Mid-market strength

While some of the giant new industrial buildings on the outskirts of Reno and Sparks have been slow to fill during the economic downturn, medium-sized industrial space sometimes is hard to find.

So much so, in fact, that some brokers think landlords may be able to stiffen their rents in the next few months, particularly for quality space.

The industrial team at Grubb & Ellis|NCG in Reno estimates that 21 out of the 27 industrial deals inked in the Reno-Sparks market during the second quarter involved spaces of less than 60,000 square feet.

"Quality product is getting hard to come by," says Dan Buhrmann, a senior associate with the firm.

Much of the demand comes from companies already located in the Reno-Sparks area, says Mike Nevis, a senior associate with CB Richard Ellis. Some companies are expanding, while others are downsizing and seeking less

space.

"Tenants are taking advantage of the economics of a slow market," he says. "The mid-sized users are active and have been active for the past two quarters."

Dan Oster, an industrial broker with NAI Alliance, notes that numerous construction-related companies have left space vacant as they close up shop or radically reduce their operations.

And technology companies are leasing up some of that second-generation space. Oster jokes that his clients once wore hard hats as they toured industrial buildings. Today, he says, they wear pocket protectors.

But some of those technology companies and other start-ups that are looking for space aren't as financially strong as industrial tenants

earlier in this decade.

"Landlords are accepting tenants with much less financial strength than they required in the past," Oster says. "They're having to take chances with people."

On the other hand, landlords with new buildings are beginning to flex their muscles as good-quality space fills, says Burhmann.

Ordinarily, tightening vacancy rates would signal developers to start building more mid-sized space. But tight credit markets combined with land and construction costs mean that new projects don't pencil out.

Grubb & Ellis estimates that land for industrial uses in the area now sells for at least $10.50 a square foot.

"Inside the Truckee Meadows, 'replacement cost' is a bit of an oxymoron in

that land and material costs have risen to the point of making replacement of a building impossible," the company said in a recent analysis.

That's going to strengthen demand for older big buildings notably, those in Sparks that can be sliced up into medium-sized spaces.

For instance, a 194,000-square-foot building in Sparks vacated by Tire Rack which moved to a new distribution center at Tahoe Reno Industrial Center now is being broken into small units and leased to mid-sized industrial firms.

The activity in medium-sized space isn't reflected, however, in the reported vacancy rates for industrial buildings in the Reno-Sparks area. Grubb & Ellis estimates the mid-year vacancy rate stood at 11.1 percent compared with 8.1 percent a year earlier.

A big factor in the rising vacancies, the company says, has been completion of several big speculative warehouse spaces in the market.

In the next few months, the company says, the vacancy rate is likely to move even higher as Development Arts of Reno completes a 632,000-square-foot industrial building at TRIC, and Dermody Properties of Reno finishes a 545,000-square-foot project in the Silver Lake area. Neither of those buildings has a signed tenant yet.