Wednesday, August 01, 2007

Can Las Vegas Keep Building Apartments?

Metropolitan Las Vegas has about .6 percent of the US population. Last year, about 2.9 percent of units in buildings with more than five units built in the US were built in Las Vegas. The pace has slowed considerably this year, but it suggests an interesting question: how much growth does Las Vegas have left in it?

The answer is: a lot. The basic industry is, of course, accomodation. Las Vegas has around 140,000 hotel rooms (http://cber.unlv.edu/stats.html) with an cccupany rate in excess of 90 percent. Hotels are profitable at occupancy rates of around 65 percent, meaning that Las Vegas could support something like 50,000 more hotel rooms with no increase in demand.

Let's cut that to 25,000 rooms to be conservative. There are roughly two jobs in the hotel business for every room in Las Vegas, meaning that 25,000 rooms will directly create about 50,000 jobs.

Economic base analysis (http://faculty.washington.edu/krumme/350/econbase.html) for Las Vegas predicts that every basic job produces an additional 2.5 non-basic jobs. So the Las Vegas market has room for another 175,000 jobs over the near-to-medium term (say 5 years).

The ratio of jobs to population in Las Vegas is .47; let's round and say population growth produced by hotel room growth will be 350,000. The average Household Size is a little more than 2.5 (census) and about 35 percent of households live in multifamily buildings (again, census). Put this all together, and there will be demand for about 50,000 multi-family units over the medium term--again assuming no growth in demand for hotel rooms. Vacancy rates for apartments in Las Vegas is a little less than 7 percent--this is close to a natural vacancy rate, meaning that the market is currently in equilibrium. The fact that inflation adjusted rents have risen by a bit more than inflation in the past year also indicates that the apartment market is not oversupplied. Assuming hotel developers respond to demand, there should be strong demand for apartments for some years to come.

There are issues, of course, not the least of which is water (although if people would stop watering their lawns, there would be plenty of water for awhile). But it is remarkable how much Las Vegas' strong population growth (and therefore demand for housing construction) is grounded in fundamentals.

6 comments:

Anonymous said...

Interesting look at an atypical town. It can, of course, keep building to soak up more and more workers... but what happens when those workers can't pay their rent as the landlords squeeze them higher? It's reasonable to assume, I think, that gambling towns make the bulk of their money from those that have difficulty controlling their impulses. These same folks will probably be running into financial trouble as the fuel that drove them -- their perceived home equity -- evaporates. So, business will probably pick up for a while at the casinos as some attempt to make some big easy money, but then once that subsides, the town will see fewer and fewer gamblers who will have less and less money to lose.

Having sucked their hosts dry, the purveyors will begin to suffer a commensurate reduction in profits. Las Vegas can build them, but the tenants will cease to come at some point.

Anonymous said...

Sorry.. unrelated, but nowhere to comment outside of an existing post that I can tell... but marginal revolution seems to be off line. Any idea why?

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