Las Vegas Sun

August 20, 2019

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Capping a ‘decade of extremes’ :

From building boom to recessionary bust, local real estate market was a wild ride that went south

If you like a roller-coaster ride, that’s exactly what happened to the Las Vegas real estate market over the past decade.

The ride was full of climbs and exhilaration followed by a rapid descent and heart-racing scenarios that still haven’t played out.

The decade started slow and steady but turned into the classic boom-and-bust cycle for both residential and commercial real estate — much like mining has been during Nevada’s history.

“It was a decade of extremes,” said Richard Lee, a real estate analyst and vice president of First American Title. “We had too much appreciation too fast and then too much depreciation too fast. The pendulum swung from us being No. 1 in jobs, population growth and housing growth to the end of the decade where we are No. 1 in foreclosures.”

Steve Bottfeld, executive vice president of Marketing Solutions, attributes the local building boom to the recession that followed the Sept. 11, 2001, terrorist attacks. The recession caused builders to stop securing permits, he said.

“By the time we got to the end of 2003, there was very little new-home product left and during the second quarter of 2004, there were no homes to buy and the median prices shot up 50 percent from the second quarter of 2003,” Bottfeld said. “Then what happened is we go through the third and fourth quarters of 2004, and builders woke up and we got a huge building boom in 2005 and carrying into 2006.”

In 2000, Las Vegas builders sold 20,508 new homes and 29,218 existing homes for a total of 49,726, according to Las Vegas-based research firm SalesTraq.

That topped out in 2005 when 93,403 homes were sold — 38,705 new homes and 54,698 existing homes. Sales declined to 41,582 in 2008 — 9,965 new homes and 31,617 existing homes were sold.

Demand for existing houses in the middle of the decade jacked up prices and, with it, demand to build homes. The decade brought more master-planned communities such as Aliante in North Las Vegas in 2002, Mountain’s Edge in the southwest in 2004, Providence in northwest Las Vegas in 2006 and Inspirada in Henderson in 2007.

In 2000, the median price of existing homes was $134,500. That shot up to a high of $285,000 in 2006, but in 2010 prices have been running slightly more than $120,000.

In the new-home market, the median price was $155,548 in 2000 and peaked at $328,580 in 2006. It is hovering just above $200,000 this year.

Many homeowners started defaulting on their subprime loans because they could no longer afford the payments after rates adjusted, triggering the wave of foreclosures that would engulf the state.

Since January 2007, Nevada has ranked No. 1 in the nation in foreclosure filings. Las Vegas was ranked No. 1 in 2009 and will be near the top again in 2010. Las Vegas started seeing a different type of buyer face foreclosure in 2008 and 2009 — people who lost their jobs and could no longer afford their homes, Bottfeld said.

“If the decade shows us nothing else, we need to balance the number of homes we build with jobs and population growth that is real,” he said.

The apartment market has suffered as well. Occupancy and rents rose during the boom and have declined since the bust.

Following the 2001-02 recession, the occupancy rate was 92.8 percent and that rose to a high of 95.7 percent in 2006, but today has dropped to a decade low of 90.8 percent, according to Applied Analysis.

It took rents awhile to adjust, starting the decade at $708 per unit to a high of $887 in 2008. Today, they have fallen to $834 per unit, Applied Analysis reported.

The story of residential and commercial real estate can be traced to the development along the Strip and the success of the gaming industry that generated jobs, population growth and construction throughout the valley.

In 2000, Clark County’s population was 1.42 million, but by 2007 it had grown to nearly 2 million.

That in turn required more homes to be built to keep up with demand and helped increase prices and fuel commercial development off the Strip, Lee said.

“Enter the financial leveraging from Wall Street with all the derivatives and that just added on top of it,” Lee said. “They were able to build stuff like crazy, and it was made easy because there was so much money.”

That was the same with the real estate industry, where people were able to buy homes with no money down and little credit and speculators were able to buy homes and flip them and contribute to what would become the housing bubble.

“It was a leveraged, false environment, and we all bought into the Kool-Aid,” Lee said. “The mentality was to go borrow credit and put money into the house and get it back before it was finished.”

Las Vegas has learned during the boom-and-bust cycle that people shouldn’t buy any more than they can afford, Lee said. The world has changed in that it’s harder to get financing today, and that will help temper any overdevelopment again.

“Hopefully it will teach us that lesson we have learned before that don’t be greedy and if it’s too good to be true, it’s too good to be true,” Lee said. “It has a been a wild ride. Now is the time to hit the reset button and get lean and mean. All recessions are followed by a recovery. The recovery is coming — if not this year, the next.”

What happened to the housing market was no different for commercial real estate.

That sector saw tremendous growth since 2000, especially in the southwest valley.

The office market grew from 28.4 million square feet in 2000 to 48.5 million square feet in 2008. Since then, the market has added only 1.2 million square feet. That’s because the vacancy rate that was 7.7 percent in 2000 stands at 23.4 percent this year with 11.6 million square feet of vacant space, according to Applied Analysis.

That has created a roller-coaster effect with office rental rates, which on average were $1.82 per square foot per month in 2000 and peaked at $2.34 per square foot in 2008. They have fallen to $2.16 per square foot.

The industrial market saw similar rapid expansion, going from 66.9 million square feet in 2000 to 102.6 million square feet in 2008. It has only added 2 million square feet since then.

The vacancy rate was 6.6 percent in 2000, but that fell to 3.3 percent in 2005 because of heavy demand that fueled 18 million square feet of construction over the next three years and forced a vacancy rate that reached 15 percent this year.

Rental rates have swung sharply from a low of 52 cents per square foot in 2003 to a high of 78 cents per square foot in 2006. By this year, it had fallen to 60 cents per square foot.

The retail market saw a similar story.

The inventory was 32.1 million square feet in 2000 and skyrocketed to 48.5 million square feet in 2007. That growth has slowed since with a supply of 51.8 million square feet today.

The vacancy rate was only 4 percent in 2007, but the recession took a toll on many national chains and small retailers and the vacancy rate reached 10.5 percent today. That’s because 4.3 million square feet of space was added in 2007, the largest amount by more than 1.3 million square feet of any year in the past decade, according to Applied Analysis.

The average rents requested for retail space in 2000 were $1.41 per square foot. That grew to $2.20 per square foot in 2007 and today has fallen back to $1.72.

Brian Gordon, a principal at Applied Analysis, said because the office, industrial and retail space increased by 50 to 70 percent over the last decade, it could take four years to work through the excess office inventory and at least three years in the retail and industrial sectors before there is any speculative development.

“It is going to take time to work through the inventory just like the housing market was facing foreclosure,” Gordon said. “Similar trends are present in the commercial market ... With any community, growing pains are part of the process. With elevated development activity during the past several years, we are in the correction process that was inevitable.”

The rising vacancy rates and declining rents have taken a toll on commercial real estate with Real Capital Analytics reporting that nearly $20 billion in Las Vegas real estate has had distressed loans. Unlike what happened in residential real estate, there hasn’t been a wave of commercial foreclosures.

As in residential real estate, billions of dollars have been lost in commercial real estate failures in Southern Nevada. But compared with residential, commercial mortgages are frequently renegotiated either in or out of Bankruptcy Court as banks and other lenders have little choice except to compromise.

The overbuilding was especially felt in the high-rise condo industry. Including CityCenter, Las Vegas has 5,500 high-rise condos today compared with the start of the decade when Turnberry Towers and Park Towers were the only condo high rises in town, Gordon said. In addition, Las Vegas saw the construction of 5,400 condo hotel complexes for a combined 11,000 units in the past decade, he said.

More than 100,000 units were on the drawing board at one time because access to capital was so easy and investors were willing to jump in and buy, Gordon said. Ultimately, supply and demand caught up to the market, he said.

The price of land has swung wildly in the past decade from $158,000 an acre in 2001, the first year it was tracked by Applied Analysis, to $900,000 an acre, excluding the Strip, in the fourth quarter of 2007. Land deals were bolstered by multiple Bureau of Land Management auctions that resulted in the newest master-planned communities going for hundreds of millions of dollars — prices that drove up the cost of housing.

Land prices fell to less than $200,000 an acre in the first quarter of 2010, the firm reported.

Bottfeld said the boom-and-bust cycle has taught us a lot about Las Vegas. It revealed that construction is the second most important industry and until that recovers and jobs are generated from it, the valley will remain in a recession.

“We learned sometimes it pays to hold back even in a boom,” Bottfeld said. “We have a lot of people who hurt themselves terribly because they didn’t see the end of the boom.”

Although the market has essentially returned to where it was 10 years ago in terms of sales and prices, Lee said that doesn’t mean it’s been a wasted decade. The water infrastructure and road systems that have been built have paved the way for the next round of growth, said Lee, who cautions that the old rules don’t work in the short term.

“We had a formula that we had been using where you build hotel rooms and create jobs and cause people to move here. That formula does not work anymore. We can’t build ourselves out of this recession ... We are all pretty anxious to see to the market where it is somewhere in the center. The more stable it is, the rules apply again, but the old rules are gone. It is difficult to navigate in this minefield.”

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