Vacancy rates rise in retail

Signs of the economic downturn are showing up in every Las Vegas Valley neighborhood, from shopping centers that are half empty to closed restaurants and drug stores. "Free Rent" banners even hang from some retail buildings.

Business may be booming on the Strip and in high-end malls, but smaller mom and pop retailers and their landlords are feeling the pinch from reduced consumer spending as the debate continues about whether the nation's economy has slipped into recession.

"There's no debate with me," said Britt Beemer, president of Orlando, Fla.-based America's Research Group. "We entered a recession back in October, no matter what people say. Christmas was a bust and January was not much better. We've had some months of positive growth, but put it with the negative and it all balances out."

Local business owner Adam Carmer knows that most new restaurants fold within six months. Still, with talk of recession and consumer confidence at a 30-year low, he opened his second Adam's Ribs restaurant in Las Vegas and has plans for a third.

"It's a contrarian point of view," the owner of Bone Apart Restaurant Group said. "Where some people see failure, others see opportunity. I've made a career of being a contrarian."

Carmer, a hotel management professor at University of Nevada, Las Vegas, opened his first restaurant in December at Flamingo Road and Grand Canyon Parkway. He celebrated the grand opening of his second Adam's Ribs at 4770 S. Maryland Parkway, across from UNLV, in early May.

"The economy is actually doing us a favor because we're providing value and that's what consumers are looking for," Carmer said. "Because we're not a big chain, our overhead isn't as high, so I'm willing to have a smaller margin. I'm not blind to what's going on in the economy."

Although the national economy is slumping, the Las Vegas retail market remains relatively healthy, albeit slower than in recent years, said Craig Shute, managing director of CB Richard Ellis, a commercial real estate brokerage in Las Vegas.

CB reported a first-quarter vacancy rate of 5.39 percent for nearly 58 million square feet of rentable retail space in the valley, up from about 4.8 percent in the previous quarter. The rate marks an eight-year high. Despite increased vacancy, average asking monthly lease rates rose in the quarter to $2.22 a square foot, up a nickel from last quarter, Shute said.

The increase in vacancy rates should not be viewed with alarm and is well within the "equilibrium" range, he said. It allows potential tenants a wider variety of choice as they negotiate leases.

Retailers who were once priced out of a nice location may now find the opportunity to open in a particular area of town where they want to be, said Kit Graski, senior vice president of Voit Commercial.

"Another thing, rental rates over the last five years have been going up, up, up and now developers are starting to get it, that it's not so hot, and for the tenant, he has the chance to pick up a site at a rate that's more conducive to doing business. I see a lot of that," Graski said. "I see developers that want x (rental rate) plus five and now he's lucky to get x."

Ken Foose, owner of Exotic Pets for 17 years, said he tried to find something cheap when he decided to move his business last year. He needed more room and the old store was in disrepair, leaving his office flooded when it rained.

He went from paying $1,300 a month for 1,500 square feet to $4,200 a month for 2,800 square feet in Rancho Air Center, 2410 N. Decatur Blvd., about a half-mile north of his previous location.

"There is no cheap rent in Vegas anymore, not with real estate prices like they are," Foose said. "Rent's expensive and it's hard to make it. Before we moved, I told my employees and I told my wife we're going to be poor for a year. No matter where you move, you're going to lose customers. Little did I know the recession was coming, so now we're going to be poor for three years."

The Discover U.S. Spending Monitor reflected a continuing pattern of economic concern from consumers in the face of rising expenses. The April index rose a scant 0.3 from March when the index hit its lowest point ever.

"Many consumers continue to trim family vacations, a night on the town and even their savings to offset higher household expenses," said Margo Georgiadis, executive vice president and chief marketing officer for Discover Financial Services.

Lower- and middle-income consumers hit record highs in April in curtailing their discretionary spending, with 57 percent of those making less than $40,000 and nearly 54 percent of consumers making $40,000 to $75,000 planning to spend less on discretionary personal purchases.

One positive sign during April was the rise in the number of consumers making more than $75,000 who plan to spend more on home improvements, and major personal purchases like a vacation.

Graski said it's significant that vacancy rates jumped 2 percentage points in such a short time. Vacancy will probably increase further as companies such as Rite Aid, Linens 'n Things and Wickes Furniture file for bankruptcy and close underperforming stores.

Las Vegas will see reduced construction of strip centers because of more stringent preleasing requirements from lenders, Graski said. Developers will need either a strong anchor tenant or, if it's a strip center, a high number of lease agreements in place to get financing, he said.

Tivoli Village at Queensridge, an $800 million mixed-use development at Rampart Boulevard and Alta Drive, is counting on a mix of unique retailers with distinct merchandise to sell, said Patrick Done, executive vice president of the project.

With a booth at this week's International Council of Shopping Centers convention in Las Vegas, Done plans to take prospective tenants on a tour of Tivoli Village, as well as One Queensridge Place, the luxury high-rise condo developed by the same company, Executive Home Builders.

The project is planned for more than 700,000 square feet of retail, restaurant, entertainment and office space on 30 acres, along with 340 condominium homes.

The Strip has always been a highly productive retail location, one of the premium locations in the country, Done said. Las Vegas is now viewed as a legitimate city for retail expansion into the suburbs.

"Now we've met those hurdles in terms of population and sales productivity," he said. "Some luxury retailers who'll look at suburban locations are tenants like Tiffany's, even Louis Vuitton at some point. Interestingly, if you look at other suburban markets with affluent areas like Bellevue (Wash.) outside of Seattle, you'll see some of those luxury retailers."

Terri Sturm, president of Las Vegas-based retail developer Territory, said she stopped buying land when it started "getting crazy," going to more than $1 million an acre. The last piece she bought, at Craig and Losee roads, was around $13 to $14 a square foot, or roughly $600,000 an acre.

Centennial Center and Eastern Beltway, "power centers" anchored by big-box retailers such as Wal-Mart, Lowe's and Sam's Club, are doing well with 95 percent to 98 percent occupancy, Sturm said.

"The retail market that's always out there, the ones that are well-located and well-anchored, are still healthy and doing fine," she said. "I suspect where the problem is, what's driving vacancy up is the middle-of-the-block unanchored centers."

Beemer of America's Research Group said tax refunds historically drive 40 percent of big-ticket purchases costing $500 or more, but this year 75 percent of Americans said they would use refunds to pay bills. The same goes for tax rebate checks, he said.

Last year, 48 percent of consumers had planned a vacation in March. This year it's down to 16 percent.

"So when you look at those things out there, we've just got huge challenges," Beemer said. "People like Walker Furniture and Best Buy are going to sell less stuff."

This story first appeared in the Business Press. Hubble Smith writes for the Business Press' sister publication, the Las Vegas Review-Journal. He can be reached at hsmith@reviewjournal.com or 383-0491.