Industrial flex selling briskly

While construction of big industrial projects has slowed in Reno, Sparks and neighboring areas, developers have found success with smaller units that are either sold or leased.

But even as developers begin work on several new projects for small industrial users, observers are divided in their forecast for the market.

On one side stand those who believe demand will remain strong, both from users and from investors, as the northern Nevada economy attracts businesses from California and elsewhere.

On the other side stand those who worry that a combination of higher land costs, higher construction costs and higher interest rates may weaken the market.

No one, however, denies the success of recent projects.

Panattoni Development, for instance, quickly sold all 16 units in a smallspace industrial project in west Reno.

A similar project, Airport East Commerce Center near Rock Boulevard,was half sold out before construction began.

And more is coming.NorWest Builders LLC plans an eight-building, 75,000-squarefoot project next year at Spanish Springs Business Center.

Voit Development Co.

plans about 110,000 square feet of industrial flex development on land next to the former General Motors distribution center in Sparks.

Low interest rates spur much of the demand from owners of industrial space who want to buy rather than lease.

"Small businesses finally are finding something in this market that they can buy," says Deborah Sasz-Vonarz, a broker with Commercial Properties of Nevada, which has marketed the two recent Panattoni developments.

Another broker, Carole Brill of Miller Industrial Properties, says additional demand for the units comes from investors who want to buy industrial property in northern Nevada but find few traditional alternatives available.

Developers respond to the demand.

Panattoni Development, which historically has built bigger industrial projects, finds that strong demand and the ability to achieve economies of scale in construction make industrial flex projects attractive, says Doug Roberts, the company's partner in Reno.

"We're opportunistic," he says."If we see an opportunity,we're going to go for it."

But some doubt the market for small industrial spaces will continue to boom into 2005 particularly projects intended for sale rather than lease.

For one, the supply may catch up with demand.

"I don't how much the market can support," says Par Tolles,who heads Nevada operations for Trammell Crow Co.

The economics of small projects also worries some developers.

Construction costs steel, concrete, labor all are rising, and that puts a squeeze on developers'margins, says Don Wilkerson, president of Gaston & Wilkerson Management Group in Reno.

"Those projects that were cheap to build no longer are cheap to build," he says.

The big question mark, however, is the direction of interest rates.

If rates rise high enough, it won't make sense for industrial companies to borrow money to purchase their own space.

If the for-sale market dries up, developers can simply begin leasing the space they initially intended to sell, says Dave Simonson, who handles industrial transactions for Colliers International in Reno.

And Roberts says the equations with interest rates have been different in Nevada than elsewhere in the nation.

Because property values have appreciated steadily, buyers of industrial properties are willing to weather upward moves in interest rates.

They know, Robert says, that higher property values will offset some of the negative effects of higher rates.