Pre-leasing interest spurs industrial build

In a time where many industrial developers are postponing plans for new construction, Tolles Development Co., is pushing forward with a new speculative building at Tahoe Reno Industrial Center.

Kyle Rea, partner and chief operating officer for Tolles Development Co., told NNBW last week that TDC is moving forward with development of the 436,800-square-foot building at 100 Wildhorse Canyon Drive because there’s dearth of industrial buildings of that size in the market.

“Even though the narrative now is that vacancy is climbing and we should pause development, we took a look at the market with this partner and decided to push the ‘go’ button because of the continued strong market fundamentals that we are seeing,” Rea said. “We are actively responding to requests for proposals and negotiating with tenants, and we feel like we’ve got a decent chance that this building will be leased before it’s completed.

“If you look at everything in the market, there’s a lot of supply and vacancy is ticking up; however, we remain scarce in that plus/minus 400,000-square-foot range – there’s only three or four options out there, and some of those buildings don’t work (for certain tenants) for various reasons,” he added. “We feel like we are in the hunt for a good pre-lease on this one, but regardless, we still feel good about the position we are in.”

Since the COVID-19 pandemic, industrial developers have delivered record amounts of new space. Over the past two years, developers brought 13.6 million square feet of inventory to market, and since 2020, developers brought 22 million square feet of new Class A industrial buildings online – a 24-percent increase in the region’s total industrial inventory.

Courtesy Jeff Dow

The facility completed at 675 Waltham Way serves as a model for the upcoming 100 Wildhorse Canyon, which will feature similar aesthetic and functional features

That unprecedented growth, coupled with voracious demand for Northern Nevada industrial facilities, led to a doubling of rental rates; however, tenant demand — and development — has cooled significantly in 2024. Vacancy crept from below 1 percent less than two years ago to north of 8 percent today, leading many developers to pause their plans for new speculative industrial construction.

Tolles Development Co., and its partner on the project greenlighted the project with a longer-term outlook on the Northern Nevada market, Rea said.

“Each one of our clients and capital partners that we work with is different, and each one has a different outlook on the market,” he said. “This client was in line with our view that if you have capital and are patient and not driven by quarter-by-quarter metrics, you will succeed tremendously in the long term.”

Mike Nevis, executive vice president and shareholder with the Reno office of Kidder Mathews, told NNBW the appetite for industrial space is expected to increase next year once the dust settles on the presidential election and if the Federal Reserve makes additional interest rate cuts.

“Most of the consensus around the West Coast from developers, owners and capital brokers is that there is pent-up demand, and they feel like 2025 will turn the corner on absorption and activity,” Nevis said. “Right now, there is a lot of flux and uncertainty about what direction the country is going in with the election and if the (Federal Reserve) will (further) cut the federal funds rate.

“The thesis for this project is to build the building and deliver it mid-year (in 2025) when demand is higher,” he added. “2024 is just a year for the market to reset, and then 2025 will be the year to rebound.”

Another significant item of note, noted TDC’s Rea, is that construction costs for the project are about 10 percent lower than they were a year ago. That drop in hard costs helped change the financial metrics for the building.

Kyle Rea

“That is a very significant component to the feasibility equation when we were deciding whether to go or not,” Rea said. “Rents are softening a little bit, but we haven’t seen a significant retreat in rental rates, as evidenced by the rates we are negotiating live right now. We have been forecasting a retreat in construction costs, and for once it finally materialized, and that was a big factor in why we decided to go forward.”

Devcon Construction is the general contractor on the facility. Joy Engineering is performing sitework, and Tectonics Design Group is the architect and engineer, Rea said.

The 25.36-acre parcel on Wildhorse Canyon Drive backs up to a bend in the Truckee River and is one of the few remaining flat development parcels in that sub-sector of Tahoe Reno Industrial Park. The owner purchased the site in 2018. The industrial building – a near replica of the TDC-developed facility at 675 Waltham Way – will feature ample parking and 36-foot clear heights, standard features for many new Class A industrial buildings.

Kidder Mathews Nevis told NNBW that he’s in active negotiations with a potential tenant for the facility. Prospective tenants looking for space in Northern Nevada have a plethora of options for industrial space under 100,000 square feet, and even more in buildings around 200,000 square feet, Nevis said. Options for larger spaces are much more limited, though.

“Even though vacancy in our region is high, there are few options for bigger-size buildings,” he said. “No one has vacancy solving to that number. There’s a softness in that 400,000 range.

“We are very early in the whole building process, but to have a user who’s looking to lease the entire building is great news – we didn’t expect that right out of the gate,” Nevis added. “There’s enough activity to make everyone feel like the thesis was sound because we are getting good looks and activity on a pre-leasing basis.”