In recent months, Southern Nevada’s residential real estate market has begun to show signs of improvement following the aftermath of the housing bubble. Now, experts say an improving economy also means fewer commercial borrowers are in danger of default. Could this be good news for investors and commercial property management companies in the Sagebrush State?
Trepp, a commercial real estate and banking research firm in New York, recently reported a significant drop in late commercial loans in the Las Vegas area: in December, the Las Vegas Valley had 53 properties with real estate loan payments that more than 90 days late. This created a delinquency rate of 10.7%. While this is less than healthy, the agency reported that this amount had decreased since December 2013, when the area had a delinquency rate of 14.9%.
Further improving matters, the new numbers show a consistent pattern of improvement: in mid-2011, Trepp found that 24% of local commercial properties were behind on their real estate loans. By mid-2012, as many as 150 local properties were delinquent.
While often eschewed for other factors, like foreclosure rates, experts say delinquencies are an important economic indicator. Other real estate metrics focus on the housing market, but delinquencies show whether or not commercial landlords can make their payment, a quality that is driven by both economic expansion and business formation. Trepp’s data shows that delinquencies are falling as borrowers and banks search for loan resolution strategies, alternatives that are now available due to a stabilizing market.
Trepp’s findings are supported by additional data from CBRE Las Vegas, which demonstrates how leasing has improved with the economic recovery: since 2012, net absorption of local office space has equaled roughly three million square feet, compared with the loss of 1.8 million square feet from 2009 through 2011. Currently, office vacancies are still high, at 21.2%, but this is less than the 27% that occurred during the recession.
Meanwhile, CBRE Las Vegas found that industrial absorption had increased 17.3% since 2013, reaching 2.8 million square feet in 2014. Industrial vacancy averaged 7.3%, a healthy decrease from 10.2% in 2013. Retail properties have shown a less dramatic improvement, but experts say that this is because the industry did not suffer as much as other areas. Still, rental vacancy averaged 10.4% in the fourth quarter of 2014, a decrease from 11.5% the year before, and down from the high of 14.1% in 2011.
Trepp’s researchers say that Las Vegas’s commercial improvement is due to improved cash flow from new tenants, which has helped loosen credit markets. They also say that the area’s overall success has helped draw in new investors who are willing to take a chance on the area. But is it really a wise decision to invest in Nevada’s commercial property industry just yet?
According to Trepp’s data, Southern Nevada’s default rate is two times the nationwide delinquency reading of 5.75%. This trend has existed since the recession: for example, in July 2012, Southern Nevada’s local rate was 24% to the national rate of 10.24%.
Despite this sobering fact, however, many people are seeing the improvement of delinquency rates in Nevada and across the nation as a reason to be hopeful.
“Hearing Deliquency Rates are down in a state that was certainly one of the hardest hit of the Housing Bubble is Excellent news for everyone in the Real Estate Industry,” says Joseph Ord, President, AMOSO Properties.
Observers are predicting that commercial delinquencies will continue to decrease through 2015, following the national rate. While the rates themselves are difficult to guess, some are projecting that additional factors, such as the decrease in gas prices, will increase consumers discretionary spending, resulting in even fewer vacancies in Las Vegas as the year continues.