Purchase of Hughes Center brightens otherwise bleak office market

Southern Nevada’s office market is still in the dumps.

More than four years after the national recession ended, 26 percent of suites across the Las Vegas Valley sit empty, according to second-quarter numbers from local research firm Applied Analysis. That’s well above the 10-year average of 16.4 percent. The market has 13.6 million square feet of empty office space, compared with a typical 7.9 million square feet. At current leasing levels of 1 million square feet a year, it’ll take the city more than five years to see balance, said Brian Gordon, a principal in Applied Analysis.

None of that stopped a major Wall Street investment firm from jumping big-time into the local office market, and that deal, combined with other recent buyouts, could mean better times ahead for commercial real estate, local observers said.

When Blackstone subsidiary Equity Office announced on Sept. 20 that it had snapped up the 1.4-million-square-foot Hughes Center at Paradise and Flamingo roads, it hinted that the worst of the commercial sector’s downturn may have passed.

“It signals that real estate markets here are moving beyond their previous lows,” Gordon said. “We’ve moved beyond the bottom of the cycle, and investors are finding opportunities in the marketplace.”

Added Robert Lind, managing partner of local investment brokerage Berkshire Bridge Capital: “It’s a sign of optimism in our market. Some very smart investors see an opportunity for things to improve here. That message is important, because we don’t have a particularly strong capital-market presence in Nevada, so we really need to be attractive to outside investors.”

The Blackstone deal marked the second time in a year that institutional investors gave the valley’s real estate market a nod: Houston real estate investor Hines partnered with Oaktree of Los Angeles to buy General Growth Properties’ 1.1-million-square-foot Summerlin office portfolio in September 2012. Ryan Martin, a senior vice president with Colliers International, said the buys are a welcome reversal in the hard-luck narrative that’s plagued local real estate in the last half a decade.

“When you see Hines and Blackstone here, it really does provide some credibility to our marketplace,” said Martin, whose firm is the commercial broker that leases Hughes Center.

It’s important to note that the Hughes Center hasn’t really struggled the way most of the office market has. It’s the city’s premier Class A office park, housing tenants such as Wells Fargo Bank, Ameristar, Boyd Gaming and law firms Gordon Silver, Lewis and Roca and Snell &Wilmer.

But the complex had its own bumpy, recession-era ride nonetheless. Texas-based Crescent Real Estate Equities Co. bought the property from The Rouse Co. in 2003 for $233 million, plus assumption of $96 million in outstanding property level debt. Morgan Stanley acquired Crescent in 2007, just before the recession began. After taking nearly $1 billion in write-downs and losses on Crescent’s nationwide portfolio of 17 million square feet in 54 buildings, Morgan Stanley handed Crescent over to lender Barclays Capital in 2009.

Barclays sold the Hughes Center to Blackstone for $347 million.

It’s not Blackstone’s first bet on local real estate. By early 2013, it had spent billions to buy up 16,000 homes nationwide to rent as investments. Its residential portfolio includes homes in Las Vegas, Phoenix and Atlanta.

“We are at a (pricing) low, and that bodes well for entering a market,” Martin said. “When the price is right theoretically, the barrier to entry is low, and that goes all the way down to (Blackstone’s) residential component. The affordability is there.”

But the tenants might not be, just yet. Gordon said job growth in the professional and business services sector hasn’t translated into healthy occupancy levels because developers overbuilt during the boom, and it’ll take years to pick up that slack.

“We have a ways to go before we reach back to anything that looks normal,” Gordon said.

Contact reporter Jennifer Robison at jrobison@reviewjournal.com. Follow @J_Robison1 on Twitter.