Investors see gold in aging flex

Real estate veterans Michael Schnabel and Tilio Lagatta are on a flex spending spree.

Although development of new Class A industrial space is perhaps the hottest sector of the Reno-Sparks commercial real estate market, Lagatta and Schnabel are finding value acquiring and repositioning some of the region’s older flex industrial property.

Flex industrial — light industrial space with front-end retail, showroom or office space with back-end warehouse space — was especially hit hard by the downturn, Schnabel says, with countless small businesses closing down and eroding occupancy rates throughout the region. But the flex industrial sector began heating up as the economy in Reno-Sparks started turning over the past 24 months or so with entrepreneurs and small business owners once again looking for shop space.

As the sector improved, investment opportunities began penciling out as well.

Schnabel, managing member of Schnabel Ventures, and Lagatta, managing member of Blackfire Real Estate Services, began snapping up flex industrial properties in early 2013 and have since acquired 17 buildings totaling more than 250,000 square feet.

The duo first purchased Truckee Meadows Business Park on Coney Island Drive. The bank-owned property consisted of 11 buildings averaging 11,000 square feet each and had not seen much in the way of owner improvements for years.

Revenue on the property suffered due to its vacancy rate of more than 50 percent, but after completing a host of tenant improvements to clean up the property, including new paint, signage and repaving the parking lots, and installing management and leasing teams, vacancy has since dropped to under 30 percent. Lagatta and Schnabel also sold two buildings to current owner-users.

Lagatta and Schnabel followed that purchase by acquiring 54,000-square-feet of flex space at 155 Glendale in March of this year, and Schnabel Ventures in late September purchased the 151,000-square-foot, five-building Kleppe-Gregg Business Park in the heart of the Sparks industrial corridor. The property was built in 1981 by The Ribero Companies and houses dozens of small businesses, including two taxidermists, a custom table maker, a home brewery and many small construction companies.

Their strategy is to scour the market for under-managed and under-capitalized flex industrial space and clean up the properties to make them ready for expanding small home-based businesses in need of dedicated shop space or growing small businesses that need additional room.

“We feel like we have a unique competitive advantage,” Schnabel says. “We are not buying what is clean and pretty and fully priced. We are spending almost $1 million in capital expenditure to improve (Kleppe-Gregg), but we have the experience to know what needs to be done and know where we will be when we are finished. A lot of people would just look at this as a distressed asset.”

Where others saw a tough sell, Lagatta and Schnabel saw opportunity. Their first purchase on Coney Island had well below-market occupancy and rental rates, and their belief was that with the right blend of capital improvements and new management and leasing teams the property could perform much better.

“A lot of people had shied away from (flex) because the class got hit pretty hard in the downturn, but it was one of the first to come back,” Lagatta says. “It really lends itself to smaller local business owners, and as we are seeing more of that entrepreneur-type of business come back these are great properties to offer up to those people.”

Tomi Jo Lynch of Sperry Van Ness handles leasing duties for the three properties, while Brittany Diehl and Jeff Gomm of Nevada Commercial Services manage the buildings.

Schnabel, former owner of the Reno CB Richard Ellis office, says occupancy at Kleppe-Gregg Business Park currently is about 80 percent. He began executing a capital improvement strategy last month at the 71-space business park that includes new paint, landscaping and HVAC systems to reposition the spaces for new and existing tenants.

“These (businesses) are the bread-and-butter of the Reno-Sparks economy,” he says. “We believe in Reno and sparks and in the flex industrial submarket.”

Both Blackfire and Schnabel Ventures are weighing their options on further flex purchases and concede that as market conditions continue to improve opportunities in the flex arena may vanish.

“As long as we still see value, we will still be buying,” Schnabel says. “But at some point we will say we are not seeing value even though we strongly believe in what is happening in the Reno-Sparks market.

Schnabel says the decision to sell or hold the properties is still up in the air.

“The first steps are to clean them up and get them to market rates and occupancy,” he says. “Then we will look at putting them up for debt refinance and cash flow the properties, or is it a good time to sell? We have flex business plans.”