WESTERN SNAPSHOT, SEPTEMBER 2008

Reno, Nevada Industrial Market

Schuster

With the completion of two projects totaling 1.17 million square feet, new big box speculative development will come to a halt in Northern Nevada, at least for the near future. The Northern Nevada industrial market includes the cities of Reno, Sparks and Fernley, which is located 30 miles east of Reno.

Dermody Properties, a homegrown development company recognized as one of the 10 largest commercial development companies in the country, is putting the roof on a 545,550-square-foot distribution facility called LogistiCourt in Silver Lake, just north of Reno. This is the first new building for Dermody in Northern Nevada since divesting their entire portfolio in July 2007. The portfolio consisted primarily of holdings in Reno, Las Vegas and Tejon Ranch in Southern California, as well as in eastern Pennsylvania and Chicago. The sale to ProLogis North American Properties Fund III was valued at $1.85 billion. The Northern Nevada portion of the portfolio, an estimated 12 million square feet, accounted for almost half the portfolio and gave ProLogis a 25 percent stake in this area’s Class A warehouse/distribution market. This speaks volumes about the faith ProLogis has in the future of Northern Nevada and the potential growth of the market.

Development Arts, another Reno-based development company, is rapidly moving toward completion on the first of three buildings totaling 1.9 million square feet. West America Commerce Center, a 632,130-square foot cross-dock facility located in Eagle Valley approximately 15 minutes east of Reno at the 105,000-acre Tahoe Reno Industrial Center, will receive LEED-CS certification and is at the head of the “green” movement, which is fast becoming a standard in new facilities across the country.

Other companies with significant market share include Panattoni Development, Northwestern Mutual and Trammell Crow Company. Attention from the Dermody sale and positive historical growth have encouraged new investment in speculative development by Chicago-based McShane Corporation, Union Property Capital and Multi Employer Property Trust. As a result, more than 4 million square feet of speculative construction has been completed in the last 18 months.

It is no surprise that the completion of so much speculative construction has caused vacancy to jump to its current high of 11.13 percent. Demand is off and with so many landlords competing for tenants, rent rates have flattened, particularly in the 100,000 square feet and larger range. Transactions recorded in the first and second quarters have averaged $0.3175 per square foot, per month, triple net (NNN).

Room to Grow in the Urban Markets

A dwindling supply of industrial-zoned land in the central city areas of Reno and Sparks has pushed current prices to $10.50 per square foot. City master planning and natural barriers to central city growth have forced new development for warehousing and distribution to move to the north Reno area, particularly Silver Lake and Stead, northern Sparks, Spanish Springs and east along the Interstate 80 corridor to the Tahoe-Reno Industrial Center. All three industrial areas are within a 15-minute drive of I-80 and U.S. 395 interchange at the heart of Reno.

Thirty miles east of Reno, the town of Fernley sits between I-80 and the main line of Union Pacific Railroad and is bisected by Alt-95 to Las Vegas. The appropriately named Crossroad Commerce Center encompasses 2,500 acres and is home to several leading distribution centers including Amazon.com, Trex, MSC Tools, Johns Manville, Quebecor World Nevada and Sherwin Williams.

Industrial property located north of Reno/Sparks is priced from $3.50 to $4.50 per square foot for level sites with all services to the site. The Tahoe-Reno Industrial Center and Crossroad Commerce Center are very competitively priced from $2.25 per square foot.

To Commit, Or Not To Commit – That Is The Question

Growth in 2007 included a number of build-to-suit facilities ranging from 337,500 square feet for TREX to 872,710 square feet for PetsMart. Although the build-to-suit spigot has cranked down, calls for space in the 100,000- to 200,000-square-foot range and 600,000-square-foot-plus range continue to be fielded by brokerage companies and municipal bodies such as the Economic Development Authority of Western Nevada and the Northern Nevada Development Authority.

The question is: will industrial players pull the trigger and commit before the end of the year? It is anticipated that the Class A big box distribution market will get worse before it gets better with even higher vacancy numbers after the completion of the Dermody and Development Arts projects. Large tenant prospects will be highly prized and rewarded with very favorable leases until stability returns and a more balanced market with a vacancy rate hovering in the 7.5 to 8.5 percent range is in place. Even though no new speculative projects are anticipated, the wild card will be the amount of space coming back to the market via sublease and that is where the crystal ball gets very cloudy.

David Schuster is a senior vice president of the Industrial Division at Grubb & Ellis | NCG.

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