RENO, Nev. — The new year is shaping up to be a record one for industrial construction in Northern Nevada.
More than 4.5 million square feet of new industrial is planned for the region, which far exceeds the 2.8 million square feet of new inventory added in 2018, say Mike Hoeck and Mike Nevis, two longtime industrial specialists with the Reno office of commercial brokerage house Kidder Mathews.
“That is substantial — almost double the amount delivered the prior year, which was a big year,” says Nevis, senior vice president and partner with Kidder Mathews. “It's an eye-opener for sure. In the past five years, we have delivered and absorbed a substantial amount of space, and Reno continues to be a healthy market for absorption.”
This year could be biggest since pre-recession
Companies continue to plant their flag in Northern Nevada. Nearly every building constructed in 2018 was leased, including the largest speculative building ever constructed in Nevada, an 800,000-square-foot facility at North Valleys Commerce Center, which was wholly leased to S&S Activewear.
Absorption remains strong, leading to strong activity in both new construction and investment. This year is projected to be the biggest for construction since the downturn, says Hoeck, Kidder Mathew's senior vice president and managing partner.
In 2007, more than 3.37 million square feet of new inventory was built. However, a severe national downturn soon followed, and it took years for all that new inventory (as well as inventory added back to the market due to companies leaving the area) to be absorbed. It wasn't until 2013 when Dermody Properties broke ground on what became Amazon's new fulfillment center off Lemmon Drive that the region saw a resurgence of industrial construction.
“It's a pretty significant amount of construction if it all happens, and we are fairly confident that most of it will get built,” Hoeck says.
Many of the new industrial buildings planned for the region in 2019 are a hedge against escalating construction costs, both industrial specialists note.
Costs for materials and labor continue to rise substantially — in some cases as much as 15 to 25 percent year-over-year, Nevis says.
Pressing factors for industrial developers
The rising costs are changing the way developers build out projects. Historically, regional developers such as Panattoni and Dermody typically erected one or two buildings and waited for those facilities to be leased out before breaking ground on new projects.
However, Panattoni plans to construct all six buildings in the second phase of its North Valleys Commerce Center this year. The development company already has built and leased four buildings totaling 2.28 million square feet at the center, and institutional investors have snapped up three of the four buildings.
One building of 313,000 square feet will be constructed on the north side of North Virginia Street, completing the project footprint on that side of the street, while five other buildings totaling 1.36 million square feet will be constructed on the south side, says Paul Kinne, development manager for Panattoni Development. Panattoni also will deliver a 270,000-square-foot building at the Longley Commerce Center in Reno later this spring.
Kinne says that outside of increased construction costs, another pressing factor for industrial developers is finding suitable ground for large-scale industrial projects.
“Topography is something we are dealing with now; drainage is another,” Kinne says. “The low-hanging fruit is gone, and now we have to look at cut-to-fills and other construction challenges. But we have been able to engineer for those and still remain competitive with market lease rates.”
Kidder Mathews handles all regional leasing for Panattoni Development. Nevis says that Panattoni will capitalize on economies of scale by constructing all six buildings concurrently.
“They have six buildings planned in North Valleys and will start construction on all six simultaneously,” Nevis says. “It will be an 18-month consistent buildout, whereas typically they would build one or two, get them leased up, and move on to the next. Over a 24-month period all six of these (buildings) will go.
“They are trying to contain costs by building them all at once,” Nevis adds. “They can buy all the steel in bulk and do all the site work en masse; it is a smart move on their part since costs will continue to go up.”
Confidence high for increased absorption
While the accelerated construction schedule does increase risk, Nevis says that strong regional market demographics help assure project underwriting and financing.
“They are confident that absorption will continue over the next 18 to 24 months, coupled with fact that they are delivering the kinds of buildings that are in high demand and historically get leased well,” he says. “All of them are smaller buildings in the 200,000 to 400,000 range, which is our bread and butter.”
Other developers are pressing forward in 2019 as well. Scannell Properties is constructing a 200,200-square foot build-to-suit in North Valleys for OnTrac, while Dermody Properties plans a 405,000 square-foot building in the North Valleys. Tolles Development Company, meanwhile, is entering the industrial arena with a 610,400 square-foot building at Tahoe Reno Industrial Center. Seattle-based developer Avenue 55 also plans on erecting two buildings of 230,000-square feet in Spanish Springs.
Hoeck says that Northern Nevada's hot industrial market continues to pique interest from large institutional investors.
“We will have some major institutional investors enter the market in 2019,” he says. “People realize that Reno is a good investment, and that kind of drives some of this (wave of) construction.”
Adds Nevis: “Your dollar goes further when you buy in Nevada. The allocation of capital by investors goes a lot further.”
Rob Sabo is a Reno-based freelance writer and former reporter for the Northern Nevada Business View.