This 1.55 million square foot industrial building in Sparks has been empty since 2014 when the Kmart Distribution Center shut its doors.
RENO, Nev. — In 2016, industrial commercial real estate crossed the line to become a landlord’s market.
Since, vacancy rates have continued to drop. At the end of 2017, Miller Industrial Properties estimated the vacancy rate across Northern Nevada at 5.86 percent, well below a balanced rate of 8 percent.
“We’ve had very steady demand of properties for a long time now,” Tom Miller, president of Miller Industrial Properties, told the NNBW in a phone interview. “About 2016, that was the point when all the long-vacant buildings were absorbed and conditions favored the landlord.”
The region saw its highest vacancy of 15.61 percent in the second quarter of 2010. Its lowest rate is where we are today, according to Miller Industrial Properties’ fourth quarter 2017 report.
“We’re definitely at very, very, very low vacancy rates; historically low,” Miller added.
Adding to the extremely low vacancy rate is the low rate of buildings that return to market (RTM) after a business moves out of the area or fails. It’s indicative of our thriving economy, but not good news for companies looking for an industrial building to lease or buy.
“We could very well have a normal RTM and raise the vacancy, but those would be Class-B buildings,” Miller said. “Many companies coming into the market don’t want Class-B space.”
Under current market conditions, landlords have the advantage when negotiating leases. With the knowledge that tenant options are limited, landlords don’t need to compete for a particular transaction.
This clearly translates into rising rental rates. Beyond that, landlords are unlikely to be compelled to grant shorter lease terms or lease concessions in the forms of free rent, free tenant improvements or early occupancies, the Miller report said.
An exception to the rule is the former Kmart distribution center on South McCarran Boulevard and Greg Street in Sparks. This 1.55 million square-foot building has been vacant since 2014.
With outdated features making it difficult to fill, the building is getting a $12 million renovation to modernize it and divide the huge space into several smaller units in the hope of getting it back into play.
Having the Kmart building even partly filled, will take a huge chunk out of the vacancy column, tilting the vacancy rate even more in the landlords’ favor.
To balance the market, new space must become available, which can happen in two ways. One is new construction, which takes quite some time to bring online. The other is a higher RTM rate, which would require the current economic vitality to soften.
Miller doesn’t see tight conditions changing anytime soon. It takes a long time for developers to go from concept to completion. And when something new does come online, it’s grabbed up.
“Lately, properties are leased up before the roof goes on,” he said.
What we are experiencing now is the result of a few years of highly successful economic diversification in the area combined with the addition of several huge new industries, the report said.
Northern Nevada’s economy is at a high level and forecasts see more of the same in 2018. With that, the industrial real estate market is expected to hold steady.
“I expect to see more of the same in 2018. I don’t think it will be changing anytime soon,” Miller said.
