Commercial Real Estate Demonstrates Resilience, Housing Supply Shortage Persists

While challenges persist in some segments of the commercial real estate market, the buoyancy of industrial and retail properties, coupled with opportunities in the housing sector, underscores the industry’s resilience and adaptability. These were among key insights shared by economist Dr. Christopher Thornberg, founding partner of Beacon Economics, during a recent economic forum hosted by Bank of Nevada.

The office market continues to struggle nationally, but the issue is less dramatic in Las Vegas than in cities like San Francisco, New York and Los Angeles. Other commercial real estate sectors also are doing well. Retail vacancies continue to drop, and industrial space remains tight in Nevada, with distribution centers supporting the market.

Once what Thornberg called “the darling of the commercial real estate world,” the logistics industry is flattening out as people spend less on goods and more on services. During the pandemic, increases in consumer spending on goods also resulted in an oversupplied warehouse market. In the aftermath, while Las Vegas is overbuilt, it’s less so than some other markets and likely will return to normal sooner.

Despite the rebalancing of the commercial real estate market, the residential market continues to have a housing shortage — both in the for-sale and rental categories.

“Let’s be clear, the vast majority of potential sellers out here have a 30-year, fixed-rate mortgage running somewhere between 2.75% and 3.5%. They’re not going to move unless you pay them enough money to be able to take on the higher interest rate on the new home they buy, so you have a very low liquidity market,” Thornberg said. “The low liquidity market keeps prices high.”

That’s making it more difficult for first-time homebuyers to leave the rental market, which also is experiencing limited supply. In March 2024, the median home price in Las Vegas was $470,000, up 9.3% from a year ago and 55.6% in the last five years. While existing home sales are down, new home sales are up. Housing starts, too, are up from 900,000 in 2019 to about 1 million at the end of last year. In response to the market, many homebuilders are buying down interest rates to entice people to purchase.

With apartment vacancy rates at about 3%, there’s an opportunity for developers to build more multifamily projects, although water shortages make building new projects more difficult.

“It is surprising that you’re seeing such good numbers in non-residential real estate lately. We all know, of course, about the increase in interest rates and huge decline in transactions, and prices took a big drop, but they are starting to stabilize in the commercial real estate industry,” Thornberg added. “But in construction — despite all those factors — actual nominal spending increased pretty steadily over the last couple of years.”