To Infinity and Beyond (or at least through 2017)

Every year starts with a variety of groups presenting their forecasts, predictions and previews for the economic climate of the upcoming year. This year I attended four different events to see how they compared to each other in their assessment of the future. Some of the information and predictions are a little like predicting the weather for a year in advance. There are some areas governed by cyclical historical patterns of the past, there are pockets of unpredictable change, there are micro patterns and there is the inevitable potential storm on the horizon that sometimes never materialize, but makes for great discussion. With the rising concerns of “alternate facts” and bi-partisan viewpoints, there are always two (or three) interpretations of any data. Most of the presentations were compiled from national, international and local data sources (conservative and liberal) and they contained a lot of charts with overlapping squiggly lines, Gantt charts in pretty colors and pie charts (gotta have pie charts). In this analysis, I am only looking at the information provided and assessing it from the 30,000 foot level.

I attended the UNLV Lee School of Business 2017 Economic Outlook, Southern Nevada NAIOP’s Forecast 2017, Las Vegas Metro Chamber of Commerce Preview Las Vegas, and, just for a little seasoning, I added the NAIOP Utah Commercial Real Estate Symposium in Salt Lake City. Each of these were designed for a specific audience but at some point, were all inter-related. The Lee School of Business looked at Global/US and local trends and focused on the most diverse set of market sectors: Natural Resources & Mining, Trade Transportation & Utilities, Education & Health Services, Government, Construction, Financial Activities, Leisure & Hospitality, Information, Manufacturing, and Professional & Business Services. They also tended to focus a little more on the growth of education and positive effects on the economy. The two NAIOP functions looked more at specific development, construction and leasing activities across office, industrial, retail and medical sectors in their specific region. The Chamber looked more at a broad overview of all sectors effecting the Las Vegas Market.

What to monitor

At some point in the first five minutes of each presentation, the presenters all made the same statement: “We don’t know what is going to happen with the new administration.”

With that little caveat, everyone was in general agreement that the overall assessment of 2016 was that the economy was good – not stellar, but good. Unemployment is low, job creation good, major economic indicators were up (moderate to fair) and continuing to trend slightly upward in most circumstances with no eminent danger signs in the near future. Tourist volume was back to pre-recession levels as are room occupancies and convention attendance. Spending per visitor is up, but the money is being spent in different sectors. Gaming is not as dominate as it once was with retail, entertainment and dining are moving up in the overall percentages. They were in agreement that 2017 should be moderate growth with a potential leveling off late into 2017 or 2018. The different groups were also in general agreement on the key factors that could influence the growth regionally and nationally. Major issues to watch:

1. The new administration’s tax reform policies: Overall it could be bullish for jobs.
2. Reduced regulation: It is touted to spur business spending and growth.
3. Immigration reform: It could constrict the labor force for construction related jobs and increase wages in the workforce thereby increasing construction costs.
4. A change in global trade policies: It could increase cost of imports for US consumers and create trade wars with other countries potentially making US products undesirable or unaffordable.
5. Rising interest rates: The intent would be to presumably make the dollar stronger – however the average consumer tends to see higher consumer rates as a negative and their reaction stalls some growth. A half, or even a full, percent increase over a year would still be pretty minimal. (To keep that in perspective – I bought my first house in 1980 and I assumed a loan at 12.5%).
6. Administration’s desire to increase infrastructure spending: This could take money from existing programs and the labor needed for new projects could put a strain on the available labor force.
7. There is a difference of interpretation of data as to whether or not the labor market is at full employment, full employment and underemployed or if it only appears to be at full employment because so many have left the market. If the market is fully employed, it raises the question of where employees would come from to hire for new job creation, expanded infrastructure projects and to offset loss of workers from immigration reform.

 

What’s positive

Positive movement in the southern Nevada region is seen in a couple of economic attributes. These could translate into opportunities of expanding some areas or adding new segments to the region. These factors include:

1. Continued diversification of the economic drivers. The Las Vegas economy has diversified in some areas and decreased the dependence on gaming and hospitality. Although still the major contributor to the economy of the area, they are not as great of an overall percentage of market share.
2. Expanded interest and growth in the higher education market. This is especially evident with the new UNLV Medical School and its economic potential, the expanded college of Hotel Administration and the overall strategic plan to move up to a Tier I University.
3. Las Vegas still has a favorable economic climate for business when compared to neighboring states. Regulation is relatively low, fees (taxes) are relatively low and labor is lower than some competitive area. One negative is the skill level (education and training) of some of the available work force.

 

What’s different

There are also a couple of new economic drivers and trends in the economy which are presenting new opportunities. Some of these are still in flux as developers and retailers get their feet under themselves and figure out a way to capitalize on them. These attributes include:

1. The millennial household: They have different buying habits, different living patterns and different priorities in life in general. The old housing types do not necessarily apply to the millennial buyer based on location, size, neighborhood and surrounding amenities.
2. The millennial consumer patterns: More online shopping, less traditional brick and mortar, more “experience” shopping.
3. A different attitude in the country: The past election has definitely highlighted different, if not stronger, demographics in some regions of the country that are a little different than once perceived.

 

What’s got potential

Tried and true and Stay the course may not be the best advice in dealing with some of the new economic drivers in the area. Some sectors are looking for creative ways to address opportunities and deficits that are being created. Some food for thought includes:

1. Retail: The decline in some retail markets has led to the growth of e-commerce facilities. Specifically, regional distribution centers to provide product availability in all areas and “last mile distribution” to decrease wait times for deliveries. This has led to a growth and an additional need for large distribution facilities with different parameters for distribution.
2. Growth in research and development sectors related to expanded college level education programs: This is creating new job markets, a different set of skills for workers and a potential guaranteed job for local graduates who can step into a profession  they’ve been trained for. New research parks in partnerships with education entities provide the opportunity to combine established office or research space with new avenues for funding research and new talent to work in the facilities. Think robotics, gaming technology, military development, etc. (i.e. the Harry Reid Tech Park)
3. Growth in medical related sectors: Similar to R&D in research parks, Medical education has the opportunity to partner new medical education facilities with new hospital and related medical facilities and encourage the growth of these partnerships. New sectors related to medical tourism, geriatric research (we are a retirement community), etc. (i.e. the Downtown Medical Arts District, Union Village)
4. Growth in professional sports sectors: Hockey is here maximizing the use of an existing facility. And football… (that is all I will say about that).
5. Re-purpose vacant or under-utilized facilities: The declining big box retail sector is leaving a lot of empty shells in southern Nevada and Utah. Some creative re-use of these shells includes schools (mostly charter schools), athletic facilities (depending on clear heights and bay spacing), entertainment venues (theaters, etc.) and call centers or high density work spaces.

 

What’s scary

It’s not at all guaranteed growth for any of these areas. In addition to some of the issues to watch as outlined in What to monitor, there may be some other potholes in the road. Some noticeable disturbances may be in:

1. Land: Availability of affordable and developable land has been in question for a while in southern Nevada and some areas around Salt Lake City. With costs rising again and the availability of contiguous parcels for larger scale developments, it could hamper growth.
2. Affordable housing: Everyone cited the availability of affordable housing as a major detriment to growth. This does not only apply to the millennial market, but the housing market at large. Some aging baby boomers and empty nesters don’t want the 4-5 bedroom house, whether its paid for or not, and some new hires and low skilled workers need affordable housing close to their workplace. Most markets are finding it hard to make affordable housing pencil with rising land costs and rising construction costs. But Las Vegas is still a more affordable housing market when compared to California.
3. K-12 education: While higher education is expanding in southern Nevada and moving towards Tier I status, the K-12 system is still languishing at embarrassingly low ratings. This has been seen as a deterrent to attract a higher skilled and educated workforce to the Nevada market thereby hampering the growth of higher earning tech companies or higher skilled industries.
4. A major difference in the Salt Lake City market is the type of worker they have when compared to Las Vegas. They have a higher percentage of college graduates in their region which plays out in the types of industry that feed their economy. Salt Lake boasts a higher percentage of corporate headquarters, regional headquarters and tech savvy entrepreneur start-ups. Think Overstock.com, Adobe, Huntsman Cancer Institute, Icon Health and Fitness, Ancestry.com, RC Willey, etc. in addition to all of the banks based there.

 

As I said in the beginning, this is a 30,000 foot level analysis of the presentations – one of which was compiled from pre-election data. Now that we are one month into the new administration, I am still hearing “Huh – where are we going?”

 

Curt John Carlson, AIA, LEED AP is a principal at SH ARCHITECTURE and a 22 year resident of Las Vegas.

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