The elusive search for the bottom

The continued decline of the commercial real estate market has some looking for a bottom and most praying we find it soon. As the inventory of available spaces continues to climb, pushing vacancy rates to new highs, lease rates continue to erode as businesses either: a) need a rent reduction to survive or b) are shopping hard and finding desperation in the sublease market. This has landlords clamoring to secure tenants and cringing every time the phone rings. New and improved underwriting criteria on the part of lenders is not only eliminating access to financing for new projects but limiting the ability to refinance existing loans coming due that is, without a substantial capital infusion. All of this fear is driving investor's expectations on return into double-digit cap rates with a devastating effect on property values.

As one can imagine, the resulting effect of building value declines is further magnified for vacant land. The term "land is worth less than zero" has become something of a mantra for those investors snooping around the market. However, those investors are snooping around the market. In most cases it's a tactic to push the owner, or owner's lender (assuming it hasn't been taken back), to ridiculously low levels. Don't get me wrong: Land values have deteriorated tremendously since 2005, and current underwriting assumptions don't paint a rosy picture. But all is not lost. The current market conditions have not eliminated land as a worthwhile investment. However, they have caused us to completely reevaluate the importance of location with a critical eye to highest and best use. Rather than "cheap dirt" driving the location of the next subdivision or shopping center, much more consideration is being given to reducing commuting expenses and access to services.

Residential: With foreclosures and short-sales continuing to dominate the residential market as they account for approximately 75 percent of current sales, the median home sales price is taking a beating. On a positive note, the lack of new building permits is helping the new home market to find equilibrium. Continued efforts on the part of the federal and state government, including Nevada's new mandatory mediation law and IRS home buyer incentives, could have a positive impact on the number of homes entering foreclosure and subsequent consumption of inventory. This could create a very real need for those finished lots currently in a holding pattern; with a renewed interest in approved projects, especially those with water and RTC credits available. Rumors in the last couple weeks point to sellers, both private and banks, that are making the necessary adjustments to create activity on finished lot transactions. Look for increased activity on quality lots at amazing prices.

Multifamily: Overall vacancy rates are now rising above 11 percent with another 1,000 units under construction. Some might consider the multifamily market saturated. But there is hope. National predictions show tremendous growth in the student housing and senior living segments over the next five years. The key to a successful project in those arenas is location, location and location. Obviously student housing is very specific to the area around the university, with current and future potential north and east of campus. But downtown also is now on the radar with developers proposing the next generation of dorms integrated in a true mixed use setting. Future senior living projects will have a heavy emphasis on access to goods, services and amenities. With a critical eye, several opportunities are available for the creative investor not afraid to rethink current entitlements.

Retail: Blended vacancy rates for the retail sector are approaching 15 percent, with more pain on the way as local and national retailers hope to weather the current crisis. The Legends at Sparks Marina project is still under construction, with the long-term implications to surrounding retailers still in question. The only other retail project currently under construction, and fully pre-leased, is 6 Development's Three Flags Center in north Reno, which is an example of today's opportunities; smaller projects with necessary goods and services tailored to a specific sub-market, using today's advantageous development costs. Well located retail land, at the right price, presents the opportunistic investor with great mid-term potential.

Office: Market wide office vacancy rates have now exceeded 21 percent, which is mild compared to the more-than-30-percent vacancy in South Meadows alone. The waning demand from residential construction and associated services (mortgage companies, title companies, etc.) has created tremendous opportunities for lease and purchase with downtown presenting itself as the darling of the market. With the contraction in asking prices, look for more businesses to revisit downtown with its access to local government, legal facilities and entertainment. The lack of new construction is also creating opportunities on the land front for those investors wanting to capitalize on the rebirth driven by the new Triple-A Aces ballpark. Truckee River frontage is still a premium; however, it's never been more affordable.

Industrial: Vacancy rates have now topped 15 percent for the market with Tahoe-Reno Industrial Center contributing heavily. As industrial developers struggled to compete with residential builders for available land the sphere of influence expanded greatly to include Whites Lake (U.S 395 north near the state line), Spanish Springs (the north end beyond the residential) and Tahoe-Reno Industrial Center (15 miles east on I-80). The effects of the current economy on other commercial real estate sectors have now created opportunities for future industrial much closer to the core with access to major highways, associated services and employee housing. Investors should note that there is currently no new construction in the industrial sector and land converted to residential use during the boom is now looking quite attractive for a future play.

While there is plenty of fear and skepticism within the media and markets, several years from now economists will look back to these days as the most opportunistic environment ever presented in real estate. Just remember the old adage "They aren't making any more of it" and keep your eyes open for those smokin' deals.

Aaron West-Guillen is a land specialist and land entitlement consultant with NAI Alliance in Reno. Contact him at 336-4674 or


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