Demand heats industrial market, but office stays cool

Northern Nevada will see a boom in industrial development during 2007, but office development is likely to remain lukewarm or downright cool.

The tight industrial market the vacancy rate dipped under 4 percent at mid-year helped fuel a massive development campaign that's under way at Stead, Spanish Springs, the Tahoe Reno Industrial Center and Fernley.

Some 3 million in industrial space, some of it speculative projects built in anticipation that new or expanding companies will need the space, are projected in the region next year.

Among major developers, Prologis has 600,000 square feet under construction, Trammell Crow has more than 1 million square feet in development and DP Partners has more than 1.2 million square feet of industrial space on the books.

And Panattoni Development has taken control of 100 acres at Wade Development's Pacific Gateway Distribution Center at Fernley. The developer plans nearly 2.5 million square feet of industrial and distribution space at the center.

At the same time, the area will continue to see redevelopment of older industrial buildings, says Aaron Somer, an industrial specialist with Colliers International. Typically, older industrial buildings are refurbished and broken into smaller units leased to companies that want locations close to population centers.

Office vacancies, however, remain high as Grubb & Ellis|NCG estimates that more than 14 percent of the region's Class A office space is vacant. When lower-quality space is included, the vacancy rate is approximately 20 percent, the company says.

Brian Armon, an office broker with Grubb & Ellis, says the vacancy rate discourages development of new buildings, and some projects apparently have been pulled from the table until existing buildings are more fully leased.

"With tenants holding the cards, landlords need to be flexible while courting the few tenants currently in the market," Grubb & Ellis wrote in a research report.

Price-sensitive tenants, Armon says, continue to look for office space in downtown Reno, in part because the tenant-improvement costs that can run $60 a square foot in new buildings often are less in existing space.