Demand for investment properties in the industrial market continues to drive sales in Northern Nevada — even for assets that aren’t yet listed for sale. Basin Street Properties, which owns and manages 825,000 square feet of mostly office space in Northern Nevada, primarily among several downtown office towers, recently divested its lone industrial flex property at Mill Street and McCarran Boulevard in an off-market sale. Hidden Valley LLC bought the property for $26.2 million. Basin Street acquired Mill @ McCarran in 2010. The mixed-use flex business park comprises nearly 130,000 square feet of office, industrial, retail and showroom space. Tenants include Sierra Pacific Federal Credit Union, Department of Veterans Affairs, Friends of MS and Indian Health Services. Dominic Brunetti, Scott Shanks, Chris Shanks and Matt DeRicco of Dickson Commercial Group represented Basin Street in the sale, while Lyle Chamberlain of Lee & Associates represented the buyer. Frank Marinello, vice president of acquisitions and development for Basin Street Properties, told the NNBW there were several positive factors that came together and led to the sale. “The timing of the sale and the market aligned with our business plan for the project,” Marinello said. “We executed on the goals of our investors and delivered a well-maintained, 95%-occupied project to new owners, as well as maintained the management of the project for the new owners.” Basin Street has approximately 5.2 million square feet of retail, office, residential and hospitality properties in its extensive portfolio, including many similar mixed-used flex properties in California. Mill @ McCarran, however, was its lone Nevada property in that asset class. Investors near and far continue to clamor for Reno-Sparks investment opportunities as they seek opportunities to either enter the market or diversify their holdings in a flourishing industrial market.
“We are seeing a lot of interest not only from California but also beyond for Reno real estate,” Marinello said. “It’s definitely easier to be a seller than a buyer in the current environment. But we also will continue to try and grow in Reno, and we continue to invest in our existing assets. We believe very strongly in Reno in both the near and long term.” That said, investment opportunities, as well as new or refurbished space for company relocations, remains scarce for Northern Nevada industrial properties. According to Cushman & Wakefield’s second-quarter industrial market report, overall vacancy in Greater Reno-Sparks stood at just 2.2%. In the first two quarters, tenants absorbed 2.7 million square feet of warehouse and distribution space, the company reported. EXPERTS: BE WARY OF TAX LAW CHANGES Matt Harris, vice president with the industrial group at Avison Young, told the NNBW that the industrial market remains constricted in all size ranges for prospective clients. “That goes for small new businesses looking for their first space, the next level up and all the way to the big boxes,” Harris said. “It puts a lot of stress on clients and affects their decisions, timelines and ability to grow.”
Harris said owners of commercial real estate should be hyper-focused on potential changes to current tax law, especially 1031 exchanges, which allow investors to defer capital gains tax liabilities on the sale of investment properties provided they roll their proceeds over into a “like-kind” replacement asset. President Biden hinted at changes in the 1031 exchange process in his American Families Plan, and he fired another shot across the bow in his fiscal year 2022 Treasury Green Book. Among the proposed changes is a hike to the long-term capital gains tax rate, which currently tops out at 20% based on income. “We are telling owners that if they are thinking of selling in the next couple of years, they should be sellers today because they know what the playing field looks like today,” said Harris, who also serves as government co-chair for the National Association of Industrial and Office Properties (NAIOP). “They don’t know what it will look like in 2022 … It could crush the whole industry.” Todd Blonsley, senior vice president of investments with the Reno office of Marcus & Millichap, also encourages local property owners to seek investment and 1031 exchange deals outside of their home markets when the story makes sound fiscal sense. “Too many people get hung up on investing in their backyard,” Blonsley said. “They want to drive by it and see it, but ultimately, these properties are professionally leased and managed. So, whether it’s 10 miles from your door or 1,200 miles from your door, it doesn’t really matter if it’s a solid deal.”
Blonsley points to the recent sale of the office of cosmetic surgeon Charles Virden, who divested his building in a 10-year sale-leaseback and is completing a 1031 exchange in an out-of-state property.
“It’s an example of someone selling with current local market conditions influenced by California and low interest rates, and redeploying capital for higher yield at a time where there’s slim pickings into a deal with a stronger tenant at twice the term,” Blonsley said. “If anyone is thinking of selling, they might want to do it now. You don’t if capital gains tax rates are going up (and will be) similar to individual taxpayer rates. “That has the potential to truly destroy the financial prudency of people who have been long-term investors — and it’s just not the 1 and 2 percenters.” Q3 STATS AND TRENDS On Oct. 19, the Reno branch of Kidder Mathews released its third quarter report for the Reno-Sparks industrial market. Below are a few key stats:
The region posted 1.4 million square feet of gross absorption and a positive net absorption of 1.2 million square feet in Q3.
Overall vacancy decreased from 3.94% in Q2 to 2.67% in Q3, a 32.2% decrease.
The I-80 East Corridor submarket posted the greatest positive net absorption with 788,050 SF, followed by the North Valleys submarket with 427,867 SF.
For lease activity, the largest deal completed in Q3 was a 260,847 SF lease at Panattoni Development and CALSTRS’ North Valleys Commerce Center, followed by a 209,520 SF lease at Hillwood and Avenue 55’s Ingenuity Industrial Center and a 162,240 SF lease at the Conco Business Park.
Average asking rates continued to grow from Q2 to Q3 — and even more so year over year: From Q3 2020 to Q3 2021, flex rates increased from $0.79/SF to $0.923/SF (16.8%), mid-bulk rates increased from $0.55/SF to $0.739/SF (34.4%), and bulk rates increased from $0.43/SF to $0.553/SF (28.6%).