RENO, Nev. — Exorbitant land prices and steep construction costs aren't putting much of a damper on industrial development in Northern Nevada.
While the extended economic recovery certainly is getting a bit long in the tooth, there's still a robust pipeline of work and ample investment capital available to industrial developers, says Mike Russell, CEO of United Construction.
And although the easier development sites in Greater Reno-Sparks are pretty much gone, there's no sign of a pending industrial development slowdown, Russell says.
“It's uncharted ground for some people, but we still have a very high level of capital available for investment in the industrial sector,” he says. “We have been developing industrial buildings in Northern Nevada for 50 years. I can says there's no easy sites left because I've looked at most of them.
“While it does create more of a puzzle for developers to make a project pencil, the good news in our world is that cap rates continue to be at all-time lows, so there has been an offset between cost increases and cap rates.”
Moving forward, developers are going to be challenged to erect large industrial projects anywhere in the Truckee Meadows because there's simply not much flat ground available.
New building sites may require extensive site work and mass grading — Panattoni Development, for example, moved more than 650,000 cubic yards of dirt to prepare building pads for the second phase its North Valleys Commerce Center in north Reno.
The scope of that site work impacts overall development costs, as every dollar spent translates to higher lease rates.
“As excavation costs increase, so does the total investment on any industrial asset,” Russell says. “With cap rates compressing, it's been good for our market because it's allowed (developments) like the Panattoni project up north to have the extra excavation costs in their pro-forma. But there's a limit as to how much money you can spend before these assets don't become financially feasible.”
As big box development in the Truckee Meadows becomes infeasible, developers are expected to shift their focus toward infill projects and make smaller buildings work on smaller sites, Russell says.
Any new big box projects likely will be built in outlying areas and east of Reno due to the constraints on large-scale buildings around the valley floor.
But even with the land challenges, Greater Reno-Sparks remains a coveted place from which to do business, Russell says. A recent influx of light manufacturing firms and expansions is solidifying and diversifying the regional manufacturing base away from purely warehouse and distribution, he adds. These mid-sized companies typically lease space in the 40,000 to 100,000-square-foot range — of which there isn't much available in the market.
Two companies operating in this space include high-bay lighting specialist Lux Dynamics, which hired United Construction to construct a new 51,000 square-foot manufacturing facility on Corporate Boulevard; and Berkley manufacturing, which partnered with United on an 80,000-square-foot facility at Tahoe Reno Industrial Center.
Mike Hoeck, executive vice president and industrial specialist for Kidder Mathews, says the lack of available Class A product under 50,000 square feet is an area of major area of concern for industrial brokers who are at wits' end to place tenants interested in leasing space in that size range.
“We are in desperate straits — we just don't have it, and no one is building any of it,” Hoeck says.
The only new spec building focusing on smaller industrial users in recent years is Panatonni's 271-000 square-foot Longley Commerce Center. Work was completed on the project in 2019, and the building is 100 percent leased.
Kidder Mathew's Gunsten says that are few spaces in the Truckee Meadows available for similar infill plays for flex industrial space, and land prices are prohibitive for industrial development on those parcels.
“The remaining pieces of land out there are more toward $10 a foot, driving it toward office and multifamily development interests,” Gunsten says.
The past year saw strong absorption in the industrial sector. In the fourth quarter alone total absorption of 3.5 million square feet of space leased far outstripped average annual absorption of roughly 1 million to 2 million square feet, the industrial team at Kidder Mathews reports.
Industrial developers added 3.25 million square feet of new inventory in 2019, growing the total industrial market to 91.3 million square feet under roof. However, companies soaked up that space almost as soon as it was delivered, allaying concerns that developers may be outpacing demand, says Tim Gunsten, senior associate with the industrial team at Kidder Mathews.
Overall direct vacancy in the industrial sector dipped to 5.5 percent in the fourth quarter of 2019. For the year, there were 55 leases inked for spaces larger than 5,000 square feet. One of the most significant leases was for logistics provider Fracht USA, which took down 785,000 square feet in the old K-Mart distribution facility on Freeport Boulevard in the heart of the Sparks industrial corridor. Constructed in 1970, the 1.2 million-square-foot building had been vacant since 2014 but received extensive renovations over the past few years to bring it up to modern industrial standards.