With industrial vacancy dipping under 5% in Greater Reno-Sparks at the end of 2020, leasing space in the new year will be similar to buying a home in Northern Nevada — expect multiple offers from tenants competing for the same space, industrial brokers say.
As a result, brokers and tenants have become much more aggressive with offers on prospective industrial spaces in the hopes of being first to the finish line.
“Brokers and tenants have to come in with very strong offers,” said Mike Nevis, executive vice president and managing director of Kidder Mathews. “Concessions are going down just so you can be sure you get into the building. It’s incumbent on the tenant and broker to be aggressive and manage expectations; that’s just the situation we are in.”
Northern Nevada’s flourishing industrial market saw 4.3 million square feet of space absorbed in 2020 — and that’s with an additional 3.7 million square feet of new product coming online during the year.
That amount of net absorption (tenants leasing space versus tenants vacating pushed vacancy down to 4.9% and also led to an increase in asking rental rates to the tune of 8% to 16%, Nevis told the NNBW.
“We are running up against a significant shortage,” he said. “It’s very tough to find anything available in town right now. In our business, a 5% vacancy almost equates to zero — what’s left doesn’t really work for everybody.”
Stalled projects expected to start back up
With the exception of Panattoni Development’s North Valleys Commerce Center on North Virginia Street, new construction nearly came to a standstill in 2020 due to the pandemic.
Expect a flurry of new industrial development in 2021 as several stalled projects start back up, Nevis said.
It will take time for those new warehouses to be built and delivered, however. Even then, preleasing activity has been so strong that the dearth of Class A industrial space is expected to continue throughout the year.
“Demand already is off to a good start,” Nevis said. “Tours are starting up, surveys are going out, and people are still looking to locate in Northern Nevada. We will continue to lease space, and the vacancy level will continue to drop over the next three quarters until that new product comes online.
“Preleasing levels are at all-time highs. Because of the (low) vacancy and (lack of) availability of space, projects are preleased to the tune of 50% to 75%.”
Further declines in vacancy also should lead to another bump in rental rates, Nevis added, with year-over-year increases seen in 2020 continuing for much of 2021. Kidder Mathews reports the region’s total industrial space under roof stands at 95 million square feet and could exceed 100 million square feet by year’s end.
‘It’s a different story now’
Even with a flurry of new development, brokers are still hard-pressed to locate suitable space for prospective tenants, said Amanda Eastwick, senior industrial advisor with SVN|Gold Dust Commercial Associates in Reno.
“We need more options for companies that are entertaining moving to this area,” she said. “Our biggest challenge for 2021 is development and how to get more areas allocated for industrial spaces. The (buildings) in development, there’s already leases out on it; it’s kind of crazy.”
Rather than site selection and lease negotiations, conversations with prospective clients have shifted to land selection and build-to-suit opportunities with developers, Eastwick said.
“It’s a different story now, and it’s a longer game,” she said. “It’s up to a two-year process with finding potential sites, introducing them to potential developers and doing the building.”
The lack of available space also can prove stifling for existing businesses hoping to expand their footprint, Eastwick added, since existing companies are competing with a host of new companies eager to plant their flags in Northern Nevada.
‘Supply is not keeping up with demand’
Joel Fountain, associate with the industrial team at Dickson Commercial Group, said finding space for new and existing companies will be the region’s most-pressing challenge throughout 2021.
“It’s only going to get tighter over the next six to 12 months,” Fountain said. “Supply is not keeping up with demand.
“There’s a fair amount of new construction planned, but we are dipping into very low vacancy — we could dip under 4% coming into the first part of the year.”
The limitations are greatest for tenants seeking space under 100,000 square feet, Fountain added. Available spaces in that range are attracting multiple competing offers, and tenants have had to adjust their expectations as a result.
“It’s crucial to have several options,” Fountain said. “If we go on a market tour and look at seven or eight buildings, most of which already have offers in place, you come up with a top three or four, and submit an offer on the No. 1 choice but have backup offers on the others, knowing that out of your four options you might be able to secure one — and even that’s a struggle.”
That kind of intense competition has given landlords the luxury of choosing only the most creditworthy tenants for their properties, Fountain added. Landlords, he said, can cherry-pick ideal tenants based on company financials.
“For companies that aren’t publicly traded, or have really high credit ratings, it’s very difficult to compete with these bigger companies,” he said. “That’s just a testament where our market is at.”
Q&A with United Construction: Industrial development outlook
United Construction CEO Mike Russell recently discussed the future of the Northern Nevada industrial market with the NNBW and provided insight into development efforts and the strength of the market for 2021 and beyond. Below is an interview with Mike, slightly edited for clarity.
NNBW: What factors will impact the industrial market as we move through the year?
Russell: We will continue to have COVID impacts such as personnel health, material supply chain issues and potential project schedule delays. In the last several months we’ve started to see significant material cost escalations related to steel, lumber and sheathing in the industrial sector.
The increase in home building across the country, combined with steel and lumber mill capacities, has created high demand for dimension lumber, sheathing and steel-related construction products (rebar, steel piping, structural and miscellaneous steel, etc.).
This increased demand has created price volatility and escalations which have driven industrial construction costs 5 to 10 percent-plus higher just over the last few months. We’ll keep watch on these cost escalation trends to see if they hold at recent higher levels, or if they recede with future home building and industrial construction demand.
NNBW: Site availability in Greater Reno-Sparks is at a premium. How does limited availability of easily developed sites impact new projects?
Russell: I believe we’ll see a few trends. Over the years here in the Truckee Meadows, industrial development has typically gravitated to sites that have simple entitlements and somewhat flat topography.
One trend we’re seeing is development on sites that require more complicated entitlements and grading.
This trend will drive development delivery timelines longer and project costs higher. Industrial development will look east of Reno-Sparks in TRIC, Fernley and beyond to have more industrial land inventory and potentially less site acquisition and development costs.
We’ll still see industrial development at appropriately zoned infill sites throughout Reno-Sparks over the coming years, and developers will get creative at multiple property site assemblies to accommodate industrial development where possible.
NNBW: How will the ongoing pandemic and social distancing guidelines impact work operations across the county?
Russell: Unless the pandemic gets worse, we don’t anticipate much impact from what we’re already experiencing. We require daily health screening, masks, social distancing, health and safety practices per local and federal guidelines. COVID has already slightly impacted some of our project schedules and material deliveries since Q2 of 2020.
NNBW: Will 2021 be a good or bad year for the regional industrial market?
Russell: Industrial development has a strong future in Northern Nevada for the following reasons:
In our current COVID environment, industrial, food, e-commerce and last-mile demand is very strong since people are staying home and ordering goods and food online for local pick-up or delivery.
Northern Nevada is experiencing a major influx of businesses and people from around the country (a high portion from California), which will continue to diversify and strengthen our local economy. That in turn will require more industrial sector support.
While developers are feeling the impact of construction and land acquisition cost increases, exit cap rates are at all-time lows. Industrial lease rates also are/will be rising.
As has been the case for many years, investors view the industrial real estate sector as a safe haven for investment, which is truer today than ever since retail and office sectors are suffering higher risk.