Waiting for tenants

When developers started work on 3.7 million square feet of speculative industrial space in the Reno-Sparks area last year, they were betting that new warehouse and manufacturing tenants were about to arrive.

They may be waiting longer than they planned.

"We've got a problem on our hands. The market remains quiet right now," says Dave Simonsen, an experienced industrial broker with NAI Alliance in Reno.

And that's important for all of northern Nevada as the jobs created by industrial tenants are among the most powerful engines driving the regional economy.

Speaking last week at a forecast event sponsored by CCIM, a commercial real estate group, Simonsen noted that the supply of industrial space on the market has risen just as national economic woes are causing some companies to rethink their plans.

"The slowing demand has occurred at the wrong time," he said.

Dan Buhrmann, an industrial broker with Grubb & Ellis|NCG in Reno, noted that the region saw its biggest boom ever in industrial construction in 2007. The 5.6 million square feet of industrial space added to the market marked a 9 percent increase.

Much of that space is being occupied by companies such as PetSmart and ACH Foam Technologies that expanded into new facilities from smaller and older buildings.

That, Buhrmann noted, is a strong advertisement for the region. Companies that are experienced with the region, its regulatory environment and its workforce have chosen to undertake big expansions.

But demand from outside companies looking for new locations in the region was sluggish in the fourth quarter of 2007, Buhrmann said, and Simonsen said the slowdown has spilled into the early months of this year as well.

As this year dawned, the vacancy rate in industrial space stood at 9.4 percent, Buhrmann said. Developers consider 7 to 8 percent to represent a healthy market.

With the amount of newly developed space set for completion by mid-year, Buhrmann and Simonsen estimate the vacancy rate could spike to about 12 percent before some of the space finds tenants.

That vacancy rate, Buhrmann said, means industrial tenants will have the upper hand in negotiating deals this year, and it probably means a sharp slowdown in the amount of speculative industrial projects that developers undertake.

Simonsen noted that landlords have started to ask for lower rents, and they appear to be taking even lower offers on some big new industrial spaces.

The big question is whether new companies will arrive to fill the available space and bring new jobs with them.

Since Oct. 1, the Economic Development Authority of Western Nevada has worked with four companies that expanded manufacturing and distribution operations in northern Nevada or launched new facilities. That's about half the pace set by the economic development agency as recently as the third quarter of 2007.

Chuck Alvey, president and chief executive officer of EDAWN, says activity clearly has slowed. But he says companies still are looking closely at the region, and some of the recent slowdown may reflect nothing more than the timing of companies making announcements.

Buhrmann said a couple of big companies have been looking at possible locations in the area in recent weeks.

Said Simonsen, "Deals will happen, but fewer than we had hoped."