The resurgence of industrial realty’s bread and butter
As foreseen in the third and fourth quarters of 2011, the Reno industrial market continues to witness a resurgence of deals being transacted in the 5,000- to 60,000-square-foot range as we enter the second half of 2012. This historically lucrative market segment, often referred to as the “bread and butter” of our market, has returned and is a sign of good times ahead. Businesses operating in this size range are often family-owned, privately-held, or more regionally focused. These are the small businesses that hire local employees, contract with local vendors, and contribute significantly to the local tax base. The rationale for increased activity in this market segment is two-fold: Smaller local or regional businesses are growing and relocating into larger facilities, and smaller tenants are emerging from their “garages,” eager to operate in a re-emerging economy.
Year to date, this market segment accounts for approximately 55 percent of industrial square feet leased and 89 percent of transactions completed. Comparatively, in 2011 this market segment accounted for approximately 28 percent of industrial square feet leased and 78 percent of transactions completed. Statistically only half way through the year, the “bread and butter” segment has seen a 27 percent increase in activity over the previous year. As an example of expanding companies, Numark Industries recently expanded into an additional 56,250 square feet adjacent to their existing facility at 12995 Echo Court in Reno.
The growth recently seen in this sector is a strong indicator of economic recovery for the northern Nevada market. As local companies expand and new businesses move to northern Nevada, the economic impact is seen on multiple levels: lower vacancy, which will lead to eventual new construction, creation of jobs, and a trickledown effect on other product types to support this growth.
Speaking to the overall health of the industrial market, as companies renew and expand, and new companies commence operations in the region, the amount of industrial inventory on the market is reduced, eventually causing rental rates to increase and rent concessions to decline; several landlords in the market have recently begun to reduce concessions offered to tenants and are beginning to push rental rates in select buildings.
From a historical high of 15.1 percent in January of 2011, the Washoe County unemployment rate is beginning to decline and currently stands at 12.9 percent. While there are a lot of contributing factors to the decline in unemployment, it is arguable that there is a direct correlation between industrial absorption and job creation. Recently, CustomInk leased a 24,000 square foot facility located at 5355 Capital Court bringing 75-100 new jobs to the northern Nevada market, and EndoChoice provided an additional 10-15 jobs to the market when they leased 8,000 square feet located at 895 E. Patriot in Reno.
There is a natural ripple effect that occurs whenever companies expand or relocate their operations. The economic effects are seen from the hiring of vendors to additional discretionary income for families as new employees are hired. For every job created, additional employment opportunities are produced in order to provide supplies, support and services to these expanding companies.
In addition to an uptick in leasing activity, there has been an increase in owner-user sales activity. Statistically speaking, nearly the same amount of transactions have been completed half-way through 2012 as were recorded in all of 2011. More specifically, the market has recorded 11 owner-user sales half way through 2012 compared to a total of 13 owner-user sales in all of 2011. The majority of these transactions (81 percent) fall into the 5,000 to 60,000-square-foot range. Not only are small businesses expanding, but they are purchasing assets in which to operate their businesses. Historically low interest rates and a decline in asset values over the past several years are affording healthy businesses the opportunity to purchase. For example CBRE Industrial Services recently represented Crown Beverages Inc in the acquisition of 600 Spice Island Drive. They will be moving their beverage distribution operation from a 25,200-square-foot facility into the 72,500-square-foot building located on Spice Island Drive. Similarly, GHX Immobilaire recently expanded their operations when they purchased 506 E. Glendale, a 9,800-square-foot facility. They previously occupied approximately half the square footage as they will at their new facility.
Much of the excitement and discussion in the market is focused on big box users in the market, such as Zulily.com and Urban Outfitters. While these companies provide a large economic impact to northern Nevada, it is important to remember the economic value provided by smaller users (5,000 to 60,000 square feet) in the market. This market segment has returned over the past several quarters and is projected to remain strong as the market progresses. CBRE Industrial Services is currently tracking over 15 deals in this size range, which is a good indicator of continued activity in the market segment.
Eric Bennett and Tomi Jo Lynch are with the CBRE Reno Industrial Services team. They were assisted in this article by the other members of the team, Gordon Zach and Daniel Buhrmann. They can be contacted at 775-356-6118 or email@example.com and firstname.lastname@example.org.
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