Las Vegas’ commercial real estate market could be recession-proof, experts say

The headlines are tough to ignore. Office space vacancies in major cities across the U.S. are at record highs. Las Vegas has never been known for its office market — or much less commercial real estate in general, outside of the Strip.

But there are still questions swirling on how big the blast radius will be when the financial buck stops — how exposed is Las Vegas?

CBRE Group Inc.’s new vice president for Las Vegas, Paul Chaffee, said there is no denying the U.S. commercial real estate sector is headed for an “adjustment,” but there are a lot of “doomsayers” predicting the worst.

“Real estate life is cyclical. We have ups and downs and you’re going to have your doomsayers and you are also going to have your faith tellers who say the opposite,” he said. “And I can tell you is there is going to be an adjustment because there is going to be an adjustment in the weather tomorrow, there are always going to be adjustments.”

Wes Drown, a certified commercial investment member for Remax Commercial, who has been working in the office brokerage side for more than 20 years, said he isn’t worried about a crash.

“Not at all; not even in the slightest little bit,” he said. “Our market is a suburban office market for the most part, and I think part of that is the lifestyle that has been developed here by the master plan subdivision concepts. The live, work, play-close-to-home idea has always been a big benefit of our market.”

But to put it simply, there’s still a big question mark on what’s going to happen to the office market — in Las Vegas and across the country — in the short term, as inflation and interest rates remain high and as many companies are still trying to decide if they will bring workers back to the office full time following the COVID-19 pandemic.

The Las Vegas office market remains active, though, with 231,000 square feet currently under construction, according to a second-quarter research report from Colliers, which is about the same square footage that was under construction this time in 2022. The vacancy rate is also down to 11 percent from 11.7 percent one quarter ago.

The job market for office work in Las Vegas also remains strong as approximately 17,500 jobs were added between May 2022 and May of this year, with the health care sector seeing the most growth within that period (9,000), while the financial services sector actually lost approximately 1,300 jobs.

However, it’s far from a booming market as Colliers noted no new office buildings were completed this past quarter in Southern Nevada, and the largest lease was 46,057 square feet at 7180 Pollock St. in Paradise Valley just south of Harry Reid International Airport.

The Colliers report noted that “under the cloud of potential recession, Southern Nevada’s office market has put together two solid quarters of performance,” and demand in the city is now favoring smaller office units.

“The health of Southern Nevada’s office market in 2023 bucked the trend in major American cities, and may be due to a renewed interest in mid-tier cities by office users, a generally strong local economy and the type of tenants that dominate the local market,” continued the report. “The question now is how the national economy will fare in the second half of 2023. Should it remain healthy, Southern Nevada may well look back at 2023 as one of its best years ever. If the national economy does fall into recession, Southern Nevada at least can take solace in entering the recession with momentum.”

Stephen Miller, a professor of economics at the Lee Business School at the University of Nevada, Las Vegas, said the Federal Reserve’s top priority continues to be reducing inflation, which is running about 4 percent year over year, and its primary tool is raising interest rates. This is the lever everyone should keep their eye on in the coming months, he said.

Miller said part of the problem of office vacancy may in fact solve itself, given some basic evolutionary traits all humans share.

“I wouldn’t be surprised if we see some movement back to the office, because of the social interaction side of things,” he said, noting employees have been talking about remote work and jumped on the chance to explore it more during the pandemic. However, he’s not sure it will entirely stick, “because a lot of people have sort of isolated themselves now.”

Miller said the Fed continuing to raise interest rates is an “open question,” and he’s not sure where the hot labor market fits into this equation. He said the pandemic literally threw everything for a loop and the world is still adjusting and finding its footing. Commercial real estate, and the workers who fill the seats in the offices, are no different.

“The pandemic was such a new event,” he said, “and the shift in the power relationship with management and employees has moved in the direction of the employees. … and so the structural aspect of the entire labor market is undergoing change.”

Chaffee is very hopeful about the future of commercial real estate in Las Vegas as the city grows, diversifies, fills out the valley and starts to grow vertically instead of horizontally given space constraints. He said the larger you pull back and look at the bigger picture, macroeconomically speaking, and the longer story, the coming cycle of commercial real estate and a potential adjustment is just part of the ongoing narrative.

“Through years, time over time, real estate has matured in value,” he said. “So whether it’s going to be a crash, or a soft landing or a hard landing – the fact is, based on results over the last 50 years, based on history, I can’t buy a house that I could have bought in the 50s or even five years ago.”