Brokers: Record pre-leasing, unprecedented demand putting serious pressure on industrial real estate market

Avenue 55 is currently erecting three buildings in the Spanish Springs Business Center.

Avenue 55 is currently erecting three buildings in the Spanish Springs Business Center. Photo: Devcon Construction

By Rob Sabo

Monday, April 26, 2021

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There isn’t much Eric Bennett hasn’t seen in his more than two decades of working as an industrial broker for real estate firm CBRE.

In all that time, though, Bennett said he’s never seen pre-leasing activity at today’s levels.

Although developers finished almost 1.2 million square feet of speculative industrial buildings in the first quarter of 2021, between 65-70% of those projects were pre-leased as soon as they came up out of the ground due to heavy tenant demand for new Class A industrial space in Northern Nevada.

“I have not seen that type of pre-leasing activity in my 23 years in Northern Nevada,” Bennett told the NNBW in a recent interview.

Developers have a record number of new speculative projects going up in North Valleys, Spanish Springs, East Sparks and Tahoe Reno Industrial Center. However, tenants eager to plant their flags in Northern Nevada are snapping up the spaces sometimes before groundbreaking.

There is currently 4.2 million square feet of industrial space under construction, a figure greater than any high-water mark achieved prior to the recession, CBRE reports — yet that space isn’t able to drive down vacancy rates because tenants are queuing up to ink deals on those buildings.

NorthPoint Development of Kansas City, a new entry into the regional industrial development market, is constructing an 800,000 square foot spec building off North Virginia Street. However, a single tenant pre-leased 100% of the facility.

And on East McCarran Boulevard, Dermody Properties and ARC Development Group are building a massive 1 million-square foot building at The Park at McCarran.

The project was originally slated for five speculative buildings, but a single tenant has pre-leased 1 million square feet. The developers will construct two additional speculative buildings of 206,000 and 145,000 square feet at the site.

Sitework is underway at The Park At McCarran. The project includes one building totaling 1 million square feet that's already pre-leased to a single tenant, as well as two smaller speculative buildings. Photo: United Construction

 

The robust tenant demand, coupled with a slight pause in development stemming from the mandatory business shutdowns put in place this time last year, has developers and brokers scrambling to fulfill tenant needs. The transformative nationwide shift to online retail that occurred as a result of COVID-19 placed even more pressure on the regional industrial market.

There was 4.3 million square feet of positive net absorption in 2020, which was one of the region’s strongest years for absorption on record. Positive net absorption is the amount of space that’s leased minus any space that comes open from companies vacating the market or exiting their existing buildings.

There was an additional 1.3 million square feet of positive net absorption in the first quarter of 2021, which is keeping the overall industrial vacancy rate hovering around 3.3%, Bennett said.

All signs point to an extremely difficult situation for companies looking for warehouse and distribution space in the coming months, Bennett added.

“We are building new speculative industrial projects as quickly as we can right now. But through COVID, activity did not slow — it turned the dial up on demand. So, while (developers) pumped the brakes, demand increased dramatically due to online shopping and ecommerce.

“The stuff going up today, which is set for completion this quarter, is 65-70% pre-leased, and there’s additional demand that will take (those buildings) to 100% leased prior to completion,” Bennett continued. “The next wave of product won’t be available until the first or second quarter of next year, so we are going to have an uncomfortably tight market.”

Demand is especially robust for building spaces under 250,000 square feet. Chris Fairchild, senior vice president of the industrial group at Colliers International, says that segment of the market is “critically constrained” — so much so that owners of big box buildings in the Tahoe Reno Industrial Center in Storey County are willing to subdivide their facilities in order to accommodate tenants in that size range, Fairchild said.

“They are doing that so there are more options in the market; it is that tight right now,” he said.

Both industrial experts said that another serious factor compounding the region’s industrial supply issues is the fact that Greater Reno-Sparks is simply running out of room to develop the huge industrial facilities preferred by many tenants.

The 594-acre master-planned Spanish Springs Business Center along Pyramid Highway will essentially be at full capacity once Avenue 55 completes construction on the final three buildings. Photo: Devcon Construction

 

Fairchild said there’s roughly 2 million to 2.5 million square feet of new industrial product yet to be developed in the Reno-Sparks area before development is forced east to the TRI Center — and even farther down Interstate 80 to Fernley.

Bennett said there is realistically about two or three years of infill development in Greater Reno-Sparks before industrial developers are forced to cast a much wider net.

“We are maturing as a market,” he said. “We are getting built out because of topography. With the size of these buildings, there are only so many places to build them. Our market is geographically spreading further and further.

“We will sprawl to the south, maybe to Minden, Gardnerville and Carson City, and to the east where there is more flat land.”

Additional new construction in the pipeline

Seattle-based development company Avenue 55 has a three-building spec project underway at Spanish Springs Business Park, which effectively brings that business park to full capacity.

Buildings under construction at the park along Pyramid Highway include 66,000, 178,000 and 417,000 square feet. Two of the buildings are 100% pre-leased, as well as one-quarter of the largest building, which doesn’t even have a roof on it yet, Bennett said.

Elsewhere, Panattoni Development recently broke ground on the 10th and final building at its North Valleys Commerce Center on North Virginia Street. The new building adds another 138,240 square feet of space to the nearly 3 million square-foot industrial park.

Also in the north, Majestic Realty of Folsom, another new entry, recently broke ground on its first spec project, two buildings of 260,000 and 240,000 square feet.

“Whether you are a tenant, a developer or an investor, Northern Nevada is getting more and more attractive every year,” Bennett said.

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