Company shifts create industrial vacancies

PetSmart's decision to build a new 873,000-square-foot distribution center at Tahoe Reno Industrial Center was big news.

But real estate brokers who specialize in industrial properties were quick to recognize that the company's decision also means it will leave behind some 240,000 square feet of vacant space in Stead space that they'll need to fill with a new tenant.

And the PetSmart space will come onto a market that will be awash in second-generation industrial space as an unusually large number of companies in the Reno-Sparks market prepare to move into newer and larger quarters.

Charles River Laboratories will leave 18,200 square feet of space in Sparks as it moves to newly remodeled space in south Reno. Tire Rack will leave about 216,000 of vacant space when it moves to Tahoe Reno Industrial Center. Parts Unlimited, building a new distribution center at Spanish Springs Business Center, will leave nearly 200,000 square feet of vacant space when it moves.

In all, Alliance Commercial Real Estate in Reno identifies 12 industrial properties totaling about 1.5 million square feet that are expected to become vacant as tenants move upward and onward.

And industrial brokers at Grubb & Ellis NCG note that the soon-to-be vacated space is in addition to some 6 million square feet of industrial property that's being built in one of the biggest industrial construction booms in the region's history.

Backfilling the second-generation space presents a challenge for brokers simply because of its age, says Paul Perkins, an industrial broker with Alliance Commercial.

Older warehouses generally don't have the high ceilings and sophisticated fire-prevention systems found in newer structures, and that limits their appeal to some companies shopping for distribution sites in the region.

In fact, some of the industrial properties coming onto the market this year probably should be considered functionally obsolete, says J. Michael Hoeck of Alliance Commercial.

Still, the older buildings offer one sales point locations close to the center of population that's tough to match in new industrial parks such as Tahoe Reno Industrial Center or the Stead area.

Convenient location has helped keep rents in older buildings strong somewhere in the range of 35 cents a square foot, roughly equivalent to much new construction.

And convenience will spur developers to continue dividing some of the vacant big warehouses into smaller spaces, says Dan Buhrmann, an associate in the industrial department of Grubb & Ellis.

Matt Riecken, a broker with CB Richard Ellis in Reno, notes that smaller industrial tenants may use former distribution spaces for manufacturing operations that might run 20,000 to 30,000 square feet. And typically, he says, operators of smaller warehouses work closer to the ground and don't require the 30-foot ceilings that are common in new high-cube logistics centers.

But the amount of second-generation space that's about to be vacated may swamp the market.

"Landlords need to be flexible," says Dave Simonsen, a broker with Alliance Commercial. "If you can divide it, look to divide it. Do what you can to get bodies into the building."

Some owners of industrial properties, worried about an oversupply of second-generation space in the market, appear to be making concessions on rent or other requirements to keep tenants from moving or to get new tenants in place.

If demand is strong enough, landlords won't need to worry about the wave of space to be backfilled.

Dave Schuster, who head industrial brokerage for Grubb & Ellis in Reno, says a number of potential companies are scouting the region for big industrial spaces 100,000 square feet or more and some of them might land in existing space.

But Perkins notes that the mid-sized transactions those involving 20,000 to 60,000 square feet of industrial space have all but dried up in recent months.

In the first quarter, Colliers says the region saw only four transactions in that category, which traditionally has been the bread and butter of industrial real estate in northern Nevada.