Regional Spotlight: Las Vegas, Nevada
“Sin City” Real Estate Posts a Summer Surprise
When COVID-19 locked down the U.S. in mid-March, analysts understandably warned that economies heavily reliant on tourism and hospitality would suffer the most. With national unemployment spiraling into the double digits and remaining above 13% in June, it seemed likely that Las Vegas, Nevada, would once again secure a spot on the hardest-hit lists for the latest downturn, thanks to its dominant tourist industry.
Instead, the city known for wild abandon and encouragement of behaviors that run counter to today’s “physical distancing” seems to be muddling through the pandemic and possibly even poised to bounce back sooner than many other areas of the country. In fact, many local real estate professionals and national economists are calling the current real estate situation in Las Vegas a “late-spring bloom,” thanks to May numbers that indicate higher numbers of properties under contract and at higher prices than for the same period in 2019.
“What surprised us [in May] was it was not just entry-level homes we were seeing the demand for, but luxury homes,” said Lesley Deutsch, author of a John Burns Consulting report on the topic.
Deutsch speculated Silicon Valley giants’ decisions to permit employees to work from home indefinitely could be playing a role in the market’s momentum.
“You can afford more space in markets like Vegas,” Deutsch said.
He described an emerging trend of homeowners “trading up on their luxury homes to have more space” and noted that the trend accelerated in May.
In early May, Twitter and Square CEO Jack Dorsey and Facebook CEO Mark Zuckerberg announced they would allow employees to continue to work from home “forever.” Further, Facebook began accepting applications for new remote positions. While the social media platforms may opt to adjust salaries to fit the employees’ new locations, the appeal of owning a much larger, more luxurious home in Nevada is likely to outweigh the appeal of renting a small, exponentially more expensive unit in the Silicon Valley area if the commute is no longer a factor.
When these high earners started home-hunting after Nevada “reopened,” they created demand for housing in higher price tiers, more so than most other markets are experiencing.
Local real estate brokerage owner Ken Lowman said his firm, which focuses on luxury housing in the Las Vegas area, is seeing the strongest interest among buyers looking at properties priced between $800,000 and $1.2 million and homes priced $3 million and higher. He also reported that before the national shutdown, about one-third of his buyers were already coming from California. Today, that number has climbed to more than half.
According to Realtor.com’s Housing Market Recovery Index (HMRI), in mid-June, Las Vegas has surpassed the index’s January 2020 baseline of 100 and is in official “recovery mode.” It is one of eight markets, including Seattle and Los Angeles, to have achieved that status. Las Vegas’s presence on the list has many investors feeling surprised and optimistic.
“Markets with stronger job creation pre-COVID are proving to have the crucial edge for real estate activity, particularly those with a strong technology sector,” said Javier Vivas, Realtor.com’s director of economic research.
He said stable jobs and incomes would “power demand for homes” and ultimately speed recovery in markets on the list. Since Las Vegas exceeded its January baseline in mid-May and has posted index measures between 100 and 105 since that time, the area’s recovery appears to be growing
in stability.
Multifamily Housing Unpredictable
Although single-family real estate in the Las Vegas area may be gaining momentum, multifamily developments are experiencing some expected turbulence.
Multi-Housing News (MHN) associate editor Adriana Marinescu observed that the Vegas “multifamily market continued to move at a slow pace through May following a sluggish April. Both landlords and renters waited for normal activity to resume in a city severely hit by furloughs and layoffs since the early days of the coronavirus pandemic” (“Las Vegas Multifamily Wrap-Up,” May 2020).
Casinos and hotels have been cautiously reopening their doors up and down the Strip and in outlying areas of town since the beginning of June, but the hospitality sector remains uncertain.
Local real estate investor Larry Loik, president of The Real Estate Investor Network, observed that suburban areas around Las Vegas are largely reopened and in full recovery mode despite ongoing unemployment issues in the tourism sector.
“Here in Las Vegas, our economy was the hardest-hit in the nation due to tourism being a major factor. Nevada had the largest unemployment of any other state. A lot of this was due to the governor’s rulings,” Loik said. He added that in suburban areas where local economies are supported mainly by Nevada residents, “restaurants, shops, malls, parks, golf courses and more are all packed … and visitor count is going back up.”
The contrast between the pace of regional recovery and the Las Vegas tourism recovery is creating some unique opportunities for real estate investors interested in holding assets long-term. The state is currently adding jobs much faster than the national average, which could translate to firmer ground for the local market and rising demand for single-family rental (SFR) housing even if the rental population’s current employment status is less than ideal.
“Nearly half of the population in Las Vegas rents, and it is a beautiful city surrounded by nearly 70 parks. It is a highly attractive destination for outdoor activities as well as its more notorious entertainments,” said Marco Santarelli, founder and CEO of Norada Real Estate Investments.
Santarelli said the most prevalent building type in Las Vegas is the single-family detached home, making it an attractive market for residents hoping to leave multifamily living situations.
As a result of the unusual nature of the Las Vegas recovery, single-family homes in the lower and middle tiers of the market could be good investment options either to rent-and-hold long term or rent in the short term and then sell when the economy more fully recovers.
Although multifamily developments are nearly always a safe long-term play for real estate investors, COVID-19 policies will make investing in these assets less predictable. That’s because incoming residents planning to work remotely and outside of the tourism sector are likely to prefer single-family residential properties. Multifamily assets will likely be hit hardest and longest in the event the state shuts down this fall during a “second wave” or if tourists decide indoor gaming and entertainment is too risky to stomach.
“Shelter-in-place orders do not bode well for a city with an economy that relies heavily on service workers and tourism,” said Harding Easley, managing director of consulting agency The Harding Group.
He noted, however, that Las Vegas clearly has learned from its experience during the mid-2000’s housing crash that hospitality-heavy economies can withstand downturns of any kind only by creating more jobs in recession-resistant sectors like government, finance and professional services.
Commercial Opportunities and Obstacles
Of course, there is much more to Las Vegas than the bright lights and crowded entertainment venues on the Strip and in the downtown area. Las Vegas has long boasted a thriving commercial sector that includes office, retail, warehouse, storage and convention space. Although retail investment is currently in decline, Adam Malan, director of LOGIC Commercial Real Estate, observed in a recent interview with “Commercial Property Executive”: “We remain optimistic for a swift recovery and feel confident in the resilience of the great companies and hardworking residents that call southern Nevada home.”
Although Malan noted retail landlords are reporting average rent collections between 40% and 70% for May 2020, LOGIC vice president of real estate Deana Marcello predicted restaurant retailers, in particular, would recover fastest due to quick adaptation to the new curbside economy.
“It seems big-box retailers, who were not considered essential and did not implement successful online strategies, struggled to adapt,” Marcello said, observing that many companies closing their doors in the area “have been on the watchlist for some time, including J.C. Penney Co. and Pier 1.” Marcello said most landlords working with these companies had already been preparing for these types of tenants to depart their facilities.
Marinescu also noted that big deals in warehouse space, office space and aviation went through in May, despite the pandemic and statewide lockdown. The largest industrial completion in 2019, a distribution center that is the largest Amazon-leased facility in Nevada, was purchased for about $110 million. Likewise, Dermody Properties announced plans to move forward with groundbreaking on a 251,800-square-foot LogistiCenter on the Interstate 15 corridor and a 150,000-square-foot industrial project near McCarran airport. Multiple B-class office properties changed hands as well, and NDL Group Inc. announced completion of its All In Aviation training campus at the Henderson Executive Airport.
“Despite myriad challenges, the city continued to grow in importance as a regional distribution hub, breathing life into its industrial sector, both in terms of development and sales,” Marinescu wrote in Commercial Property Executive’s “Las Vegas Commercial Real Estate Wrap-Up – May 2020.”
Follow the Jobs to Recovery
It is an axiom of real estate investing and market analysis that the relative strength of an area’s jobs market usually translates to the relative strength of an area’s housing and real estate sectors. By that standard, the Las Vegas real estate market remains in real peril if COVID-19 exists as an ongoing and unpredictable threat.
“Cities with more resilient industries will have more resilient real estate,” wrote Haas School of Business professor Terrance Oden in an introduction to a Unison report on most-vulnerable housing markets published in June 2020.
Tourism has a long history of eventually recovering from crises, but not necessarily at an accelerated pace. Las Vegas is fighting that trend aggressively, posting employment growth and rising demand for homes despite having one of the three most vulnerable jobs markets in the country, according to the Unison report. The key to the area’s recovery and growth likely lies in its unique appeal not just to tourists but also to new residents no longer geographically bound to the West Coast.
“You have to ask: How diversified is the demand side for housing?” wrote Unison CEO Thomas Sponholtz.
In the case of Las Vegas, it appears the demand side of things may be a bit more diversified than most investors expected, and that early oversight represents present-day opportunity for real estate investors. n
Sidebar: Sustainable Recovery or Artificial Boost?
About one in three people employed in the Las Vegas metro area work in leisure and hospitality; roughly 10% are employed in the construction sector. Not surprisingly, the city took an extremely hard hit when COVID-19 closed casinos, halted travel and canceled conferences.
Unemployment in Las Vegas soared from 3.9% in February 2020 to 33.5% in April. Despite this huge swing and ongoing nervousness about the future of the tourism industry, the Las Vegas market appears to be in recovery mode along with a few other select markets like Denver, Dallas and Boston, where home prices seem to be supported largely by remote-working and local tech and biosciences employers.
How has Vegas made this elite list and remained on it? The answer could be a positive indicator for local market health or a caution flag for every investor, depending on which analysis rings true.
Javier Vivas, Realtor.com’s director of economic research, warned the Las Vegas recovery might be more of an “artificial boost” created by Nevada’s decision to reopen the economy earlier than many other states. Although local real estate professionals report that many out-of-state buyers are injecting dollars into the local economy in terms of the homes they are buying and a new influx of spending as they move, Javier said housing affordability, long a staple in the Las Vegas market, “will no longer be enough to keep a market healthy.”
On the other hand, it is possible that Las Vegas will attract a new and far more diverse population of workers because of new corporate policies on remote work. If those workers become permanent residents and homeowners rather than simply visitors and tourists, the local employment spread could change dramatically and quickly. In that scenario, new employers “transplanted” from Silicon Valley, for example, not by their companies but by their lifestyle preferences, could change the face of the Las Vegas economy and create a more resilient, more sustainable market for everyone.
Sidebar: Fountainebleau Las Vegas Takes Another Hit, but Las Vegas Keeps Building
The tallest building on the Las Vegas Strip has been dark for more than a decade. Locals now wonder whether The Drew Las Vegas (formerly Fountainebleau Las Vegas Hotel and Casino) will ever open its doors.
The project was announced in May 2005, and the resort was slated to open by 2008. Unfortunately, it was a victim of the housing crash and was never completed, suffering through a series of lawsuits, fire sales and even “cosmetic wrapping” designed to mask exposed construction. Developer Witkoff Group purchased it for $600 million in mid-2017 and renamed it The Drew Las Vegas.
In April 2020, Witkoff Group announced the opening of the resort would be delayed until the second quarter of 2022. Less than a month later, it emerged that the company had “suspended principal and interest payments on the property,” much to the chagrin of South Korean investors who had invested 600 billion won into the project and will face serious losses if senior investors decide to dispose of the asset. Other parties involved in the project noted it is not in default yet. Local news coverage is calling the building site “cursed” and describing the project as in “default” rather than its actual status as in “deferral.”
Steven Witkoff, Witkoff Group’s founder, said through a representative in mid-June he hasn’t given up on The Drew.
“We remain committed to the project and are actively working with our partners and lenders,” a representative said.
The project’s lead construction team levied more than $36 million in claims for unpaid bills the same month.
Witkoff is certainly not the only developer pausing construction on the Strip. Developers of the MSG Sphere at The Venetian have also suspended activities and no longer expect to finish the venue in 2021.
Other hospitality sector projects remain on schedule, including the reopening of the Hard Rock Hotel as Virgin Hotels Las Vegas in fall 2020, expansion of the Las Vegas Convention Center and its $52.5-million underground people mover, the opening of Resorts World Las Vegas in summer 2021 and the opening of Allegiant Stadium with a Garth Brooks concert in August 2020. Circa Las Vegas, slated to open in October 2020 in downtown Las Vegas, is ahead of schedule.
