Investors: Good year for industrial

Dermody Properties’ new 624,000-square-foot speculative building at LogistiCenter 395 at Lemmon Drive and Highway 395 probably isn’t going to set the regional industrial development market on fire, but it is a strong sign that institutional investors once again are taking a close look at northern Nevada.

Pacific Coast Capital Partners of San Francisco is the strategic financing partner on the project, its third industrial development with Dermody Properties. Michael Dermody, chief executive officer of Dermody Properties, says that as the economy of northern Nevada continues to rebound, industrial developers such as Dermody Properties and capital partners like PCCP will join forces because the metrics of the economy finally make sense.

“It’s better now than it was a year ago, and it was better last year than it was two years ago,” Dermody said last week as his company formally announced the LogistiCenter 395 project at a press conference attended by Reno-Sparks dignitaries, business executives and Gov. Brian Sandoval. “At some point, as the economy improves, it’s time to build buildings and offer your clients a chance to come here.”

Jim Galovan, managing director of PCCP, says Reno had an exceptional year in 2013 in terms of industrial absorption, and the region’s lack of state-of-the art distribution product made backing the LogistiCenter 395 project a solid bet for his company. Principal characteristics of the new building — 36-foot clear heights, ample docking and truck and trailer parking — also better position the new facility to land potential tenants versus properties in competing markets such as Central California, Las Vegas and Phoenix.

PCCP is involved in industrial projects in many other U.S. markets, Galovan adds, and it seeks to be on the leading edge of development in order to retain the strongest market position.

“Industrial nationally is probably the strongest-performing property type,” Galovan says. “We are believers that 2014 is going to be a good year to build industrial, especially if you can be first or second out of the ground — if you are late and there is a bunch of product ahead of you there could be trouble, so we are trying to be first or second across the country.”

Dermody Properties made its mark as a frontrunner on building speculative industrial properties — it amassed a portfolio of more than 25 million square feet under roof before selling its portfolio to ProLogis in 2007.

DP’s new building will be built by United Construction and is scheduled to come online in September. It’s the first of three planned buildings totaling 1.23 million square feet at LogistiCenter 395. The planned development also will ease the shortage of large Class A industrial buildings capable of holding three-tiered mezzanine storage and clear heights favored by e-commerce companies — the building was designed specifically to accommodate an Internet-based retailer, Dermody says.

Other developers soon may follow the path being blazed by Dermody Properties as the institutional investment community seriously reconsiders northern Nevada, notes David Loring, principal with Development Arts.

Twelve to 18 months ago, Loring says, northern Nevada didn’t even register with the investment community as a viable place to invest. However, investors have shown renewed interest in the Reno-Sparks market in the past six to eight months as opportunities dwindled in primary real estate markets where the economic recovery began much sooner than in Greater Reno-Sparks.

But don’t expect to see a flood of new development hit the market just yet, Loring cautions. Vacancy rates may be tight, but rental rates still are too soft to justify a new wave of speculative construction.

“Northern Nevada still is considered a secondary maket, and we need to get our rental rates up in order to compensate for that,” Loring says. “Investors are looking for higher rates of return, and in order to get that we need to get our rental rates up.”

Class A industrial rents are running about 32 to 34 cents per square foot, says Eric Bennett, a commercial broker for CBRE.

Developers will move slowly to make sure that the success the market has seen recently has legs to support multiple speculative buildings, Bennett adds.

The last speculative building Development Arts completed was funded by the Southwest Carpenters Pension Trust. The 632,000-square-foot building at Tahoe Reno Industrial Center was completed in 2008 and sat vacant for several years before being leased in its entirety to Toys “R” Us and Zulily. However, both companies are leaving the space. Zulily is expanding into a new space, and Toys “R” Us is closing its operations June 1.

Development Arts had lined up an eager capital partner for a large build-to-suit project currently underway by another developer at TRIC, but speculative industrial construction still remains hard to finance, Loring says. Dermody’s successes in that area are a boon for the local development community.

“We have not been able to attract an investor to do a spec building at this time,” he says. “Dermody set the bar. If they are successful that will mean good things for the rest of us. Dermody is making a bold move, and they have been very successful in leading in that way.”

Two other large industrial projects were announced in 2013, but both projects had tenants before a spade of dirt ever was turned. SJS Commercial Real Estate built a 524,800-square-foot facility at Tahoe Reno Industrial Center for Randa Accessories, and Lake Washington Partners of Seattle recently broke ground on a 750,000-square-foot building at Spanish Springs Business Center to house a new distribution center for SanMar Corp.

With vacancy rates for large Class A buildings running under 8 percent, commercial brokers and economic development executives worry about losing out on some deals due to the region’s lack of inventory.

Mike Russell, chief operating officer for United Construction, says the new Dermody building could house a tenant requiring anywhere from 100,000 to 600,000 square feet. A lot of the push behind the new development was Dermody’s penchant for being first to market, Russell adds.

“Our capital partners saw a lot of the trends we did: decreasing vacancy; stabilizing and increasing of rents. They are very comfortable with these signs in the market.”