Will demand meet supply?

More than 3.8 million square feet of new industrial space was completed in the Truckee Meadows in 2007, including the largest speculative building in northern Nevada's history, a 601,000-square-foot project by ProLogis at Tahoe Reno Industrial Center.

Another 2.1 million square feet of industrial space is under construction, and another 6 million square feet is planned during the next few years.

That's a big amount of new industrial development added to a market that saw a rise in vacancy rates throughout 2007.

"We expect the overall industrial vacancy rate to rest in the 8.5 percent range at the end of the year, an increase of nearly 40 percent from the beginning of the year," says Aaron Somer, an industrial specialist with Colliers International in Reno.

With the volume of new product to be completed in 2008, Somer expects vacancy rates to rise into double digits in the coming year.

"In relation to the demand levels of 2004 and 2005, last year was very similar. I do not expect we will see the demand levels of 2006 for another 12 to 18 months," he says. "Overall it will be a year of slow recovery as we hold out hope that industrial demand can catch up to new construction."

The increase in the area's vacancy rate for industrial buildings has much to do with existing companies repositioning themselves in state-of-the-art warehouses and existing obsolete buildings within the city, says Mike Nevis, associate broker with CB Richard Ellis.

"Sparks is good example," Nevis says. "We will see an increase (in vacancies) as developers reposition older buildings and cut them down into smaller sizes to feed the demand of smaller users."

Nevis predicts vacancy rates of 9 percent for the fourth quarter of 2007, and he says that's not a troublesome figure for the Reno-Sparks area.

"The market is unhealthy when it's too low because there is no availability," he says. "Nine percent is very healthy. It gives tenants coming into the market a lot of choices, it creates competition with landlords, and it keeps the market going."

Developers such as Seattle-based Tarragon LLC, which entered the market in the Spanish Springs Corporate Center with plans for three industrial buildings totaling more than 1 million square feet, have tempered construction plans in light of market conditions.

Tarragon cleared a 50-acre site and completed one of two 411,000-square-foot spec buildings in December, but the company won't develop the rest of the site until it finds a tenant for its current project.

Dennis Rattie, vice president, says developers must be cautious about the amount of new space they create.

"There is a lot of product on the market, and a lot coming on the market without a great deal of activity," he says. "It could be a concern, but we think Reno is still a very good market. It's positioned very well for warehouse and distribution, and our model is long-term hold."

Other large developers remain bullish on this market due to larger tenant requirements. Mike Perkins, vice president with Trammell Crow Co., says the company remains committed to developing larger spec buildings in the Tahoe Reno Industrial Center.

"There is lot of new inventory coming on to market, but we are starting to see larger tenant requirements from outside of the area, new tenants, as well as growth of tenants currently in the market. We remain optimistic that the addition of large new spec buildings will provide homes to these expanding and new tenants."

"Historically Reno has been passed over by larger markets like Salt Lake City and Phoenix because of a lack of an available large product," Perkins says. "Now, with the increased delivery of large spec building in TRIC and Stead, that is not occurring as much."

Nevis notes that just one year ago the average transaction size for industrial space was 25,000 square feet. By the second quarter of 2007 it was 60,000 square feet, with more and more users requiring warehouse space above 100,000 square feet.