Tight space may slow industrial growth

Northern Nevada's lack of vacant top-tier industrial space soon could lead to a loss of business for the region but even so, don't expect to see developers mobilizing to begin construction of speculative buildings anytime soon.

Instead, developers are waiting ready with plans drawn and approved for potential tenants to come aboard before breaking ground on any new construction.

Despite having just a few class A industrial buildings in the market that can accommodate new businesses seeking 250,000 square feet or more, developers won't begin new construction until market rents increase by as much as 30 percent, says Tom Miller of Miller Industrial Properties.

"The economics don't work at today's market numbers," Miller says. "We are 25 to 30 percent below where we need to be to make the hurdle for any kind of investment return and a 30-percent jump in rental rates isn't predicted in the real near term."

Once the three vacant large industrial properties in the Sparks, Stead and Tahoe Reno Industrial submarkets fills, commercial brokers and economic development officials will have to adjust their pitches to lure new businesses to northern Nevada.

Stan Thomas, vice president of business development for the Economic Development Authority of Western Nevada, says the Reno-Sparks market already lost several large businesses to neighboring Arizona because this market lacked facilities that were a suitable match for those companies despite an overall vacancy rate of 14 percent for industrial properties.

It's impossible to match new businesses with Class A industrial in the 400,000 to 500,000 square foot range, Thomas says, and once the remaining large Class A spaces are leased businesses may turn away from locating in Reno-Sparks altogether.

"It's very thin Class A space is just about gone," he says. "We are OK for a little bit, but when we get leased up we will be out of Class A space, and then we will have a problem. We will definitely lose some deals if we don't have some buildings to show in that 300,000-square-foot range."

The new pitch: "We can build whatever you need in just over a half-year." Case in point: Build-to-suit industrial spaces erected for NOW Foods in Sparks and Urban Outfitters in Stead.

"That is all we will be able to do," Thomas says.

Although it takes time to erect a large build-to-suit industrial space, the pace of construction happens very quickly in Reno-Sparks, Thomas notes.

"You can't build a building anywhere faster than we can here in northern Nevada you can have permits pulled in three weeks depending on where you are located. In seven to eight months you can have a building. You can't do that in some other states we are competing with, and we are relying on that right now."

Brendan Egan, regional director of development for Dermody Properties, which developed the sites for Urban Outfitters and NOW Foods in conjunction with United Construction, says the new business model for industrial developers is "spec-to-suit."

Developers can shave months off the construction window by having plans and sites for buildings at the ready. Dermody, for instance, can move forward at any time with a 306,000-square-foot building at Logisticourt at Silver Lake in Stead. All that's needed is a tenant, Egan says.

And it shouldn't take all that long to find tenants for the region's few remaining vacant Class A industrial spaces, which should help firm up rental rates. Rates have sagged and stayed low due to a combination of the huge glut of inventory that hit the market in the late 2000s and a host of subsequent deals made at terms that are keeping the overall market low.

Newer businesses to the area, such as Diapers.com, Zulilly, Toys 'R' US and Randa, all located in industrial spaces that sat empty for several years at Tahoe Reno Industrial. The terms of those deals established baseline pricing for the entire market.

"Developers were just as aggressive as can be to get those tenants, and that has set the tone for other deals," Miller says.

A new speculative building might lease at 32 or 33 cents a square foot, Egan says, and many of the deals getting done today typically are at or below 28 cents a square foot.

Still, Miller notes, lease rates throughout Greater Reno-Sparks are lower than other adjacent markets such as Salt Lake City and Las Vegas. Northern Nevada also enjoys a host of strategic advantages than those markets, Miller adds.

As the market continues to improve, Thomas says, lease rates eventually will trend upward and that's when developers will erect new spec buildings. The region probably won't see many mega-tenants such as Barnes and Noble, Amazon and Walmart, Thomas notes. Site consultants, he says, predict most new businesses to the area likely will fall in the 250,000-square-foot to 350,000-square-foot range.

Miller says there has been some probing into the regional market by companies seeking 500,000 square feet or more, and the only solution would be to combine several buildings or relocate current rent-paying tenants deals with unlikely terms.

"It will take that kind of creativity to accommodate a space like that, and the likelihood is very small," Miller says. "We are going to have to turn deals away before a lot of new spec space comes on board."

Still, Reno is always on site consultants' short list, Egan says. Like the host of new distribution and fulfillment businesses that chose northern Nevada in the past few years, companies will continue to relocate or expand here to cut down on shipping times and costs.

"The nation and Nevada has experienced an awful four or five years, but Reno is still dead-on, ground zero the best site in the West," Egan says. "Reno is still a wonderful location."