By dollar volume, Las Vegas ranks third nationally for distressed commercial real estate, falling behind only Manhattan and Los Angeles. When the figures are scaled to market size, however, Las Vegas comes in at the top.
The local hospitality sector, which registered a 24% drop in average daily room rate year to date, accounts for almost half of the distressed dollar volume marketwide. Troubled properties in this segment run the gamut, ranging from smaller motels and limited-service Extended Stay properties to mid-sized off-Strip hotels and major resort/casinos, such as Planet Hollywood. So far, banks have reclaimed or initiated foreclosure on just a handful of local hotels, all of which are relatively small, lower-quality properties that were built in the '70s or '80s.
Developments account for another sizable share of distress in the Las Vegas market, as the weak economy and severe tightening of credit markets stalled many projects. Within the local market, several condo and apartment projects failed in the wake of the housing collapse. In addition, a few large mixed-use developments, including the Fontainebleau project located near the north end of the Strip, came to a standstill when lenders cut funding. There have been a few offers to purchase the idled project at pennies on the dollar, but as of now, it remains mired in litigation.
Among the core commercial property types, retail is the segment most directly affected by reduced consumer spending. Previous hotbeds for residential construction, including Las Vegas, have been hit particularly hard, as shopping centers were developed to serve subdivisions that now sit largely vacant or failed to come to fruition altogether. So far, few retail property loan extensions or modifications have been reported, but the vast majority of foreclosures appear to be due to operational issues as opposed to an inability to refinance maturing debt. There are five retail CMBS loans in the Las Vegas market that matured this year and remain in limbo, including one of General Growth Properties' most exclusive properties, the Shoppes at the Palazzo.
While retail accounts for the most CMBS debt outstanding in the Las Vegas marketplace, apartments comprise a solid share of the problem loans. Approximately 22% of the CMBS apartment loans in Las Vegas are delinquent, compared to 13.4% across all property types. Multifamily CMBS loans originated in 2006 and 2007 report the highest 60-plus-day delinquency rates of 26.4% and 44.1 %, respectively. This trend is hardly surprising, as conversion-related sales were prevalent during this period and apartment vacancy was hovering around its lowest level since 1993, as a result, prices were at or near peak levels. In the years since, the conversion trend collapsed and apartment vacancy has nearly tripled. Many investors have found themselves in distressed situations as a result, and more are likely to run into issues in the near term, with an estimated 20% of CMBS loans at debt-service coverage ratios ofless than 1.0.
Softening has been recorded across property types, but office fundamentals have deteriorated to the greatest degree. As of late 2009, vacancy was on track to end the year at more than 24 percent, with forecasts calling for continued upward movement through 2010. The Las Vegas office market is relatively small, but it accounted for a substantial share of new construction in recent years, contributing to the current oversupply situation. As of late 2009, only 26 local office properties were considered troubled, but many indicators suggest growing distress in this segment next year. Office loans comprise 16% of the total CMBS debt outstanding in Las Vegas, and about 78% of the debt that was originated between 2005 and 2007. Overly optimistic underwriting, high-leverage loans and peak pricing characterized this period. At present, more than 30% of Las Vegas' office CMBS has been placed on watch lists.
Hotel and development projects will continue to see the highest levels of distress in Las Vegas next year. Further compounding the challenges in the commercial real estate market, the city will lag other major cities in an economic recovery due to its oversupply of housing and its dependence on gaming, tourism and conventions. For the real estate market to change, job creation must take hold.
Vacancy rates in Metro Las Vegas are already well beyond previous peak levels, and further weakening is anticipated in 2010. The city was among the markets to lead the economic charge earlier this decade, boasting some of the strongest job creation and population growth in the nation between 2000 and 2006.
The housing market boomed, driven by demand from local residents and speculators banking on continued appreciation. Residential construction skyrocketed in Las Vegas as a result, with single-family development pushing further out into the suburbs and high-rise condo towers rising up along and around the strip. It is a different story today, however, with home prices down 35% from 12 months back and more than 56% from three years ago.
The drastic shift in the housing market and overall economic conditions caught many developers off guard, resulting in a surge of failed high-rise condominium and condominium conversion projects and a significantly oversupplied retail market. Furthermore, the broad based nature of the recession led to a dramatic decrease in consumer and business spending, cutting deeply into Las Vegas' vital convention, tourism and gaming industries. Year to date, local visitor volume is down 4% from one year ago, while convention attendance and gaming revenue have slipped 26% and 12%, respectively.
While a sustainable recovery and the resumption of job creation remain several quarters off for the Las Vegas economy, there are signs emerging that the worst is over. For example, the overall employment trend in Las Vegas reflects decelerating job losses, albeit not to the degree seen at the national level, but slowing nonetheless. Over the past six months, Las Vegas employers have reduced payrolls by an average of 4,000 jobs per month, compared to an average of more than 6,000 per month in the previous six-month period. This trend will continue through the first half of2010, with stabilization or even modest job creation likely in the latter part of the year.Commercial real estate investment slowed considerably in 2009. Despite significantly higher cap rates and reduced prices, few properties have changed hands in Las Vegas this year due to persistently tight credit markets, general economic uncertainty and a wide gap between buyer and seller expectations. The most activity was recorded in the single-tenant retail sector, a trend that emerged in several metro areas this year as riskaverse investors looked to the relative safety of these deals.
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