Investment opportunities abound across Reno-Sparks industrial market

RENO, Nev. — A sign of the strength – and investor interest – in Northern Nevada's industrial market: There's more property currently listed for sale than there has been in the past 20 years.

And after a slow fourth quarter in 2018, leasing activity rebounded in full force in the first quarter of this year with more than 880,000 square feet of positive net absorption.

Investment opportunities abound in what's historically been a difficult market to enter, says Eric Bennett, senior vice president of the industrial team at CBRE. Sale properties include:

Dermody Properties' Logisticenter I-80 at Boomtown (794,750 square feet)

Dermody's Logisticenter at 395 (626,960 sq. ft.)

Westcore Properties' portfolio of industrial buildings in Sparks (1.4 million sq. ft.)

Northwestern Mutual Life's 13-building portfolio in Reno and Sparks (1.8 million sq. ft.)

Bendetti Company's Southern Way Industrial Park in Sparks (634,786 sq. ft.)

“In a market that is traditionally very hard to break into for investors, this is a window where there are a lot of institutional eyes on our market,” Bennett says. “They now have the opportunity to get into our market as owners.”

Reno's cap rates are attractive

The three legs of the stool – strong demand, low vacancy and strong/rising rents – are primary factors prompting developers to sell.

For developers such as Dermody and Westcore, exiting ownership is an extension of their business strategy. For Northwestern, which developed and owned its Northern Nevada portfolio over the past two decades, it's taking advantage of strong market demographics.

“Institutional investors have checked the box on Reno as a viable market to be in,” Bennett says. “They are chasing cap rate. Our neighbors in California, and Tier 1 markets such as Seattle and Los Angeles, cap rates are down in the 4s. Our low- to mid-5 cap rates are attractive, and (investors) have bought into the notion that Northern Nevada is a viable market now and into the future.”

Put simply, the higher the cap rate, the better the rate of return for investors. The high volume of sale transactions also allows a handful of new landlords to plant their flag in the Truckee Meadows.

Steve Kucera, first vice president with the industrial team at Kidder Matthews, agrees that many institutional investors are seeking plays in the Reno market because of attractive cap rate deals.

“You can still get good cap rates (here),” Kucera says. “You can't find those deals in some of the larger markets like San Francisco, Los Angeles or the Inland Empire. Reno is still a value market and is considered to be a good buy compared to those larger markets, which probably peaked earlier and now there's no room for growth.”

The region will see more industrial property exchange hands during the next few quarters than in the past few years, adds Mike Hoeck, senior vice president of the industrial team and managing director at Kidder Matthews.

Landlords have performed evaluations of their properties, and with values at or likely near their peak, there's no better time than the present to sell, he adds.

Many investment properties on market are headed to escrow and should close in this quarter,” Hoeck notes.

“We might not see sale actively like this for years to come,” he says.

Rental rates rising at a rate ‘unheard of'

However, the flurry of sales activity could bring added upward pressure on rents, Bennett notes: “The overall activity in the market proves more each year that Northern Nevada is a great place to distribute to the 11 western states and to manufacture in. We are really hitting on all cylinders right now.”

Rental rates continued to rise in the first quarter – another reason why investors are looking at Reno, Kucera notes. Spaces under 20,000 square feet and above 100,000 square feet saw a 10-percent increase in rents in the first quarter, Hoeck adds.

“That is unheard of,” he says.

Although no new product was added to the region's 89.8 million square feet of industrial inventory in the first quarter, a number of projects are breaking ground that will boost inventory levels in the second quarter and in early 2020.

New industrial projects at Longley Lane and Mustang will be delivered this quarter, while Panattoni Development will soon break ground on a five-building project at its North Valleys Commerce Center. Tolles Development Company, Avenue 55 and Hillwood Investment properties have new industrial projects underway as well.

Significant leases in the past quarter include: Webstaurant taking 256,000 square feet on Newlands Drive in Fernley; Patagonia taking 143,000 square feet at Logisticenter I-80; and KP Aviation taking 126,268 square feet at Capital Boulevard in Reno.

And with the second quarter historically being the strongest quarter of the year for leasing activity, more deals are expected to get done, Kucera notes.

“That continued forecast is unchanged,” he says.