Industrial, commercial construction activity to remain slow

Non-residential construction in the Truckee Meadows and surrounding areas is expected to stay stagnant through 2012, developers, construction executives and commercial real estate experts agree.

But they say absorption in top-notch office and industrial spaces throughout the year could lead to a return to speculative development in those market segments.

The majority of regional construction projects in 2012 will be build-to-suit projects for large companies, says Craig Willcut, president and chief executive officer of United Construction. United Construction in 2011 landed two of the biggest build-to-suit jobs in the area: Urban Outfitters' 462,720-square-foot Internet fulfillment center in Stead and NOW Foods' 130,000-square-foot distribution facility on Vista Boulevard in Sparks.

"We will see more self-funded projects from top Fortune-500 companies that have the capability to do their own projects," Willcut says.

Though both jobs provided stability for United Construction employees, the company will wrap the NOW and Urban Outfitters' work in the first quarter of 2012, and the pipeline of new contracts in Greater Reno-Tahoe remains nearly empty, Willcut says. United has cast its net far in order to land more work.

"There are projects being looked at and analyzed locally, and we are looking in California and other places. We still feel that the Reno, Sparks and Washoe County market still has a ways to go."

Jobs are scant for the majority of large construction firms in northern Nevada.

Q&D Construction recently landed a $47 million job to renovate the baggage claim area, restaurants and security checkpoint at Reno-Tahoe International Airport a crucial contract that should keep key employees working this winter and through the first quarter of 2013, says Norm Dianda, president and chief executive officer of Q&D Construction.

At its peak the Q&D employed 1,152 workers. Last winter the company had just 188 people on its payroll. Q&D is expected to employ close to 300 workers this winter, down about 45 percent from peak summer employment, Dianda says.

Willcut says that development of health care facilities still remains strong in the region. The markets for new office and industrial buildings remain stagnant, but strong absorption in Class A space in both industry segments has developers anticipating a return to speculative development by 2013 at the earliest.

Currently, the there are two large Class A industrial buildings in the market: A new 258,000-square-foot building on Ireland Drive at Tahoe Reno Industrial Center that was developed by Kennedy Associates in 2007, and Miller Industrial Properties is marketing a 271,152-square-feet of space on Boxington Way in Sparks.

Doug Roberts, a partner with Panattoni Development of Reno, says speculative development is at least 12 to 18 months away. John Atwell, chief operating officer for Dermody Properties, says that rents need to rise about 20 percent in order to justify new building. Atwell expects additional companies such as Urban Outfitters to take a hard look at locating in Reno due to its proximity to customers in the greater western region.

The Carson City industrial market, which houses a number of manufacturing firms and aerospace companies, hasn't fared much better. There are at least a dozen buildings many larger than 20,000-square-feet that have sat vacant for more than five years, says Kris Holt of Nevada Business Connections. The region has about 5 million square feet of industrial space and a 20 percent vacancy rate, Holt says.

Developers aren't expected to build any top-tier office space in the coming year due to high vacancy rates and low monthly rental rates. Vacancy rates in Class A space hovered around 20 percent for most of 2011 and rental rates are still under $2 a square foot.

Two of the Truckee Meadows top locations for Class A office space South Meadows and Meadowood still have more than 200,000 square feet of space to absorb.

Melissa Molyneaux, senior associate with the office properties group at Colliers International, says that some developers may erect build-to-suit garden office projects. Tanamera Construction, for instance, is erecting a 6,000-square-foot building in South Meadows for a doctor's office.

Tanamera had leased or sold all of its similar-sized spaces in the Reno Tahoe Tech Center Towne Center Project, and the only way to capture the tenant was to construct a new building, Molyneaux says.

"The construction we will see, much like this example, is a build-to-suit for a specific tenant," she says. "Vacancy for buildings over 10,000 square feet has hovered around 20 percent, with garden office closer to 25 percent. Much of the space available is in the form of Class B and C buildings. When you break out Class A office in Meadowood, downtown and South Meadows, those rates have actually started to decrease.

"Flight to quality is something we've been talking about it all year, and we continue to see this trend in the northern Nevada office market."