Reno-Sparks industrial developers seeing healthy market conditions, though COVID uncertainty looms | nnbw.com
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Reno-Sparks industrial developers seeing healthy market conditions, though COVID uncertainty looms

Rob Sabo

Special to the NNBW

Exterior view of the 610,000-square-foot building at 550 Milan Drive, located at the Tahoe Reno Industrial Center, which was entirely leased to Tesla.
Courtesy Photo: Tolles Development Company
EDITOR'S NOTE: This is the first in a 5-part series of stories in the NNBW's newest quarterly edition of the Northern Nevada Real Estate Journal, which looks at various statistics, trends and news updates regarding commercial real estate across greater Reno-Sparks. You can read the full series below, or check out the Wednesday, July 29, print edition of the NNBW.

Businesses across the region are experiencing financial hardship under COVID-19 restrictions, but one sector of the regional economy continues to thrive despite the coronavirus. Northern Nevada’s core strengths in logistics, coupled with the emergence of newer industries such as advanced manufacturing and technology, along with constant consumer demand for goods, is helping Nevada’s industrial market weather the COVID-19 storm.

Some sectors of the regional economy — retail shops, bars and restaurants, for example — continue to be rocked by ongoing coronavirus restrictions and state-mandated rollbacks. Office landlords, meanwhile, are learning how to navigate shifting tenant needs as much of the white-collar workforce continues to work from home.

Regional industrial developers, however, along with local and institutional industrial landlords and property brokers, are still enjoying healthy market conditions.

Mike Hoeck
Courtesy photo

“With COVID-19, we expected things to slow down some, but that doesn’t appear to be the case,” said Mike Hoeck, executive vice president of the industrial team and managing director of Kidder Mathews’ Reno office. “The fundamentals are strong. There are more than 35 prospects out there for over 40,000 square feet in the market. The phones have not stopped ringing, and we are touring just as much as before COVID.”

Online retailers leading the way

Industrial is steaming ahead, but it’s still an interesting time in commercial real estate, Dermody Properties Nevada Partner John Ramous recently told NNBW during an interview.

Several sectors of the industry haven’t seen any declines in business activity or weakened demand for new space despite the economic damage COVID-19 is causing statewide and nationally.

E-commerce, in particular, has been the darling of the logistics industry, Ramous said, and e-retailing is the direction more companies likely will go, he added.

John Ramous
Courtesy photo

“If you are able to distribute goods to end customers quickly, certainly that’s been highlighted during the pandemic because you can minimize contact. Every company is looking at their supply chain, now more so than ever, and that bodes well for the logistics sector.”

Mike Russell, chief executive officer for United Construction, told the NNBW that e-commerce demand is expected to remain robust moving forward mostly due to the disruption of traditional retail sales channels by the coronavirus.

“Everybody stayed home and used Amazon or other delivery services to buy their goods and even a lot of food,” Russell said.

Russell also sees the potential for some manufacturing to return onshore as companies seek better control and efficiency throughout their supply chains.

Tariff wars, coupled with businesses making moves to avoid breakdowns in their supply chains, could lead to the development of new manufacturing facilities in the future, Russell said — and Northern Nevada will continue to be at the forefront of many companies’ expansion plans.

Mike Russell
Courtesy photo

“Our backlog of work is pretty robust — we have two projects in Las Vegas and 13 up here (in Northern Nevada),” Russell said. “All but two projects are either a build-to-suit or speculative building in the industrial sector.

Uncertain future

Although many regional contractors and industrial developers still have a full pipeline of work with no sign of an immediate slowdown, there still are many moving pieces on the board that could impact operations and industrial development plans, said Dermody’s Ramous.

“We haven’t fully vetted the long-term impacts of COVID on the economy, there’s uncertainty around the election year, and our customer’s financial landscapes are all very different,” he said. “(Demand) depends on all those factors. I think there will be more demand in Northern Nevada because Nevada is a state that’s easy to develop in, is business-friendly, and it’s centrally located for the West Coast of the United States.

“Other than a small blip from mid-March to the end of April, we continue to see a pick-up of demand across the state, and that’s consistent with (our) other markets across the country,” Ramous added. “It’s due to pent-up demand. People were kind of shocked during the initial 45-60 days (of pandemic shutdowns) but then demand continued. When we were able to tour spaces and get people through buildings, demand was equal to, if not greater than, before the pandemic.

Exterior view of LogistiCenter at 395 Phase II Building 1, located in the North Valleys.
Courtesy Photo: Dermody Properties

The pandemic continues to wreak its special brand of economic havoc, but there still was strong absorption in the second quarter of 2020 that was right on pace with historic quarterly net absorption data, Ramous said.

According to Kidder Mathews’ quarterly industrial report, meanwhile, absorption in the second quarter of 2020 was 1.2 million square feet, primarily due to two large industrial leases:

  • An undisclosed tenant took the remaining empty space — 374,000 square feet — at the renovated former K-Mart facility in Sparks.
  • Tesla leased the entire 610,000-square-foot building on Milan Drive recently completed by Tolles Development Company at Tahoe Reno Industrial Center.

Kyle Rea, chief operating officer of Tolles Development Company, said the quick leasing of the facility at 550 Milan Drive spurred TDC’s plans to begin construction of a second speculative building of 663,600 square feet at 527 Milan Drive.

“A perfect scenario came to be, and we leased the entire building to one user,” Rea said. “That certainly does accelerate plans for the next phase of the development.”

TDC already broke ground on the second building and expects it to come online in February of 2021. Other new construction underway includes a three-building project in Spanish Springs by Avenue 55, while Panatonni Development continues to advance the second phase of its North Valleys Commerce Center.

Interior view of the recently completed industrial building at 550 Milan Drive.
Courtesy Photo: Tolles Development Company

Overall industrial vacancy in the Northern Nevada industrial market for the second quarter, meanwhile, was a tick over 5 percent, Kidder Mathews reported.

“We had an exceptional quarter,” Hoeck said. “It was very strong given the circumstances.”

Continued demand for industrial space

Robust demand for industrial space by new companies coming to the region, along with the building needs of other customers, will power the industrial sector and regional contractors through the next two quarters and beyond, said United’s Russell.

United, for instance, has focused mostly on tilt-up industrial construction during its 40-year partnership with Dermody Properties.

However, United recently started work on a three-year renovation of Swope Middle School — one of many renovation or new school projects underway by the Washoe County School District.

Industrial demand in the regional market equates to about 2 million to 3 million square feet of new development from companies on cusp of making business expansion decisions to Northern Nevada, Russell said.

“It’s a pretty large pipeline of work — in fact, it’s about the highest volume in the past 25 years,” Russell said.

Retail, mixed-use and office are all impacted by COVID-19, Russell said, while industrial remains strong with many speculative buildings and build-to-suits in play.

“People are finding that it’s relatively less expensive to own their own facilities, especially for small manufacturers,” he said. “We will stay robust here for several years. E-commerce and our geographical region and the keys — we serve customers all the way from San Diego to Seattle.

“All contractors in town are busy and haven’t lost much time to the pandemic.”