The tide turns
December 17, 2007
What a difference a year makes. Twelve months ago, the northern Nevada industrial market had a low 5.4 percent vacancy rate and plenty of tenants looking at the market. Now, vacancy has risen to 9.4 percent and with a number of additional projects under construction, we are sure to see double-digit vacancy before the tenants come back to the market. In summary, the industrial bulk distribution market has quickly become out of balance turning from a slight landlord market to a market strongly favoring tenants at the negotiation table.
Historically, northern Nevada has been a stable and healthy market. Location, location, location (for West Coast distribution) and a tax-friendly state for business has enabled us to remain immune to the ups and downs of national or regional economic conditions. Tenant activity and development were fairly consistent. If activity slowed, development slowed. If activity picked up, development picked up. There would be a little lag time, but the four dominant big-box developers were local and kept a good handle on activity to quickly adjust new building output to meet demand.
So why the big change in one year? Answer: bigger buildings developed by new players to the market. Where there once were four development companies building industrial bulk distribution space, there are now eight. Union Property Capital, Tarragon, Development Arts and McShane have joined Trammell Crow, Panattoni, ProLogis and DP Properties as active developers in the area. Five out of the eight have recently completed projects with space available to rent and the other three have projects under construction.
Doubling the number of builders was a big change. The other big change was the size of the buildings. Prior to this year, the two largest speculative big-box buildings in the market were 336,000 and 420,000 square feet. The size of the most recent buildings from each developer is 500,000 square feet, 411,000 square feet, 632,000 square feet, 567,000 square feet, 491,000 square feet, 429,000 square feet, 600,000 square feet, and 546,000 square feet,. Yes, that is correct, by the time the last three projects are completed, we will have added 4,175,000 square feet of speculative space to our market. These eight buildings alone will increase our market size by 6.25 percent. In addition, all but one of these developers has additional land and plans to build more buildings once the first is occupied. For the foreseeable future, our market will not have a supply problem. The pertinent question is this: In a market that has averaged 1.2 million square feet of new big box construction per year over the past five years, while maintaining a stable vacancy, is 4.2 million square feet too much? Will the “Field of Dreams” build-it-and-they-will-come theory win out over history? It will if the tenants show the same love for our area in 2008 the developers did in 2007. I’d like to see this, but I’m skeptical. Currently, we see tenants being tentative to make decisions. Cost of oil, housing news, waiting to see what happens with Christmas sales or the upcoming election are all reasons tenants are content to sit on their hands and wait until a direction for the economy becomes clear. At a time when we need activity, a wait-and-see attitude is reasonable but not welcome. Therefore, there are a lot of developers and brokers with their fingers crossed with one thing on their Christmas list this year a large tenant.
What is in store for 2008? I hope I’m wrong here but my once bright crystal ball is darkening. Our historic immunity to economic swings might not hold out this time and we may be in for a quiet year. Absorption has slowed in the third and fourth quarters of the year. Both the number of transactions and square footage absorbed is down. Time will tell if the market is taking a breather or if the slowing is chronic. Regardless, deals will get done in 2008. Likely, just not as many as the market hopes.
So, who will be the winners and losers next year?
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If you are a big-box contractor or landlord holding out for asking rents, you may be better off sitting on a beach somewhere as opposed to spending time in your office. If you are a builder with a well-placed and well-priced building, you should be smiling next year at this time. The big winner next year looks to be the tenants. If you are a tenant looking for new space in 2008, be prepared to have many carrots dangled in front of you in hopes of luring you to a building. You will be treated like the prettiest girl if not the only girl at the dance.
Dave Simonsen is a senior vice president with NAI Alliance Commercial Real Estate Services in Reno. Contact him at 336-4667 or DSimonsen@naialliance.com.