A man walks into FedEx Kinko's on Las Vegas Boulevard South on Monday. The 10,000-square-foot retail store was sold for $6.1 million, but a real estate executive says investors are backing off the Las Vegas commercial real estate market because of overpriced property. Photo by Clint Karlsen.

Real estate investors have backed off from buying commercial property in Las Vegas because prices are generally perceived as being overvalued, an investment executive said.

"Las Vegas is still a very hot market for companies buying real estate for tenant-in-common investors, but properties are expensive and pricing is ultra-aggressive," Tim Snodgrass, president of San Clemente, Calif.-based Argus Realty Investors, said during a Tenant-In-Common Association conference at Bellagio.

Argus specializes in 1031 exchanges, a section of the IRS code that allows investors to sell and buy like-kind commercial real estate without paying capital gains taxes.

Snodgrass said demand is strong for properties such as warehouse and distribution buildings and office complexes.

"We're looking for deals, but there are not as many attractive properties available compared to a year ago and there is a lot of institutional investor money chasing those buildings," he said.

Charles Moore, investment broker with CB Richard Ellis in Las Vegas, said he had twice as many buyers looking at the market in May and June of 2005 than he has today.

"We'd have 10 to 20 offers on a property because of low interest rates versus five to 10 deep today on any given offering," Moore said. "Interest rates have stabilized in the last 60 days, and that's opened the window of opportunity for investors who didn't want to buy at 6 (percent) to 61/2 percent cap rate and wanted to wait until it gets to 7 (percent). It's still not as much interest as we had last year."

Moore explained that investors make their profits on the spread between capitalization rates, or the income generated from a property as a return on investment, and the interest rate they're paying on debt taken to acquire the property.

"You'll see as interest rates rise -- and we believe they will -- you're going to see a rise in cap rates and then you'll see institutional investors like pension funds pay cash for properties," he said.

Investors make money from rents through cash flow as well as appreciation, David Bax of Bax Investment Group said. Property values are high partly due to previous and continued demand, but also from capitalization rate compression, he said.

"This is a fancy way to say that buyers are willing to accept a lower percentage yield. If a building is netting $1 million after all expenses and you needed to earn 8.5 percent on your money, the most you would pay for that building would be about $13.3 million. If you needed to earn 6.5 percent, then you could pay just under $15.4 million. Investors were willing to accept lower yields, so sellers increased prices," Bax said.

Moore negotiated the $6.1 million sale of a 10,000-square-foot FedEx Kinko's retail store at 7620 Las Vegas Blvd. South, in front of the Las Vegas Outlet Mall, to an out-of-state group of investors.

He said the cap rate was only 5.9 percent on the deal, but it's "quality real estate" and brand new construction, which is important for an absentee owner who doesn't have to worry about management maintenance issues. Also, with rents projected to increase 3 percent annually, the cap rate should climb above 6 percent, Moore said.

The Las Vegas retail market remained strong in the third quarter with 3.9 percent vacancy for 47.2 million square feet of space, CB Richard Ellis reported. Average monthly lease rate is $1.92 a square foot. For the year, average rent is $1.78, up from $1.75 in 2005.

Moore said shopping centers in the Summerlin community are getting upward of $3 a foot for rent. Summerlin has nearly 3 million square feet of retail construction planned, the most of any submarket.

Office vacancy rates soared to 18 percent nationwide in 2001 following the bursting of the "technology bubble" and the resulting recession, but that will not likely be repeated with the U.S. housing market slowdown, a report from Grubb & Ellis brokerage suggested.

The local office market is hot, and the softening housing market has done little to cool it off, said Joseph Kupiec, managing director for Grubb & Ellis in Las Vegas. A more significant issue, he said, is the affordability of office product, which has been hurt by rising land and construction costs.

"Landlords and investors should be aware of their exposure to housing-related tenants in their properties and their submarkets and adjust their management and leasing plans accordingly," Kupiec said.

Las Vegas-based Centra Properties has listed its 21-acre, 450,000-square-foot Centra Point office park near the Las Vegas Beltway and Durango Drive for sale. Centra principal Jim Stuart said the $100 million development, whose major tenants include Pulte Homes, Warmington Homes and Stewart Title of Nevada, has reached the maturity point where it's become desirable to institutional investors.

"We're going to explore where the property's at," Stuart said. "We've had so many inquiries, we think it's responsible as management to investigate the depth of those inquiries. It may not pan out. We may find that our best financial alternative is to retain ownership of that property. By no means are we compelled to sell if the market doesn't warrant it."

Argus' Snodgrass expects apartment communities to be prime targets for tenant-in-common sponsors that specialize in multifamily housing.

"Anytime single-family housing sales slow down like it has in Southern Nevada, you can expect apartment investors to move in and buy, hedging their bets that rents are going to climb," he said.

Argus is a value-added investor with a track record in "turning around problem real estate," Snodgrass said. Argus sold Silverado Business Park, a 164,100-square-foot warehouse distribution center in Henderson, for $17 million in 2004. It bought the property two years earlier for $9.8 million.

Snodgrass said his Western region vice president is talking with commercial property real estate brokers, owners and lenders in Las Vegas who want to sell troubled properties by the end of the year.