Industrial spaces begin to fill once again

One by one, Jesse Haw, president of Hawco Properties, ticks off the recent activity at his company's Spanish Springs Business Center along Pyramid Highway:

* Massimo Zanetti, a coffee distributor, relocated from Los Angeles to 50,000 square feet at 105 Isidor Court in the middle of last year.

* Velux, a distributor of skylights, is moving its 10-person operation from Stead into a 50,000-square-foot space.

* Jentech Drilling Supply, a mining supply company, built one of the few new industrial buildings in northern Nevada last year and has purchased more land for further expansion.

* A company that doesn't want to be identified leased 50,000 square feet at 105 Isidor for an operation that will employ 50 within the next couple of months.

Haw isn't alone in his observation of stirring in the market for industrial space.

The first decrease in industrial vacancy rates after 18 consecutive months has some commercial real estate brokers eyeing 2011 with an air of hopeful anticipation, but more than 10.8 million square feet of industrial space remain vacant throughout the Truckee Meadows.

Industrial vacancy in the region stood at 15.1 percent in the fourth quarter of 2010, down a few ticks from 15.7 percent in the previous quarter, shows a report by NAI Alliance. Brokers in the industrial market completed 43 lease transactions totaling nearly 800,000 square feet of space in the fourth quarter.

Much of the space being leased is in newer, better-class A warehouse and distribution facilities, which formerly saturated the market and led to lower occupancy and lease rates across all classes. Currently, the only large brand-new industrial building entirely unoccupied is the 632,000-square-foot Development Arts' West America Commerce Center at Tahoe Reno Industrial Center.

Although the region's dwindling supply of top-tier industrial space may eventually lead some companies looking for a large warehouse or distribution facility to locate elsewhere, don't expect developers to jump back into the fray anytime soon.

"I don't think real estate investors have a strong appetite to put in more product when we have 15.7 vacancy," says Tom Miller of Miller Industrial Properties. "I think we will lose some deals because we won't have space available for them before somebody steps up and builds a building."

Dave Simonsen, a vice president with the industrial properties group for NAI Alliance, says a tightening in the market for newer industrial space should help firm up sagging rental rates as well as push some new tenants into older industrial buildings.

"Things are looking positive as we enter into 2011," Simonsen says. "If trends continue I anticipate firming of rents in Class A before we see it in B and C buildings."

Miller says two of the primary reasons why top-level industrial space is filling much faster than older properties are extremely competitive rental rates and tenant concessions offered by landlords. The difference in price per square foot between new and older industrial space has become marginal, he says.

Even if the market sees positive absorption and increased leasing activity, bankers and developers will remain leery of new speculative construction, Simonsen says. Net absorption in the fourth quarter totaled 350,239 square feet, the NAI Alliance quarterly reports shows, but total net absorption for the year was just 93,047 due to the large amount of industrial space put back on market from companies vacating the region.

"Although activity seems to be heading in right direction, and one would hope for new construction, developers that were building have been burned, and the banks that have been providing financing have been burned," Simonsen says. "Even though a project might be justified, with gun-shy developers and bankers it will be difficult to build a new speculative building."

Simonsen and Miller both point to 2012 before any new speculative construction breaks ground in the area.

Currently, there are plans to develop just 90,000 square feet of new industrial space, which is a build-to-suit project. By comparison, in 2008 more than two million square feet of industrial space came online in TRIC, Spanish Springs, and Stead, and in 2007, 3.8 million square feet of new industrial space was added to the market.

Mike McCabe, senior vice president of the industrial group with Colliers International, says brokers are keeping their fingers crossed that positive trends in the industrial sector continue. McCabe says most users contemplating a new location in Reno-Sparks seek smaller spaces, and there is an ample supply of vacant buildings from which to choose.

"We are seeing very slow improvement," McCabe says. "But there is a lot of space available. Very seldom do we have users come into our market looking for space in excess of 150,000 to 200,00 square feet."

With positive absorption in new industrial space, it's time for landowners and developers to begin positioning themselves for new construction, says Haw. Hawco Properties has 175 acres of land in Spanish Springs that could be developed in the future.

"I expect to have several (land) sales this year and it will steadily get better," he says.