WEATHER THE STORM

Weathering the Storm

Las Vegas, NV

John Matt Stater

The second quarter of 2020 was the “business closure” quarter, and only the industrial market bucked the expected trend of weaker commercial real estate numbers.

The second quarter of 2020 produced over 2 million square feet of industrial net absorption. Warehouse/ distribution product posted all of the Valley’s positive net absorption in the second quarter of 2020. Other industrial product types, which rely more heavily on small businesses, suffered negative net absorption. While it is likely that warehouse/distribution demand will remain relatively strong through the remainder of 2020, it is unknown how quickly small businesses will recover. By the end of 2020, we may see an overall positive industrial picture that nevertheless obscures the challenges faced by many landlords of nonwarehouse/distribution properties in the Valley.

After a robust first quarter, pandemic woes sent land sales activity much lower in the second quarter of 2020. While it is unlikely that this slump in land sales was directly related to the existence of COVID-19, it is probable that the uncertain business climate created by the business closures enacted to stem the spread of the virus put land investors on the sidelines in the second quarter. Land sales may not fare better in the third quarter, but signs of solid economic recovery in the third quarter could put investors back in the market by the end of 2020.

INDUSTRIAL

HISTORICAL VACANCY RATES AND ASKING LEASE RATES

Southern Nevada’s office market has, so far, showed surprising resilience in the face of the business closures enacted to stem the spread of COVID-19. While approximately 10,000 square feet of net absorption is nothing to brag about, any positive net absorption in the face of the massive job losses experienced over the past two months is remarkable. Anecdotal evidence suggests that most office tenants continued to pay their rent over the past few months, but the eviction moratorium imposed until July makes it difficult to know how vulnerable the market is to future vacancies. We think the office market will continue to be challenged by the job losses already experienced and the uncertainty regarding evictions, utilization of office space post-pandemic and whatever other upheavals 2020 has in store for us.

There was little doubt that Southern Nevada’s retail market was going to suffer a rough second quarter. Job losses in the retail sector, even if mostly temporary, are staggering, so negative 74,874 square feet of net absorption was not as bad as was feared. The fact that businesses are now opening and retail sales are improving should not, however, instill a belief that the worst is over. Further retail job losses remain a possibility, as the requirements imposed under the PPP program end in July. Furthermore, the state moratorium on evictions also ends in July, raising the possibility of a wave of retail vacancies in the third quarter. Finally, announced closures and potential closures of major retail chains have almost 500,000 square feet of occupied retail in the Valley in jeopardy. The third quarter of 2020 should give us a better understanding of the resilience of Southern Nevada’s retailers, and how long and painful a recovery we can expect.

Just as Southern Nevada’s medical office market was putting up strong numbers in the first quarter of 2020 the healthcare sector was hit hard by the restrictions on medical care enacted due to fears of hospitals being overtaxed by the COVID-19 pandemic. While those fears may not have been realized, the damage done by the restrictions is undeniable, as almost 15,000 healthcare workers lost their jobs in April and May and the activity in medical office market came nearly to a halt. The pandemic is not over, and fears over going to the doctor may leave the health care industry wanting for business despite lessened restrictions on care. Uncertainty alone may put a damper on leasing and investment activity in 2020, although the chance of recovery in the second half of the year is not out of the question.

The closure of hospitality properties in Southern Nevada for more than two months was unprecedented and had an obvious negative impact on the hospitality industry in particular, and the Valley’s economy in general. Just how permanent this damage will be is unknown, as properties only began re-opening in June 2020 and we lack visitation and revenue data for those re-openings. There is anecdotal data suggesting that visitor volume in June was more than was expected by property operators, but the potential for further travel restrictions, and the lack of business travel’s impact on the local convention industry make it difficult to predict how quickly the Valley’s hospitality industry will bounce back. For now, we remain in “wait-and-see” mode, a fact unlikely to stimulate investment in hospitality properties in the near term. HISTORICAL VACANCY RATES AND ASKING LEASE RATES

OFFICE

RETAIL

MEDICAL

Recent Economic Indicators Point to a Gradual Recovery for Industrial Real Estate

As predicted, the U.S. economy hit a major slump at the start of the second quarter. The COVID-19 pandemic negatively impacted employment, manufacturing production, retail sales and consumer sentiment across the country. Some of the lowest economic measures were reported during the second quarter as the country officially entered a recessionary period.

Assessing CRE Transaction Viability Post-COVID-19

Many occupiers are asking where and when to pick-up with the implementation of transactions now that we are transitioning back to a new way of working. In our previous article, we noted the way businesses occupy real estate portfolios in the “new normal” could change dramatically. Actions that were planned or started pre-COVID-19 now have questions around their relevancy.

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