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May 18, 2017

Industrial real estate records low vacancy rates leading into second quarter

Northern Nevada Business Weekly

Rob Sabo

Investors in 2016 snapped up industrial properties in northern Nevada at record pace.

Last year there were 20 deals done over 100,000 square feet, which is double an average year, said Dave Simonsen, senior vice president of the industrial group at Kidder Mathews.

The pace of investment activity, particularly from national investors, took the market by surprise and left brokerages with limited investment opportunities to market in 2017, Simonsen said.

"We do not have the inventory to duplicate the demand we had last year," he said. "Landlords are taking advantage of the tight market and increasing rental rates for new tenants and renewals - this is a 180-degree turn in the market from five years ago."

Investment activity in the first quarter was just under 1 million square feet and sold at an average of $57 per square foot, Kidder Mathews notes in its first-quarter industrial report. The largest transaction was by Mt. Anderson LLC, which acquired a 545,550-square-foot building on Moya Blvd. in North Valleys for just under $34.5 million.

The heated Reno-Sparks industrial market has garnered the attention of many national investors. Stag Industrial of Boston purchased the 161,986-square-foot Nugget Industry Center for $8.4 million. Simonsen said national investment will continue to come in as companies scour the region looking for robust investment opportunities.

"It is reminiscent of 2006 through 2008 on the investment side," Simonsen said. "The difference this time around is that we have a number of investors buying existing properties. The last time we had investors buying properties, in addition to a number of new developers that came to town buying land and building buildings in excess of the need."

The addition of national names such as Google, Apple and Tesla, combined with northern Nevada's long-standing strengths as a business-friendly environment and western region warehousing/distribution center have made Reno a much sought-after market for national investment dollars.

The addition of those big names lends additional confidence to investors already keen on Reno as a safe bet, Simonsen said.

"Investment demand for industrial properties in Reno is very high," he said. "There's a lack of willing sellers this year compared to last year that will likely result in less investment volume. The total number of sales in 2017 may be a bit below last year's numbers due to the constraint of available product for users and willing sellers for investors.

"But there is no shortage of investors calling our office looking for properties; our issue is finding them suitable buildings or portfolios to buy."

Cap rates also continue to drop, Simonsen adds, which means investors now are paying premiums for a given stream of income. Market-wide, the $57 price per foot for investment activity represents a continued increase over the past three years.

Overall vacancy in the Reno-Sparks industrial market to start the second quarter was a very low 6.1 percent and is expected to drop even lower based on demand for the remaining vacant premier spaces in the market.

Tahoe Reno Industrial Center currently has the most class A space available with three buildings in excess of 300,000 square feet each. However, Simonsen notes, two of the giant warehouses are vacant due to company expansions from online retailers and

There's a smattering of new construction, but much of it already has tenants signed to leases.Panattoni Development recently completed two buildings at South Valleys Commerce Center on Sandhill Road, and online retailer Zazzle took 209,000 square feet of it in a relocation to northern Nevada from the Bay Area.

"What is being built is getting looked at if not leased," Simonsen said. "We are getting lean on new class A properties."

North Valleys continues to see the most new construction. Sparks has long led the overall industrial market with more than 25.6 million square feet under roof, but the North Valleys/Stead area has 20.7 million square feet under roof - and the room to add more. Overall, there is 82.6 million square feet of industrial space in the Reno-Sparks market, Kidder Mathews reports, including 659,941 square feet of new construction.

There were 16 new leases signed in the first quarter, Kidder Mathews reports. Fosdick Fulfillment took the largest amount of space with 269,620 square feet on Military Road. Syncreon Technology took down another 182,000 square feet on USA Parkway at TRI.

Direct vacancy is lowest in central/west Reno at 2.8 percent and in south Reno at 2.9 percent. It's highest in Tahoe Reno Industrial Center at 8.8 percent, but that number will drop over the next few quarters as several of those recently vacated spaces are re-leased. Vacancy in North Valleys stands at 7.4 percent, and it's hovering around 5 percent in the airport and Sparks submarkets.

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