Las Vegas Investment Properties 2016 Outlook

We wrote the following article for our clients in mid December 2015. We would welcome comments from fellow BP members.

National Economy

We think that a quote from Business Wire summarizes the national economy fairly well.

Economic Growth Stuck In Neutral – The U.S. economy seems unable to break out of its disappointing pace of growth that has kept real GDP growth range bound between 2.0% and 2.5%, below the historical pace achieved during previous recoveries. Although the labor and housing markets are performing well, muted corporate and consumer spending along with an array of global concerns – from China to sharply lower commodity prices – are acting as governors on economic growth. Business Wire

Las Vegas Housing Market

For the general Las Vegas housing market, the Las Vegas Review-Journal summarized the 2016 outlook as follows:

Vegas housing market to make respectable gains in 2016 Las Vegas Review-Journal

What We Are Anticipating in 2016

Our predictions are based on the following assumptions:

• Interest rates will rise in 2016 but at a modest rate. "Interest rates are headed up, but at a fairly mild pace." Forbes - Interest Rate Forecast 2015 - 2016
• China's economy will continue to slow down and there will be less cash property purchases in 2016. "China's Economy: More Volatility Ahead in 2016?" Bloomberg Business
• There will be no significant world events that will create volatility in the world economy.

Assuming the above, we predict the following for class A and B investment properties in Las Vegas:

• Sales Volume - The sales volume in 2016 will remain about the same as it was in 2015. If interest rates rise more than expected towards the end of 2016, we will see the sales volume trending down.

• $/SqFt - With sales volume declining, $/SqFt growth has flattened in recent months. We see $/SqFt as stable at least through the first half of 2016.

• Rents - Single family rents have steadily increased starting in mid 2015. Las Vegas has very little remaining develop-able land that is desirable. Because of this and continued economic growth in Las Vegas, we expect the trend to continue in 2016. For example, "Faraday chose the (North Las Vegas) site over locations in Georgia and Illinois that offered usable auto plants and better relocation incentives because it likes the business environment Nevada offered." Las Vegas Review-Journal. It is predicted that Faraday will employ 4,500 direct employees and approximately 9,000 indirect employees. We are seeing other businesses relocating from California and other states with less business-friendly laws and high taxes.
• Cash vs. Financed Purchases - With the Chinese economy slowing, we expect further declines in cash purchases. A year ago the percentage of cash sales was close to 50% and now it is down to 23%. The large number of cash buyers was making it difficult to get financed offers accepted through the first half of 2015.

In Summary

We do not see any significant overall change in the market if interest rates do not increase significantly. Las Vegas remains one of the few large metro areas with:

• Positive cash flow with 20% down financing
• Business friendly environment
• No state income tax
• Low property taxes (~0.86%)
• Low landlord insurance (~$500/Yr)
• Timely and cost effective evictions (28 days / $500)
• Almost zero urban sprawl since Las Vegas has little develop-able residential land in desirable areas
• Steadily growing population.
• Steady economic growth.