, 2.7 million sf in Community Centers and the remaining 2.8 million sf was in Neighborhood Centers.

Henderson’s anchored center direct vacancy rate was 9.4% at the end of Q3, representing nearly 800,000 sf (see Figure 5). The Valley average at the end of the third quarter was 9.2%. The Henderson average during the nine-quarter period was 6.5% and the Valley’s, 5.6%. Since Q3, 2007 retail vacancies in the city have risen, on average, by 262% from 2.6% and in the Valley’s by 207% from 3%. Again, the first half of the period experienced the starkest jump, when the vacancy rate rose by 208% in Henderson and 80% in the Valley.

For the last several years, Henderson had been a severely supply-constrained retail market. This is no longer the case now that the vacancy rate is just below the long-term equilibrium of 10%. The more critical issue, though, is that the rate continues to rise rapidly, while the Valley’s appears to slowing its rate of ascent.

Monthly asking rents for anchored centers during the period were generally below the Valley average (see Figure 6), reflecting the city’s higher vacancy rate. However, Henderson ended the third quarter with a rent of $1.79 psf, versus $1.75 psf for the Valley. The nine-quarter average was $1.95 psf in Henderson and $2.03 psf in the Valley. The city’s quarterly average retail rent declined by 23% during the 2-plus year period, while the Valley estimate declined by 22%. Prior to Q3, 2007, Henderson generally had stronger rents and lower vacancies than the Valley.

About 450,000 sf of anchored retail space were completed in the Henderson between Q3, 2007 and Q3, 2009. The fourth quarter of 2008 was the only quarter with any completions. This represented 11% of the Valley’s 4.2 million sf of additional new space. While the Valley experienced nearly 1.5 million sf of absorption during the period, Henderson experienced negative absorption of 186,000 sf.

There was the 276,100 sf Green Valley Crossing under construction at the southwest corner of Green Valley Parkway and Horizon Ridge Parkway in Henderson at the end of Q3. However, there were no anchored centers in the planning stages. Because of its above average income profile of its residents as well as its large residential base and excellent access, including the completion of the 215/Lake Mead Drive interchange last year, Henderson is one of Valley’s most prominent retail markets.


When we lasted reported on Henderson’s commercial development industry in January 2008 (using 2007 data), the Southern Nevada economy had yet to experience the significant shocks of 2008 and 2009, including the acute arc of rising unemployment, the cancellation of several major Strip projects, reorganization filings of major resort companies, the collapse of the commercial development and construction and the turmoil in the local banking industry. Again, what a difference 24 months make.

In past recessions, the U.S. economy tended to bounce back strongly with growth in GDP of 4-5%. However, will this happen this time? In other words, will the U.S. economy rebound sufficiently in 2010 to make up for the lost ground of 2008 and 2009? As we all now know, the current recession, which some economists are saying has “ended,” was the worst since the Great Depression. Additionally, it has features and issues associated with it that your “run of the mill” recession normally doesn’t have.

For example, over-manufacturing triggers most recessions, as companies get too eager about expansionary predictions, thereby, causing surplus inventories. Businesses then slow production and layoff workers as they reduce inventories back to supportable levels. At that point, companies increase production and rehire. This, in turn, reduces unemployment, stimulating a new growth cycle. However, this time around, the U.S. economy is suffering double-digit unemployment, enormous debt levels and a frail consumer.

The challenges facing strong national economic growth in 2010 are almost completely based on the fact that consumers are plagued with having to shrink their debts. By some accounts, credit card delinquencies jumped in 2009 to more than 6% (double the rate recorded at the end of 2005) of total cards “outstanding.” Additionally, total outstanding consumer credit is currently around $2.5 trillion; it almost reached $2.6 trillion in 2008. The decline means that consumers are taking out less credit as they rebuild balance sheets. This is not exactly the best formula for a return to robust consumer spending. And it has consequences for the rapid return of commercial development in Southern Nevada, because of our discretionary spending-dependent economy.

Everyone also knows the unemployment story, and recovering the 3.6 million jobs lost since January is only one issue that we must be concerned about. The U.S. Census Bureau estimates that approximately 2.5 million new job seekers per year, on average, will come into the workforce in the next several years. The problem is that they may not be getting the jobs that they might have gotten, without the recession. The reason: Many baby boomers near retirement are likely to continue working during next several years as they also repair their balance sheets.

Let’s do some simple math. Adding these new workers to the jobs lost equals 6.1 million jobs that would have to be generated in 2010 nationally, to exceed the 2008 estimate. According to federal statistics, the greatest number of yearly jobs generated during the last 10 years was 3 million in 1999. That is just less than half what is required to be created in 2010 to regain the losses. If this calculation holds true for the U.S., it certainly holds true for Southern Nevada.

For example, if Clark County jobs (establishment-based) started growing at the annual rate of 4% experienced between 2000 and 2007, it would take nearly three years to get back to the December 2007 estimate of 932,900. And it will take even more time for the Southern Nevada job market to fully return to its pre-recession peak. The simple fact is that the only way to reduce unemployment is through consistent job growth (we believe at least six continuous months) before we see the fruits of a sustained economic recovery in the region.

The Mortgage Bankers Association recently said that the percentage of commercial mortgage-backed loans 30-plus days past due climbed to 4.1% in 2009 versus 1.2% in 2008. The MBA also noted that this was the greatest rise since 1997, and that 3.4% of bank-owned loans were 90-plus days past due (the 2008 estimate was 1.4%). So the wave of potential defaults is rising, but when it will crest is unknown at this time. And, the extent of this problem will have a very direct impact on the recovery of the region’s commercial markets and, subsequently, the economy and tax revenues.

Additionally, one of the most serious drags on Nevada’s economic recovery is the hazardous financial situation of California. There is great concern around the country about California as the nation’s leading economic engine. California’s problems are many and complex, from its finances, mortgage defaults, double-digit unemployment and the cost of doing business there, including the production of high value durable goods. Its health heavily influences the health of Southern Nevada for a variety of reasons.

So where does this leave our region, in general, and Henderson, specifically? It leaves them both in the same position of relying more than ever on their extensive resources and competitive advantages, like their creativity, entrepreneurial spirit, climate, location, “brand” and business-friendly government sector, to move them forward to the next phase of their evolution. At same time, we must continue working on our major challenges, such as a discretionary spending-based economy, troubled educational system and growth-dependent culture and institutions.

In our opinion, the next phase for Southern Nevada and Henderson is one that focuses on how they develop, economically speaking, not just how much they grow. The concepts are not the same. Development speaks to the quality of economic activity, while growth speaks to the quantity of the activity. The bridge from an economy and community that is overly growth-dependent to one that is evolving and developing is economic diversification, something that will take all our resources and talents to really achieve.

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