Industrial vacancies exceed 15 percent

Factories and warehouses stand vacant throughout northern Nevada, but commercial real estate brokers think the vacancy rate of more than 15 percent at the start of this year isn't likely to get much worse.

On the other hand, they don't expect that vacant spaces will fill quickly this year.

In the final 90 days of 2009, the amount of occupied industrial space on the market decreased by more than 204,000 square feet, says a new analysis by the Reno office of NAI Alliance.

For the year, industrial specialists at Grubb & Ellis|NCG in Reno say that the amount of occupied industrial space fell by 1.7 million square feet. That's the first time in anyone's memory that occupancy in industrial buildings in northern Nevada declined for an entire year.

Among the companies that shuttered factories and warehouses in the region were Standard Motor Products, Coast Aluminum and window-maker Royal Sierra Extrusions, which closed a plant east of Sparks, says Colliers International's industrial group.

The market is seeing some small glimmers of good news.

Dean Krieger, managing partner of the Lee & Associates office in Reno, says brokers were busier than usual during November and December with requests from industrial users looking for property.

At the same time, Krieger suspects the big exodus of industrial companies is nearly at an end.

"Most of the companies that were going to leave the market did so last year," he says.

The rising stock market has led publicly held companies to feel more confident about their future, and some industrial users are looking to nail down long-term leases at extremely attractive rents, says Krieger.

Mike McCabe and Aaron Somer, industrial brokers with Colliers International, agree that the market appears to be near a bottom.

"We expect it to be a long, slow haul, but we hope that 2010 will be the year that we begin to eat away at our record-breaking vacancy rates," they said in an analysis last week.

Property owners are being hammered by high vacancies.

Grubb & Ellis estimated that rents for industrial space in the Reno-Sparks market declined by 16 percent last year.

While the asking rents for industrial properties haven't changed much, side deals are lowering the true rent figures to levels that haven't been seen in the Reno area for at least 15 years, said the industrial group of NAI Alliance.

Free rent something on the lines of one month free for each year of the lease along with big allowances for tenant improvements and moving allowances that sometimes top $1 a square foot are common in new leases, said the Grubb & Ellis analysis.

And brokers say that existing tenants are squeezing landlords with blend-and-extend deals in which they agree to sign a longer lease in return for reduced rent.

"Most landlords acquiesced, fearful that the market malaise might continue for two more years and reasoning that an occupied space, even at a fraction of pro-forma rent, is better than space that might remain vacant for a long time," NAI Alliance brokers wrote.

So far, however, few industrial properties have been given back to lenders by highly leveraged owners who can't make their payments.

In part, the Grubb & Ellis|NCG analysis said, that reflects the willingness of lenders to work with borrowers. And Krieger said optimism about the long-term future of the Reno-area market encourages banks and other lenders to extend the due dates of some loans. They figure that properties ultimately will get filled.

But the recovery isn't right around the corner.

Brokers said they expect the first half of 2010 to remain slow as some companies continue to leave the area and demand for space grows slowly.

Much depends, they said, on the national economic recovery and the speed at which it filters down to northern Nevada.

But construction of new industrial buildings is likely to remain rare.

NAI Alliance notes that 2009 marked the first time in at least 35 years that not a single speculative industrial building was developed in the Reno-Sparks area.