Retail Market Outlook: Market tightens with construction slowing

Northern Nevada’s retail market showed its resiliency throughout 2023, with strong positive net absorption and a slight uptick in average monthly rental rates. Both trends are expected to continue throughout 2024, regional retail brokers said.

The lack of new retail construction and continued tenant demand for shop space in Reno-Sparks led to average retail vacancy of just over 4 percent at year’s end, which is the lowest it’s been since 2007, the Colliers Reno retail team reports. It also mirrors the national retail vacancy rate, said Roxanne Stevenson, senior vice president for the retail services group at Colliers.

Net absorption for the year, meanwhile, was more than 170,000 square feet, she noted.

“Retail is doing well, and the fundamentals (of the Northern Nevada market) are strong,” Stevenson said. “We are seeing many boxes that were available getting backfilled. Our challenge is the lack of new inventory – there’s just so little inventory available as a result of having no new retail construction.”

Notable lease transactions completed in 2023 that helped push down overall vacancy rates included:

• O’Reilly Auto Parts took the old 35,086 square-foot Stein Mart space at Smithridge Plaza.
• Fitness Connection took down 51,096 at Kietzke Center next to Sportsman’s Warehouse.
• Hank’s Farmers Market took 30,386 square feet at Paradise Plaza.
• Twin Peak leased 12,859 square feet at Redfield Promenade.
• Ace Hardware took 6,000 square feet at Caughlin Ranch Shopping Center, as well as 16,364 square feet in a freestanding building at Pioneer Meadows Marketplace.
• Trek Bicycles leased 8,000 square feet at The Crossing at Meadowood Square.
• AutoZone leased 50,861 square feet at Ironhorse Shopping Center.
• Meadow Creek shopping center off Wedge Parkway leased space to The Cheese Board, Yogurt Beach, Pinon Bottle Co. and Zephyr Wine Bar.

Additionally, two Panera Bread eateries, as well as a Cracker Barrel, opened their doors during the year.

However, with few notable construction projects underway outside of The Oddie in Sparks and additional phases at Meadow Creek in south Reno, vacancy is expected to tighten further in 2024, said Kelly Bland, retail properties senior vice president and principal with NAI Alliance in Reno.

“There’s not a lot of construction going on, and we have a decent amount of leasing activity given where we are at in this current cycle,” Bland said. “But since there is no new construction, net absorption did go up a bit.”

Bland said commercial real estate information company Costar reported average monthly rental rates for retail space in Reno-Sparks was $.185, or $21.90 per square foot per year, for triple net lease. That’s a 4.4 percent year-over-year increase. Certain upscale or boutique retail destinations, however, such as Rancharrah, Reno Public Market, and newer shop spaces in Midtown, have rental rates that are significantly higher than that modest market average.

“We are still seeing some increases in rents,” Bland said. “Inflation had some impact on rental rates, and even though costs are high and it’s increasingly harder to get loans for startup businesses, there is continued interest by retailers to lease space in our market.”

Outside of well-funded corporate entities planting new flags or expanding their footprints in Northern Nevada, there will be a continued lull in new construction due to high construction costs and interest rates that make construction debt untenable for most developers. Similar to 2023, the bulk of activity is expected to come from remodeling existing spaces.

“New construction will be challenging this year due to high interest rates and runaway construction costs,” Bland said. “Construction already was expensive – even more so when you have to finance it – and that will increase rents proportionally, which makes it harder to get any deals done.

“Any new construction (in the market) has been in the pipeline for quite a while,” he added. “New entries will be limited due to the cost of financing, unless entities are paying cash for build outs and don’t have to worry about financing costs.”

The lack of new retail construction combined with continued absorption, should further push down vacancy in 2024. Both factors could potentially create an uptick in average rental rates – provided there aren’t a lot of retailers closing their doors.

Retailers that recently left Northern Nevada in 2023 include Bed Bath and Beyond, Tuesday Morning and Jenny Craig all closed regional locations due to corporate bankruptcy proceedings.

“The retail market is always balanced by those who come in and those who leave,” Bland said. “We will have some companies vacate this next year, but in general we should have moderate positive absorption similar to last year, and as the market continues to tighten we will probably see rental rates edge up a bit.”

Going forward, Stevenson said Colliers national research team predicts half of national brands will expand their physical footprints over the next five years by leasing additional brick and mortar locations.

Corporate retailers may find it difficult to plant additional flags in Northern Nevada, though.

“There is such a lack of new retail product that there may be some slowdowns in leasing,” Stevenson said. “There’s really no opportunities for retailers. There’s not a lack of interest, but there’s a lack of product. It will help when construction costs come down, and when interest rates go down and debt markets even out.”

Construction and expansion is underway at Meadow Creek in south Reno.