From an appraisal perspective, the commercial real estate market appears to be headed for trouble as we progress through 2009. The first quarter of 2009 has brought with it a reported unemployment rate of about 10%, which is well above the national rate, and the rate will likely increase.

Based on UNLV’s Center for Business and Economic Research (CBER) and its Southern Nevada Index of Leading Indicators, the index and the economy that the index is tracking is “dropping precipitously.” CBER indicated that the graph of the Index is a “cliff-diving chart” that indicates a strong downward move in economic activity.

It is common knowledge that major casino employers are giving 1 to 4 month advanced notices to their employees of upcoming lay-offs. There does not appear to be any sign of an economic turnaround at this point, and this does not bode well for the commercial real estate market.

As one would expect, the Southern Nevada Index displays decreasing residential construction permits. They were down about 76% over the last year (December, 2007 to December, 2008). This sharp downward movement in residential permits says a great deal about the state of the residential real estate market. Falling prices have created a situation where builders have elected to build very few homes. Sales activity has increased recently, however the increased activity has a great deal to do with the sharp price reductions and nothing to do with an economy on the mend.

The second largest Southern Nevada Leading index change was, however, related to commercial building permit valuations. The value of commercial construction fell about 72% over the last year. The statistics indicate that commercial construction, like the residential sector which has been hit the hardest, has also come to an abrupt halt.

Banks have started to release information on commercial loan defaults, and while defaults are still relatively small with under 1% of commercial mortgages in default, it is notable that the number of defaults is increasing.

As employment decreases, and the demand for office space and retail space also decreases, the number of defaulted mortgages will likely increase. If large scale casino layoffs accelerate, per predictions, the impact to the commercial real estate market in Las Vegas could be significant. Office vacancy rates are already increasing toward 20% in Las Vegas, and the vacancy rate for retail properties is increasing toward 11%.

A review of commercial real estate offerings on the Internet in Clark County, Nevada including properties located the City of Las Vegas and the City of Henderson, indicated that hundreds of retail properties and hundreds of office buildings are currently for sale. In slow times usually 10% of the offerings are in escrow or pending sale. A review of Internet offerings in the retail and office sectors revealed no pending sales as of the date of this article.

Does that mean the commercial real estate market is dead?  No, but it does means that the economic slowdown has had a profound negative impact on it.  For appraisers it means that sales information has become very difficult to find.  Looking at property offerings it is clear that asking prices are down, and leases rates are down and often include concessions.  When will it end?  No one really knows, but some firms that track activity are looking to 2011 or 2012. 

Note: The day after I wrote this an article appeared in the Las Vegas Review Journal, Mortgage Delinquancy Creeps Higher in Commercial Section.  It provides further discussion regarding this subject.  gjr