Need for Reno-area big box space key focus in tightening industrial market

RENO, Nev. — Reno’s tightening industrial market is bumping up rental rates across the board, but nowhere is the pressure being felt more than for quality space to serve smaller tenants in the 5,000- to 50,000-square-foot range.

Several new projects coming online later this year will address the region’s pressing need for new Class A big box space. Panattoni Development and Dermody Properties are building more than 1.24 million square feet of new industrial product in the North Valleys, while Conco is beginning a 550,000-square-foot building at Tahoe Reno Industrial Center.

Panattoni, however, also recently announced its new Longley Commerce Center, a 271,000-square-foot building at 6550 Longley Lane. The building is expected to be completed by year’s end and is being built specifically to meet the needs of smaller industrial tenants. Longley Commerce Center is being built on the last large undeveloped industrial parcel in the highly desirable South Reno submarket.

The site at Longley and Airway Drive is the last remaining parcel of the old Capurro-Quilici Ranch, says Paul Kinne, development manager for Panattoni.

“It is an outstanding location,” Kinne says. “Longley is a very strong location for south Reno and for Reno in general. We like the access and ability to get to the freeway.”

The new Panattoni building will offer tenants flex space in the 8,400 to 16,800-square-foot range, and industrial units from 24,000-square-feet and larger.

‘There’s a lot of demand’

Demand for smaller flex (industrial space with office or showroom space) and industrial space with dock doors to house the many service-oriented businesses that come with Reno’s booming economy, coupled with an ever-shrinking pool of properties that meets the needs of these smaller users, are pushing rents to new highs.

It’s that factor, Kinne notes, that makes Longley Commerce Center an attractive option for Panattoni.

“When we analyzed the market, we noted that there was nothing getting built in this development cycle to accommodate smaller users,” Kinne says. “This is a concept where we are really expecting many smaller users — there’s a lot of demand in those size ranges.”

Panattoni expects to break ground in May and have the center come online by year’s end, weather permitting. Alston Construction will be the general contractor on the project.

Dave Simonsen, senior vice president and partner with the industrial team at Kidder Mathews, says rents for newer spaces in the 5,000- to 15,000-square-foot range currently run about $.75 cents a square foot, plus operating expenses such as taxes, insurance and maintenance. Conversely, rents for industrial and flex space in the 25,000 to 50,000 square foot range is about $.42 to $.45 cents a square foot, plus operating expenses, for good quality product located in town.

“Smaller spaces with dock doors continues to be in high demand, with a smaller and smaller pool of remaining properties,” Simonsen says. “A limiting factor to new growth is the lack of available land options within Reno-Sparks proper, where most of these smaller service-oriented companies desire to be. What’s there is very expensive, and construction costs also are increasing rapidly due to both material and labor costs.”

As a result, new industrial product built specifically to house smaller tenants is expected to command elevated rental rates.

Asking rates for the new Panattoni building are expected to be aggressive, but Simonsen is confident tenants will ink their names on leases due to the strong demand for space and lack of supply.

Rates are on the rise

Across the board, rates are rising – and raising eyebrows. Industrial vacancy across the regions sits at just under 5 percent. Direct vacancy in South Reno, however, was 2.81 percent in the first quarter, Kidder Mathews reports.

“Tenants are surprised with the rapid ascension of rental rates throughout the marketplace with both new deals and companies renewing within existing spaces,” Simonsen says. “There is far more demand coming into the market than there is supply. Throughout 2016 and 2017 we had the supply available to meet demand, but with the new drop in vacancy we are getting very tight or limited on the amount of product available.”

Much of the big box space that came online in 2017 already has been leased, forcing larger companies scouting northern Nevada to wait until the later this year when projects under construction are completed.

It’s not like developers are hesitant to dip their toes in the water. From 2013 to 2017, industrial developers added 12 million square feet of new industrial product, a 14-percent increase. At the end of 2017, there was more than 85.3 million square feet of industrial space under roof across the six main Reno-Sparks submarkets, Colliers International reports.

Industrial construction came to a complete standstill for five years during the recession, and back then the notion of running out of developable land seemed like far-fetched foolishness. However, with the pace of new big box construction, coupled with the purchase of the remaining developable land at Tahoe-Reno Industrial Center by Southern California company Blockchains, Reno-Sparks is quickly running out of easy land for developers of large industrial warehouses.

Looking ahead for 2018

While there’s still tracts of developable land available in both Stead and Spanish Springs, those plots are expected to disappear in coming years.

“It is catching everyone by surprise that we are becoming limited on industrial land within Stead, Spanish Springs and TRIC,” Simonsen says. “We always believed we had multiple years of supply, and in certain areas we can see that saturation is near.”

Chris Fairchild, vice president with the industrial group at Colliers International’s Reno office, says most of the low-hanging fruit – sizable sites with good topography, nearby utilities and equitable prices -- in North Valleys has already been picked. There’s really only a handful of good industrial sites left in the market today, Fairchild says.

Developing new sites for large industrial buildings will come with the added challenges of establishing a new location, installing major infrastructure services, such as roads, sewer, water, pumping stations and the like that will boost development costs, he adds.

The rest of the year is anticipated to be an active year for industrial. Although leasing activity slowed in the first quarter of 2018, Fairchild expects more deals to be completed in ensuing quarters.

“We are seeing great activity. Q1 was off in absorption, but that’s not new – we’ve seen that several years running. Q1 is kind of regrouping quarter; we don’t get a lot of signatures, but we expect many deals to get signed later in the year.”