Big-box industrial market stirring

After a deep slumber, the market for bigbox industrial properties is beginning to stir.Vacancy rates in northern Nevada remain above their historic levels, but property managers say they're beginning to hear inquiries particularly from big companies looking toward a national economic upturn that might lead to a resumption of construction activity next year.

Some caution that a similar flurry of inquiries early this year fizzled, but they remain hopeful.

"I think the market has bottomed and is about to turn," says Paul Perkins, senior vice president of the industrial properties group at Colliers International in Reno.

The vacancy rate in large industrial and warehouse properties those of 100,000 square feet and larger is in the 9-10 percent rate, experts in the field agree, and they note that the Reno market with its 54.9 million square feet of industrial space typically has seen vacancy rates of 6-7 percent.

The reasons for rising vacancy rates aren't hard to find, says Dave Schuster, senior industrial specialist at Grubb & Ellis.

The dot-com crash and the national economic slowdown that began even before the Sept.

11 attacks both dried up demand for new industrial and warehouse space at the same time that some tenants were shrinking their operations.

"We've had a fair amount of sub-lease space and space that came back to landlords," Schuster says.

Even so, the downturn didn't catch northern Nevada developers with big amounts of unleased space in buildings they'd constructed on speculation.

"We're healthy because the majority of developers here have a governor on them their use of institutional money," says Par Tolles, area director/senior vice president for Trammel Crow Co.

The institutions that finance major industrial developments generally are conservative and unwilling to get too far out on a limb on speculative projects if historical absorption rates and current activity do not support aggressive building, he says.

Scott Shanks, a vice president at Prologis, owner of 3.7 million square feet in the market and one of the biggest developers of industrial properties in the region, agrees.

"Reno has done a good job of keeping supply and demand in check," he says.

Because there isn't much vacant space overhanging the market, even slow absorption of existing space makes a difference particularly because new construction is essentially at a standstill.

Colliers International estimates that 266,214 square feet of industrial space of all sizes was absorbed during the first half of this year, slightly higher than the 226,856 square feet absorbed in the same period last year.

"While this represents relatively insignificant growth, it is growth nonetheless, contrary to conditions in some other Western markets," the company says in a recent report.

At the same time, the Colliers study notes, this year's absorption figure is only 20 percent of the average of the comparable period in the previous five years and pales in comparison with the record of 1.81 million square feet of industrial space absorbed in the first half of 2000.

Shanks says Prologis expects this year's absorption rate will run below last year's level.

Even at that, the Colliers study notes that the number of big-box industrial spaces on the market at mid-year was 14, down from 19 a year earlier.

Those spaces available this year represent 2.19 million square feet, compared with 3.48 million square feet of big-box space available a year earlier.

Perkins says that, in response to one of the longest dry spells in local industrial activity, developers have scaled back construction and the vacancy rate has been held to less than 10 percent.

Consequently, more landlord concessions and lower lease rates have not occurred.

"However, if activity doesn't pick up soon, we might begin to see some rates soften," he adds.

On the demand side of the equation, Schuster at Grubb & Ellis says he's beginning to hear from big companies that are looking past the current soft economy nationally and want to have themselves well positioned to take advantage of a recovery.

Because new construction requires eight to nine months from start to finish, companies that believe the national economy will recover in early 2003 are beginning to make plans today, Schuster says.

Perkins, meanwhile, notes that Reno retains the advantages that have made it the premier western distribution hub - a central location to all of the West, with a well developed transportation infrastructure and work force.

In addition, the area enjoys a tax structure, cost of living and quality of life superior to neighboring California at the same time that some manufacturers are looking to move from California to Nevada because of concerns about electric costs in the Golden State.