Companies drive high demand for new spaces

Major new industrial development companies are beginning to move into northern Nevada, drawn by continued strong demand for big manufacturing and distribution facilities.

More subtly, the entrance of big new players into the market is an indication that more institutional investors the pension funds and others that finance mega-scale industrial projects increasingly take northern Nevada seriously.

Union Property Capital, a San Francisco-based company, made its first foray into the northern Nevada market when it bought 108 acres at Tahoe Reno Industrial Center east of Sparks.

The company plans to build more than 2 million square feet of warehouse space in four buildings.

Seattle-based Tarragon LLC, meanwhile, bought 49 acres at Spanish Springs Business Center along Pyramid Highway, and industrial brokers said the company is talking about building as much as 1 million square feet of industrial space.

Other big developers also are scouting the region for industrial properties, brokers have said in recent weeks.

In recent years, big industrial development projects in the region have been dominated by four companies DP Partners, by far the largest, along with Trammell Crow Co., ProLogis and Panattoni Development Co.

But they're getting new competition as the result of strong demand and tight supplies of big industrial spaces.

The vacancy rate in the region's industrial buildings stood at 5.43 percent at the end of the year, says Alliance Commercial Real Estate.

And with a continued stream of companies looking for new or expanded locations in northern Nevada, pressures on that limited inventory of space remain high. Big development companies want a piece of that action.

"This shows how attractive the market is," says Doug Roberts, a partner with Panattoni.

"Reno continues to attract national attention."

Along with strong demand and low vacancies, the newcomers see strong natural advantages to the Reno market.

Terry Sternberg, managing director of Union Property Capital, says his company likes the region's location within a one-day drive of major West Coast markets and likes the region's wage rates as well.

But the developers would be able to do nothing other than look yearningly at the northern Nevada market if the institutions that provide their financing didn't take the market seriously.

"In the past, we were under the radar," says Aaron Somer, an industrial broker with Colliers International. "We were seen as a smaller market and a smaller town."

But now financial institutions appear to believe the risks of investing in the region have lessened, says Dan Oster, an industrial specialist with Alliance Commercial.

If nothing else, Somer says, the availability of cheap capital worldwide ensures that some of it was likely to be put to work in northern Nevada.

Over the short term, however, the risks of industrial projects will rise a bit as returns on the big industrial projects that are coming out of the ground this year appear to be razor-thin.

On one hand, says Trammell Crow's Par Tolles, land prices remain high and are only getting higher as more developers bid against one another.

At the same time, the amount of new industrial space coming onto the market both from newcomers as well as established players may keep a lid on lease rates.

"There's been a lot of pressure on returns because the market rents haven't kept up with costs," says Mike McCabe, who oversees Reno-area leasing for DP Partners.

And the pressure will grow greater as about 3.5 million square feet big-box distribution centers come onto the market from Stead to Tahoe Reno Industrial Center later this year.

"That's kind of daunting in a market that's 62 million square feet," says Paul Perkins of Alliance Commercial.

With that much space coming onto the market, developers may be tempted to trim lease rates just a hair to snag a tenant, and that may be enough to keep rents from rising at other new buildings.