John Ramous
Despite challenges facing commercial real estate in the nation’s current economic climate, “Industrial properties remain one of the most sought-after commercial real estate asset classes nationwide,” as noted in CommercialEdge’s National Industrial Report for November.
This is especially true in Nevada, where there’s an increasing demand for industrial and logistics real estate facilities, extensive leasing activity and historically low vacancy rates.
As we head into 2024, demand for industrial and logistics real estate is expected to remain strong, but stakeholders need to be agile, maintain a pulse on consumer behavior and prepare for some obstacles due to continued economic headwinds. Below are some key trends to watch and what to expect in 2024.
Key Trends
Rise of E-commerce
One of the most conspicuous trends impacting the industrial and logistics real estate sector is the shift in consumer behavior, subsequent rise of e-commerce and “nearshoring” – relocating operations closer to home.
Consumers want home deliveries and they want them fast, within a same-day or a three-day delivery timetable. To meet these expectations, e-commerce and omnichannel retailers are working overtime to optimize supply chains, warehouse networks and last-mile delivery. All of this is driving the demand for larger facilities close to home that can accommodate ample parking and trailer storage. However, strategic infill locations with smaller facilities are equally sought after. It’s all about being close to the consumer and labor.
Overall lower operating costs and Nevada’s strategic location, situated between major population hubs and West Coast ports, gives manufacturing, distribution and logistics companies a competitive advantage, making Nevada an ideal distribution network.
Data Center Growth
The rise of automation and artificial intelligence (AI) is driving the rapid expansion of data center facilities in key markets around the U.S. According to MarketsandMarkets, “The AI market is projected to reach a staggering $407 billion by 2027, experiencing substantial growth from its estimated $86.9 billion revenue in 2022.” This forecast has technology giants racing to build data centers that can handle the vast computing power of AI workloads. In 2023, more than 3,000 acres of industrial land in Northern Nevada was purchased for data center development at $8-9 per square foot.
Data centers require ample space and considerable power and energy, all within proximity to major markets. Nevada is very attractive for data center development due to its strategic location, cost-effectiveness, reliability, connectivity, clean energy focus and supportive policies.
Focus on Sustainability
There's a growing emphasis on eco-friendly practices within logistics real estate. Renewable energy sources, energy-efficient lighting and designs, water conservation measures and sustainable materials are becoming pivotal factors in constructing and operating logistics facilities.
Some of the sustainability initiatives this year across Nevada will be using more solar and thermal energy, shifting to HVAC, implementing gray water reclamation for irrigation, decreasing the use of evaporative coolers and incorporating robust charging to accommodate EV fleets.
What to Expect
Interest Rates and Financing
The biggest challenge heading into 2024 is interest rate uncertainty and tight financing. Although industrial real estate has performed better than other sectors, it’s still dependent upon financing costs and the ability to obtain financing for developments. Recent signals from the Fed suggest a pause or even gradual reductions in rates later in 2024, which could provide relief to the industry.
In Nevada, leasing remains strong and momentum is expected to continue, especially in Northern Nevada. However, construction and permit approval delays should be expected with leasing volumes or net absorption to adjust accordingly. To hedge against potential increases, we continue to look at shorter-term leases (3-5 years) rather than long-term leases (10+ years).
Land Availability
Finding available infill land at a reasonable price and size in northern Nevada is an increasing challenge. At Dermody Properties, our long-standing history in the community, relationships with brokers and innovative approach to real estate development are key advantages in helping customers source what they need.
Vacancy Rates
As of Q4 2023, Reno’s industrial vacancy rate was 4.2% and the vacancy rate in Las Vegas was 3.2%, but that’s quickly changing in north Las Vegas. Due to the large amount of space expected to be delivered over the next year, north Las Vegas is expected to approach a 10% vacancy rate in 2024. All other submarkets should remain tight during 2024 with vacancy levels expected to remain at approximately 2-5%.
Navigating these ups and downs requires flexibility, creativity and a willingness to adapt and explore various lease terms, such as abated rent, tenant improvement allowance (TIA) and lower rent escalations.
While other trends and challenges will undoubtedly arise, Nevada’s logistics real estate industry is poised to remain strong, resilient and opportunistic due to the state’s strategic location, close proximity to California, favorable tax climate, ready-to-work labor force and business-friendly reputation – all historical advantages that will continue to serve the Silver State going forward.
