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John McCloud is editor of Industry Property Journal, from which this article is excerpted.

Las Vegas—Even though millions of acres of untouched land surround this rapidly growing desert oasis, the sobering truth is this sprawling metropolis has limited room to grow. In fact, some analysts believe all available developable land will be gone in less than a decade.

The reality is the endless miles of open space that lie not far beyond the metropolitan area’s current reach are, for the most part, completely and forever off-limits to development. Geographic constraints, environmental prohibitions and designations as national parks, military bases or Federal Indian Reservations ultimately make Las Vegas as hemmed in as Manhattan. Nearly 40% of respondents to a recent survey of local real estate experts by Restrepo Consulting Group LLC and McDonald Carano Wilson LLP, both of Las Vegas, identified lack of land as the most significant issue facing the market.

Even today, a shortage of development has created an extremely tight market. The market’s Q3 vacancy rate stood at 3.8%, down sharply from more than 8% in Q3 2004, according to Grubb & Ellis Co. However, the short-term tightness can be corrected. Development of Apex Industrial Park and land around the Ivanpah Valley Airport and the Las Vegas Speedway and new projects by Portland, OR-based Harsch Investment Properties Inc. and Thomas & Mack Development Group of Las Vegas will allow expansion of the market for the immediate future. Harsch, for example, developed Speedway Commerce Center, a 1.4-million sf complex just off Interstate 15, about 10 miles from downtown Las Vegas, adjacent to the Las Vegas Motor Speedway.

But the outlook beyond the next decade is considerably bleaker. “I’ve heard different experts estimate we’ll run out of land anywhere from five years upward,” says Xavier Wasiak, senior vice president for the industrial division of Grubb & Ellis in Las Vegas. “But the early figure doesn’t take into account land that that’s still available but lacks infrastructure. I think we have quite a bit longer than that before we run out completely.”

Wasiak refrains from making his own prediction, noting that there are a number of possibilities for expanding the inventory of developable land at least modestly. The most promising of these are US Bureau of Land Management auctions of infill sites within the existing metropolitan area. A few of these are sold each year. Only some of these are suitable for industrial development and none is particularly large, the biggest coming in at about 40 acres. Moreover, even these will eventually run out, Wasiak adds. Beyond that, developers will have to look for land farther out to Northern Arizona and the area around Parrumph, NV, with the space between left undeveloped.

Before that happens, however, Wasiak sees a shift in uses for existing industrial properties. “In the past, we were more a Southwest distribution center, but as our rents increase, distributors may opt to go elsewhere. That space is likely to be filled by the local service industry, which is going to need to expand and is willing to pay higher rates,” Wasiak observes. The changeover may take longer than it would elsewhere, however, because Nevada’s lack of income, corporate and warehousing taxes as well as lower workman’s compensation rates will enable tenants to afford somewhat higher rents.

Rents have been rising at a steep rate for the past several years, though brokers anticipate a flattening as the next wave of development begins to come on line. Property prices have also been rising, going up 10% to 15% since January. Wasiak expects a similar rise for 2007, but some brokers predict a much smaller rise or none at all as sites are opened and projects completed in new developments. Wasiak pegs prices at about $50 per sf to $55 per sf for 100,000-sf warehouses in better locations and the high $30s per sf to low $40s per sf in lesser locations.

Competition for property is intense, with extremely strong owner-user demand making it difficult for investors to compete. But Wasiak says investors who can afford the rates and have the ability to hold long term stand to do exceptionally well due to the market’s natural constraints. “There are great opportunities for investors who are able to purchase warehouse/distribution centers at even what appear to be an aggressive cap rate of 6% to 7%,” he tells IPJ. “Lease rates are inevitably going to show substantial increases higher than most other markets. Exactly how fast that will happen I can’t speculate, but it will happen eventually.”

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