Coldwell Banker Premier Realty

Las Vegas Real Estate Report 2014


HIGHLIGHTING THE RESIDENTIAL REAL ESTATE MARKET
Posted: February 25, 2015 by Jesse Olive

REVIEWING THE LAS VEGAS REAL ESTATE MARKET

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2014 was a market characterized by a return to traditional home buying and selling. After a tumultuous six years where we went from boom, to bust, then recovery, we saw more normalcy in 2014. This occurred against a prior backdrop of bank owned homes, which drove pricing down sharply beginning in 2008. A few years later, short sales, where a homeowner owes more on the mortgage than the home is worth, became a big slice of the inventory. Then the investor frenzy began peaking in 2013 when nearly half of the sales were acquired by investors and market values soared. With compressed yields and slowing price appreciation, 2014 saw a return to classic reasons to buy and sell, including job related moves, retirement, increasing family size and first-time buyers looking to settle into their first home. While the industry enjoyed servicing the needs of investors, finding families a place to call home is the rewarding part of our business.

 

Las Vegas had an immense reawakening following the financial crisis and there were more projects completed or under construction at the end of 2014 that didn’t exist a year earlier. Howard Hughes Corporation unveiled its Downtown Summerlin mixed-use district, the shuttered Sahara Hotel was reimagined as SLS Las Vegas, the old Bills Gambling Hall was redesigned as The Cromwell and Wyndham Desert Blue was completed west of the strip. Caesars Entertainment’s The Linq project debuted in 2014 with its massive observation wheel and dining and retail complex. The Grand Bazaar shops next to Bally’s is scheduled to open in late February 2015. This new retail center includes more than 120 shops with many recognizable brands as well as unique retailers.

 

Genting, the Malaysian conglomerate that boasts a strong balance sheet, is moving forward on its north strip project. The first phase is anticipated to be 3,000 rooms and 175,000 square feet of gaming space. The expected date for delivery is 2016. This will be a big boost to the north strip and will further bolster an improving job market. Few North American cities can boast this magnitude of activity.

 

The efforts to diversify the industry base in Southern Nevada is also making progress. Several important firms either expanded into Las Vegas or made their headquarters here. Cannon Safe, Inc., a maker of home and office safes, plans to build a facility in Henderson and many employees have already moved to the area from California (Las Vegas Review Journal, April 1, 2014).[1]

 

Asurion, LLC, a Tennessee based firm which provides replacement mobile device insurance, opened an office in Las Vegas, leasing significant space in a long vacant, never before occupied building in the Northwest part of the valley. This is their newest Premier Support Solutions Center. Initially, nearly 500 jobs are expected to be associated with the office, with potential for many more in the coming years (Las Vegas Review Journal, May 26, 2014).[2]

 

Catamaran RX, a pharmacy benefits manager, is planning to develop a 110,000 square foot facility in the Southwest part of the Valley (Molaskyco.com, Oct 14).[3] A public company, Catamaran RX is expected to require 353 jobs at its fulfillment facility (Las Vegas Review Journal, Nov 7, 2014).[4]

 

Non Farm Employement Las Vegas
Existing Home Sales
Figure 1: Existing Home Sales

Finally, to go along with some of the resumed growth we are seeing in the Valley, Swedish based IKEA has acquired land in the Southwest Valley. In our opinion, the site is an excellent location, servicing large swaths of the Valley due to its proximity to the 215. While we don’t have employment figures, anecdotally, many Las Vegas residents are known to visit the Los Angeles stores, so the new option in Las Vegas will be a time saver for them.

 

The job market has improved substantially in Southern Nevada. Battered by the long recession, Las Vegas had one of the higher unemployment rates amongst larger metropolitan areas. Clearly, employment remains a primary issue for the area and not all of the jobs lost during the recession have been recovered.

 

In terms of non-farm employment, we still need about 50,000 more jobs to reach our pre-recession peak in addition to attracting higher paying jobs.

 

Acknowledging we have a long way to go before we are firing on all cylinders, we should also note how far we have come from the doldrums. The Las Vegas-Paradise MSA official unemployment rate peaked at 14.4 percent in 2010 but has been declining markedly since.

 

EXISTING HOME SALES IN LAS VEGAS

Closing figures for existing homes sales have dropped sequentially since 2011 when it was a high distressed market and banks unloaded significant inventory at extremely low prices. Following some legal changes, the procedure for foreclosing on homes became stricter and lengthened the process. We then experienced a shift in the market away from foreclosures towards short sales, which had its own set of complications. Supply became intensely restricted in 2012 and remained relatively tight through 2013. Effective demand by investors was also very strong in 2013 but supply remained restrictive which prompted significant price gains without an increase in sales rates. 2014 had a recognizable shift from a low inventory environment to a much higher level, but still historically moderate, peaking in September.

 

One solid positive for both new and existing home sales was the return to positive net migration in Southern Nevada. When we examine data across several sources, including the United Van Lines survey, locally prepared population estimates and active residential meter counts, we can infer that there is further organic demand for homes. Whether the demand is for rentals or ownership is largely predicated on how credit-worthy buyers are, the amount of student loan debt, and how quickly employment opportunities grow. Nevertheless, outside of student loan debt, it appears as though buyer capacity will increase mildly in the near term.

 

United Van Lines 2014 National Movers Study

SELLING YOUR HOME IN LAS VEGAS

The professionals at Coldwell Banker Premier Realty (CBPR) are experts in the real estate industry and constantly educate themselves to provide their clients with the most accurate information to make well- informed decisions. The real estate market is very fluid and dynamic and staying current on trends, legislative changes and economic factors is necessary to provide our clients with the service they deserve, creating loyalty and trust. As practitioners of their chosen profession, CBPR agents have a solid track record of pricing and marketing homes. Homes sold by agents at CBPR closed for an average of 99% of their listed price and 46% sold at or above their list price. CBPR has an array of specialists including residential, luxury, short sale, high-rise, investor and commercial.

 

NEW HOME SALES IN LAS VEGAS

Prices have gone up significantly in the existing home market relative to the trough, making some of the new home options more relevant from a pricing perspective in several key areas. Although existing homes are a great option for many buyers, new homes and existing homes are not perfect substitutes. Some buyers simply prefer newness, low maintenance, energy efficiency and modern floor plans. Additionally, many of the builders offer substantial incentives which may include finish upgrades, down payment assistance, closing costs and other benefits.

 

New Home Closings and Permits

New homes have been a niche industry since 2007, as distressed sales dominated the market and bargain hunting become modus operandi for both owner-occupants and investors. Ultimately, this process led to escalating bid values until the big discounts disappeared. This process took considerable time and as a result, new homes, despite massive improvement, remain far below the deliveries experienced during the bubble and pre-bubble years.

 

During the immediate, post-recession period, new home offerings were muted in terms of various configurations and sizes as builders had to cope with existing finished lots, capital market issues and a weak forecast for demand. This has recently changed with multiple new offerings including multigenerational housing, large semi-custom homes and middle market offerings starting just above $200,000.  Since it is rare to find entry-level new housing product below $200,000, we anticipate some builders will consider building higher-density product.  This may include creative, attached housing options to offer homes at lower price points.   

 

Additional product across a wide spectrum of offerings is scheduled with several new master plans moving forward. Notably, at Skye Canyon (formerly Kyle Canyon located north on interstate 95), grading is already in progress as several homebuilders are actively cutting new lots and building roads. Homes are currently being offered at Cadence, a large new master plan in Henderson, and Inspirada, which opened in 2007 but was largely derailed during the crisis, has returned with increased vigor. Some of the best new home options in Henderson can be found at Inspirada.

 

New Homes Closed Sale Price Range

Some builders have noted cost pressures, particularly in labor but also in materials. It will be interesting to see if the stronger dollar influences the foreign sourced inputs but in the near-term, several builder earnings calls have noted that costs are an issue along with less than expected deliveries of new homes. One key input, land, also increased in price substantially over the past few years but appears to be slowing down, with the possible exception of multifamily land.

 

While there are numerous attractive new home options available, we expect new homes sales to remain fairly flat in 2015. As greater infrastructure is built in the new master plans, sales absorption should grow more dramatically as this key supply constraint will be removed. For buyers that want modern amenities, ask your CBPR real estate professional to show you some new home options.

 

S & P Case Shiller Home Price Index
30 Year Conventional Mortgage
For Sale Single Family Inventory (Not Under Contract)

The velocity of price increases slowed for the balance of 2014. After the inflection point was established in 2012, a rapid ascent in prices occurred in 2013, driven about equally between investors and owner-occupants in a market that was intensely supply constrained. Some month-to-month increases were nearly three percent, when measured by the widely cited Case-Shiller Index. For context, prior to the bubble, the Las Vegas market was generally characterized by one percent to three percent annual increases.

 

To a large extent, the hyper buying activity by homebuyers and investors in 2013 was largely due to how undervalued Las Vegas real estate was.  Hence, the subsequent rapid rise in values was simply a cure for being so undervalued. We anticipated price growth would slow as we intercepted the pre-bubble trend (highlighted in the accompanying chart). 2014 experienced a strong spring buying season, but it was generally a meek, more sustainable increase for most of the year thereafter. If prices continued to escalate strongly throughout 2014 it would have been cause for concern, perhaps signaling a similar herd mentality and a minor repeat of the last boom-bust cycle. Instead, higher available supply and tempered demand led to more sustainable gains.

 

In the future, we hope these more moderate price increases characterize the market as they did before the bubble when we had a price trend that moved closer to the rate of inflation.  The only minor exception was during the early 1990’s which had strong fundamentals despite a national recession and an extreme amount of new strip resorts were added making Las Vegas a highly desirable city by job seekers. On the horizon, we cannot expect the job growth of the 1990’s or even the early 2000’s, so an organic price trend should begin to show more moderate price changes, barring another asset bubble or abrupt changes in mortgage interest rates.

 

DISTRESSED HOME SALES IN LAS VEGAS

Between 2009-2013, Las Vegas was known as one of the key distressed markets in the U.S.  Foreclosure activity was frequent and sale prices were dragged down by excess supply and perceived housing market risks. Bank owned homes, also known as REO’s (real estate owned), dominated supply followed by a period where short sales, or homes that are worth less than the mortgage balance, became ubiquitous.

 

The chart below illustrates the abrupt switches that occurred between the three inventory categories, REO, short sale and traditional sales. Clearly, traditional sales are now dominant as we have returned to a more normal, traditional market. We have largely switched back to the fundamental reasons that people buy and sell homes including new family formation, increased family size, divorce, death, move-up and retirement, along with some investment and second homes. Some home owners should still consider a short sale especially if there is a financial burden and they believe prices will not increase enough in the short-term to place them in an equity position.   Similarly, while REO inventory is low, we expect it to be an important, but smaller component of new listings in the future.

 

INVESTING IN LAS VEGAS REAL ESTATE

2013 was the year of the investor while 2014 was a year of transition back to normalcy. Capitalization rates, the rate of yield a property provides when dividing net operating income by the sales price, began to compress significantly in late 2013 and throughout 2014 and investor interest cooled. The private equity, hedge fund and real estate investment trust (REIT) buyers were the biggest part of the story in 2013, although small private investors made up a larger overall proportion of sales. Private investor activity continued into 2014 but not nearly with the same vigor during 2013. As a proxy for investor activity, cash sales are illustrated in the accompanying chart as the blue line. Cash sales peaked in early 2013 and have been waning since. Similarly, institutional purchases have been on the decline since the same period. Although institutional activity was not as strong as the media reported, they were competitive buyers and will be an important provider of rental supply going forward.

 

Intitutional Purchases of Single Family Homes Clark County NV
Single Family Closings by Financing Type
Proportion of Single Family Homes Closed with Cash Relative to Total Sales
Institutional Purchases in 2013 and 2014

Many question the intent of the institutional buyers. Is it one big trade? Is it a permanent business? For some owners, it probably is a trade driven by leveraging an undervalued situation to be cured by time and improving economic fundamentals. But for the majority of larger firms, particularly organized as REITs, we view them as a long-term business and most are organized as such. Several large firms invested significant capital expenditures to improve the value of their assets and many achieved strong rentability. Since homeownership was artificially inflated in the mid-2000’s, the renter portion of society should provide a significant pool of interest for landlords.

 

Further, as long as yields remain low, dividend stocks like REITs should continue to see capital inflows. Additionally, the low interest rate environment has provided fuel for the acquisition of smaller portfolios by larger investors and resources for capital expenditures on currently owned properties.  In our 2009 Annual Report we proposed this would become an important business model yet surprised at how interesting and prevalent it has become nationally.

 

We expect some investors, particularly the smaller ones who purchased homes during 2009-2013, to begin selling to capture real gains on their properties. Our expectation is that some will rotate out of rental homes into other real estate asset classes. The commercial office sector is the latest asset class to move into the recovery cycle and anticipate there will be speculative interest from investors. For some, the challenge will be dealing with capital gains taxes and deferring them by employing a 1031 exchange.

 

Finally, being a landlord is a challenging endeavor. Undercapitalization, remoteness from the properties owned, dealing with contractors and other management issues may cause some owners to examine the potential for selling. Furthermore, a majority of investor homes are now valued less than $250,000 which coincides with current demand and future demand from emerging Millennials and the Boomerang buyers who rotate back into ownership after completing the seven year credit restoration period.

 

Overall, we see opportunities for some investors with specific cash flow requirements rather than specific yield hurdles and a greater opportunity for sellers to capitalize on gains, especially since price increases are not anticipated to be as strong as they were in 2013.

 

Number of Single Family Homes that Sold for 1 Million Dollars or More
Lake Las Vegas

 

LUXURY HOME SALES IN LAS VEGAS

Luxury home sales in 2014 were slightly less compared to 2013 but overall it was a solid year. There were 233 homes that closed escrow exceeding a sales price of $1 million per the multiple listing service. For many buyers from the coastal regions, it remains quite shocking what you get for $1 Million in the Las Vegas market. Many California homes of similar architecture trade for a multiple of what similar homes in Las Vegas sell for.

 

Prices continue to trend upwards but we still view the luxury market as having significant value across three key areas: lifestyle, replacement cost and comparative value. Lifestyle is the principal reason most owners purchase a luxury home.

 

Comfort, entertainment options, security, views and outdoor living options are typically central to the choice. Las Vegas has some fine examples of prime homes that meet even the strictest demands, the result of passionate design and craftsmanship.

 

The Ridges, a Summerlin area prime location, continues to have some of the highest selling prices in the Valley including one sale for $600 per-square foot. Lake Las Vegas, Anthem, Southern Highlands, Red Rock Country Club and Foothills at Macdonald Ranch are just a handful of areas with prime residential real estate.

 

These highly appointed homes are sometimes indescribable where only a tour can do them justice. Nevertheless, a few key features found in these homes include movie theaters, wine cellars, game rooms, massive swimming pools and extensive technology and electronic packages. The luxury homes sold in 2014r ranged from old world style to edgy modern.

 

Selected Luxury Home Communities

HIGH-RISE SALES IN LAS VEGAS

For a long time we thought the high-rise market was one of the most undervalued of all asset classes, often trading for a fraction of replacement cost. Times have changed substantially and there is more upside in the future for high-rise communities. This is a difficult market to target absorption rates since each building is a submarket, due to its uniqueness. Further, supply can change abruptly when bulk inventories trade causing jagged edges in sales trends.

 

High Rise Condominium and Condo Hotel Closing

We do not anticipate a surge in sales in the condominium sector because most of the inventory that was controlled by the original sponsors is now owned by individual owners or held as mini-bulk packages. Mandarin Oriental, a prime residential project within the prestigious CityCenter, is quickly approaching being completely sold. One Queensridge Place had some excellent sales rates the past few years but available builder inventory is minimal. The Martin, opposite CityCenter on interstate 15, is nearly sold out also. A majority of builder owned inventory is located within Veer Towers (CityCenter), Turnberry Towers and the Ogden, located in downtown Las Vegas. For other high-rise communities that have controlled inventory, most of the condominiums are rental stock, so the transition to for-sale product will not be immediate and moreover, it may take further price increases to entice these owners to place inventories for sale. In condo-hotels, Palms Place is an active seller with a professional marketing program in place.

 

With slower sales rates in the near-term, the developments near the strip and downtown are desirable. In fact, downtown Las Vegas is very sought after and there is price pressure manifesting in the resale market. Eventually we expect interest in the South Strip to pick up since it offers both convenience and amenities.

 

WRAPPING UP THE 2014 ANNUAL LAS VEGAS REAL ESTATE REPORT

In general, we see the residential market continuing its progression towards normalcy and equilibrium with moderate price appreciation under accelerating job growth. The first-time buyer market is likely to re-emerge as household formation returns. When this market comes back, it opens up opportunities for the move-up market, which has probably been tempered by a weaker than historical first-time buyer pool. Our hope is to see more gradual changes in the market, similar to what we experienced pre-bubble. We are hopeful that distressed and negative equity homes will transition into the positive equity column in the years ahead.

 

One thing we always knew instinctively but less practically was the danger of leverage. It was the instrument that fed the bubble and although room for improvement continues to exist, our market is more robust with the removal of significant underlying debt in residential real estate. Times have improved substantially considering the negative equity share of mortgaged homes in Nevada during the first quarter of 2010 was nearly 73% and dropped drastically in the 3rd quarter of 2014 to 25.4%.[5] Additionally, the sheer number of homes that were purchased with cash the past few years implies the number of homes that have mortgages has declined. Some owners may ultimately finance the homes they purchase but many are expected to remain unleveraged.

 

Although we do not want to be overconfident in our core industry, gaming and hospitality, the strategy to diversify away from a gaming revenue centric business model towards a more holistic entertainment venue is necessary and timely. Visitor volume achieved historic highs in 2014, proof that Las Vegas remains one of the world’s favorite destinations. With Atlantic City facing challenges, Las Vegas appears to be a unique product, distinct from many other venues offering a large mix of convention space, world-renowned dining options, a variety of gaming options and outdoor recreation opportunities. Its proximity to Southern California, connected by the I-15, is ideal serving as a path of goods for freight and a feeder market for Californians seeking weekend excitement. McCarran Airport remains one of the country’s busiest with nearly 43 million passengers in 2014.[6] Additionally, as noted earlier, new firms are choosing to move to or establish operations in Las Vegas, helping achieve the long-term goal of expanding and diversifying the pool of employers. Although large employers like MGM Resorts International will continue to define Las Vegas, other companies like Zappos have gained name recognition.

 

While numerous economic fundamentals that instigate housing demand have been noted, we are most grateful for the opportunity to serve the people and families in Las Vegas to help them find a place to call home and establish a new chapter in their lives. Las Vegas is a unique, larger-than-life metropolitan city with a variety of living options and numerous well-kept secrets that most tourists are unaware of or appreciate like Las Vegans do. Climbing at Red Rock Canyon, enjoying peaceful bliss at Mount Charleston, exploring the new Downtown Summerlin, bar hopping on East Fremont in Downtown Las Vegas and splashing in the heat at the mega water parks in Henderson and the Southwest Valley are just a few that make living in Las Vegas an everyday attraction.

 



[1] http://www.reviewjournal.com/news/henderson-city-council-approves-discount-land-attract-safe-company

[2] http://www.reviewjournal.com/news/tech-insurance-company-open-800-job-office-las-vegas

[3] http://www.molaskyco.com/molasky-media-blog/2014/10/molasky-group-to-develop-build-to-suit-for-catamaran-rxbriova-rx-at-unlv-harry-reid-tech-park/

[4] http://www.reviewjournal.com/business/economic-development/sandoval-praises-company-starting-build-tech-park

[5] Corelogic Negative Equity Report Q1, 2012 and Q3 2014.

[6] http://www.lvcva.com/includes/content/images/media/docs/ES-Dec-2014.pdf

 

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