Abundance of industrial space boosts vacancy rate

With an abundance of industrial space sitting vacant around northern Nevada, potential tenants push hard for concessions such as a few months of free rent as a reward for signing a lease.

Some of those potential tenants, meanwhile, are getting the biggest concession of all, says Dave Simonsen, an industrial broker with NAI Alliance in Reno.

Some financially weak companies that otherwise wouldn't get the time of day from landlords are able to lease industrial space, and some of them are even able to get attractive terms.

"For landlords, the alternative to taking a bad credit risk is a vacancy," says Simonsen.

Real estate brokers who specialize in industrial properties reported in recent days that the vacancy rate in manufacturing and distribution buildings in the Reno area stood at about 10.5 percent at the end of the first year. That's up sharply from the 6.5 figure a year earlier, and it marks a rise of about one percentage point in the previous 90 days.

Paul Perkins, a broker with NAI Alliance, notes that 3.4 million square feet of speculative industrial space was added to the market in 2007 a figure that's three times the average during the previous seven years and another 1.2 million square feet of speculative space is under construction.

Using figures from recent years, Perkins says the 3.6 million square feet of new space is enough to meet the region's needs for more than four years.

Developers who don't want to wait four years to see cash flow from new projects are cutting deals right and left, says Dave Schuster, an industrial broker with Grubb & Ellis|NCG.

Among the concessions: Lower rent for the entire term of the lease. Free rent for a few months. Moving allowances. All of them, Schuster says, have the effect of reducing the true rental cost for tenants.

But upfront concessions, he says, often are a small price to pay for a developer who is taking a long look. If, for instance, a developer plans to sell a building in four years, potential buyers will want to see that the property is fully leased. They won't care very much if tenants initially got a break on their rent.

Some of the concessions don't necessarily show up in developers' income statement.

Shannon Wiseman, executive vice president of Reno's Development Arts, says the company's staff is spending a lot of time listening to the needs of potential tenants for its WestAmerica Commerce Center under construction at Tahoe Reno Industrial Center. Development Arts currently is leasing the 632,130-square-foot first building in the project.

"We're really going out of our way to give the customers what they want," Wiseman says.

ProLogis, the largest industrial property owner in the market with about 23 percent of its 68.3 million square feet of space, hasn't seen much pricing pressure in the smaller and older buildings in Sparks and Reno that make up much of its portfolio.

"Our core infill portfolio still is performing very well," says Brandon Page, who oversees the company's operations in northern

Nevada.

A couple of brokers say, however, that an increasing amount of industrial space that's currently leased may become vacant in coming months.

Aaron Somer, an industrial broker with Colliers International in Reno, says some industrial and distribution companies appear to be consolidating their operations in an effort to control costs as the economy weakens.

Companies that are on the move as the current leases expire are likely to be looking for smaller spaces, he says.

And the rippling effects of the near-halt of residential construction also will create some vacancies, says Dan Oster, a broker with

NAI Alliance. He says some subcontractors that served the new construction market are likely to go out of business in coming months, leaving vacant spaces in industrial centers behind them.

Rents appear to be softening slightly, the industrial group of CB Richard Ellis in Reno said last week

Market-wide, CB Richard Ellis said, the average asking rent on industrial properties in the first quarter declined to 33.08 cents a square foot from 34.9 cents at the end of last year.

Rents on flex space, which combine office and industrial, averaged 73 cents a square foot at the end of the quarter compared with 77 cents three months earlier.

An analysis by NAI Alliance, meanwhile, finds that vacancy rates vary widely across the region.

In the neighborhoods around Reno-Tahoe International Airport, the vacancy in industrial buildings is about 5 percent, and only 2.6 percent of the industrial space in south Reno is vacant.

But in the areas along Interstate 80 east of Reno, where numerous big speculative projects have been added to the market, the vacancy rate tops 20 percent, the firm said.

In its own analysis of the market, Grubb & Ellis said a good number of companies have been scouting industrial properties in the market in recent months, although most of them are moving slowly while they wait to see the direction of the national economy.