Reno Retail Market Update
Market Overview - 2nd Quarter 2017
The Reno/Sparks retail market continued its growth trend for the tenth consecutive quarter with positive net absorption, stabilized capitalization rates, and lower vacancy. Construction activity was slow this quarter with no completed projects and minimal new construction planned for the foreseeable future. Market trends indicate continued growth for the Reno/Sparks retail market.
Leasing activity remains strong and was reflected in the downward trend in total vacancy, which declined to 9.3%. Meanwhile, lease rates continue to trend upward, rising approximately 26 basis points to $1.24 per square foot. Notable lease transactions from the second quarter included Marshalls Home Goods (40,233 sq. ft.), Sprouts (30,000 sq. ft.), and Grocery Outlet (20,416 sq. ft.).
There were eight shopping center sales in 2016, and over the last couple of years, retail investment activity has picked up. Cap rates have started to decrease, going from 10% in 2012 to 6.5% last year. Investment activity is primarily generated from buyers across the state line. Two notable sales transactions occurred in 2Q17. The largest sales of these involved Sparks Crossing, which was acquired for $40,278,351 on May 22nd. Sparks Crossing consists of 342,879 square feet of retail space housing tenants such as Pets Mart, Best Buy, Bed Bath and Beyond, and many others. The second notable sale was Southwest Pavilion, which is located in South Reno and sold for $9,100,000 on April 7th. Southwest Pavilion consists of 75,357 square feet of retail space, but its former anchor, Scolari’s Grocery Store, closed that location shortly before the sale, leaving 46,600 square feet vacant. The last notable sale was Plumb Gate Shopping Center, which was sold for $4.9 million on May 24th. Plumb Gate consists of 13,897 square feet of retail space primarily leased to local tenants with no anchor.
The market’s main construction project is the South Meadows Promenade shopping center, a 70,000 square foot development scheduled for delivery during the third quarter.
Historic Shopping Center Sales & Avg Cap Rate Chart
Triple Net (NNN) vs Gross Leases
Every shopping center, single-tenant, mall, or other retail building all have expenses. Expenses include property taxes, owner’s insurance, and common area maintenance (CAM). What are CAM’s? They are fees associated with the area around the property like trash, security, and maintaining the landscape. The decision is up to the Landlord (LL) in how they will receive reimbursement from their tenant(s). A triple net (NNN) lease is when the tenant pays their “base lease rate” plus taxes, insurance and CAM’s. At the end of the year, the LL will reconcile the NNN costs and will adjust accordingly. Sometimes the tenant will owe or even receive a little bit of money back at the end of the year. A fully serviced lease (Gross Lease) the LL will pay most of the absorbed costs and apply these though the lease rate as a “Load Factor.”
If you can recognize variation in operating expenses each year a NNN lease will ultimately save you money over time. Nonetheless, gross leases are nice because it is easier to forecast for operating expenses for the entire year. The downside to a gross lease is a LL will charge a premium on your lease rate to cover costs to account for unexpected operating costs.