Building Nevada - July 2006

Industrial Strength

by Jennifer Rachel Baumer

As land costs skyrocket in Southern Nevada and land availability plummets in Northern Nevada, with available land moving farther and farther outside Reno, developers in industrial real estate are still seeing a healthy market.

Vacancy rates are dropping, new properties are pre-leasing during construction and even older buildings are getting a second look. “Older, obsolete buildings are being torn down and used for infill or rehab’d,” said Doug Roberts, partner, Panattoni Development. “We’re seeing that in both Reno and Las Vegas as land gets more expensive.”

It’s an interesting time, north and south, to be an industrial real estate developer in Nevada.

Reno Moving On Out

Panattoni Development works in both Northern and Southern Nevada. What it sees in absorption of product has the company feeling confident. A 400,000-square-foot building completed at the Lear Industrial Center north of Reno is fully leased; another 200,000-square-foot building under construction is 85 percent pre-leased. Two more buildings will be under construction towards the end of 2007. Trammell Crow also works at both ends of the state. In the North, it is planning a 550,000-square-foot building east of Reno in the Tahoe-Reno Industrial Center. Located off I-80, on USA and Waltham Avenue, it’s the biggest spec building ever built in Reno, but officials at Trammell Crow aren’t worried.

“We’re encouraged with the amount of activity we’ve seen,” said Par Tolles, area director/principal, Trammell Crow Company. “We’re breaking ground this week and we’re already seeing a large number of distributors interested in the whole building. We’re not surprised – we knew the requirements [for industrial space] were getting larger – but we didn’t know we’d see this level of activity.”

The interest in the space is so positive that the next phase – a 375,000-square-foot building – will be started immediately after the first 50 percent of the current building is leased, and Trammell Crow will start looking for more land.

Finding land is a challenge in Reno – there isn’t that much left. The only place you can buy reasonably priced industrial land is 13 miles east of Reno in the Tahoe-Reno Industrial Center, or in Fernley, where Wade Development owns the Crossroads Center property near the Amazon distribution center. Even the North Valleys – the areas around Stead – are filling up, and users and developers are looking outside Reno.

We have a significant inventory of land in the outer markets,” said Michael Schnabel, senior managing director/partner, CB Richard Ellis, Reno. “There’s Tahoe-Reno Industrial Park, there’s land in Fernley, markets like that. There’s in-fill. Within the valley we are certainly running out of what we call good quality, reasonably priced industrial land.”

Southern Nevada: Ten More Years?

In Southern Nevada, land availability, coupled with steeply rising land costs, is causing demand to far outstrip supply for industrial real estate.

“In my opinion, we’ll be done in the Las Vegas Valley in 10 years on buildable land at any price. Forget if it works or not. That’s if we built 2.4 million square feet a year, which is approximately 60 percent of what we’ve being doing for the last 20 years,” said Kevin Higgins, SIOR, senior vice president, Voit Commercial Brokerage.

Adding to the scarcity of industrial land is the population explosion in Southern Nevada. Land has been converted from master-planned industrial zoning to master-planned residential communities and mixed-use sites around the Strip and the resort corridor.

“We had many hundreds of acres that were master-planned for industrial, but residential developers came in and bought in the outskirts, in the North Las Vegas sub-market and the south end of town. The speculation component in Vegas has driven prices up as well,” said Donna Alderson, SIOR, CB Richard Ellis. “All these forces are driving up values, and those higher values don’t support industrial. We can’t afford the price of the land, and thus we don’t have enough industrial product being built or on the drawing board to support the ongoing demand.”

Location, Location…

It’s enough to make users look out of town – and they are, some of them all the way to Pahrump and Mesquite, or even out of state into Pima, Arizona. Those are bedroom communities that just might be able to support some of Southern Nevada’s demand, Alderson said, but a lot of users aren’t interested. They want Nevada’s tax structure, they want the flexibility or they need to be in the Las Vegas Valley.

Industrial use in the Las Vegas Valley is moving in two directions, creating two markets. In the north are regional markets, those that can take a little more time to reach the city core and benefit from land that’s a little cheaper – maybe 10 to 30 cents less per square foot than in the southwest. The southwest market is closer to the Strip, however, and companies that supply casinos and trade shows with food, linens and the like need to be closer.

Some companies pay the higher rents and leases because they need that proximity to the city core. “They have to,” said Alderson. “Because they’re providing linens or ash trays or food to casinos and trade shows, they just have to ramp up in rent and stay in the market because they can’t afford to be that far away, whereas regional markets can.”

Other companies choose to move out of the area because of high prices. “Developers are concerned because escalating prices are going up faster than perceived rental rates or sales prices can be achieved,” said Higgins. “I say ‘perceived’ because I’m not saying we can’t achieve those rents and sale prices. I believe we can. Just because you’ve always leased for 38 cents [per square foot] you don’t think you can get 48 cents, but you might if you have someone who understands the nature of growth coming into the market.”

So if users are coming into the area willing to pay for industrial properties, are there properties for them to lease or buy? There are some, and more are being built. Approximately 3.65 million square feet of industrial projects are currently under construction throughout the Valley, said Higgins, and another 4.5 million square feet are coming up behind them.

DP Partners has a 513,000-square-foot building planned to break ground at the end of the year. According to Alderson, it will be the largest spec building ever constructed in Southern Nevada.

The first phase of Majestic Realty’s Beltway Business Park is under construction, consisting of two completely pre-leased buildings, some 540,000 square feet. Phase II will break ground later this year, with three buildings totaling 837,000 square feet.

Harsch Investment Properties broke ground in April on 523,000 square feet at the Speedway Commerce Center. The eight buildings planned will try to attract smaller space users, with units running from 3,700 square feet to 11,000 square feet of light industrial flex projects.

In Northern Nevada, DP Partners broke ground in June for a 500,000-square-foot building, and it is in the planning stages for a 370,000-square-foot building to follow. In Reno it has 255,000 square feet under construction in the North Valleys, is starting another 230,000-square-foot project at Silver Lake Industrial Park in the North Valleys and a 300,000-square-foot building planned in Patrick Business Park, 13 miles east of Reno.

Panattoni Development is putting up four buildings at the Lear Industrial Center north of Reno. One 400,000-square-foot building is complete and fully leased. A 200,000-square-foot building under construction is 85 percent pre-leased, and two more buildings will be under construction towards the end of 2007.

Will They Come?

The supply and demand equation is nicely tipped in favor of demand. That’s a good thing for industrial developers when they have products to sell or lease, and when they have the land on which to build the project. But are they still constructing buildings on spec, or is that a little risky? Is it better to wait and see what the demand is?

There’s never a good answer to that question. The market is strong right now with encouraging activity in Reno. Northern Nevada is still very much on the radar screen for large users, according to Tolles. And according to Alderson, for Southern Nevada, “Demand fluctuates, but it has been pretty consistent for my career of 20 years. It goes up and down, but never down to any great degree.”

Which is why, even with land costs driving up lease rates and construction costs continuing to rise, developers are still choosing to build on spec.

“We find we get a better return on spec development than on build-to-suit,” said Aaron Paris, executive vice president and chief operating officer at DP Partners. “For example, we started that 255,000-square-foot building in Silver Lake and in the very near future will have it fully leased to one client, so basically that turns it into a build-to-suit. We’ll make various modifications for the client, so I guess you could call it a spec-to-suit.”

Harsch Investment Properties builds on spec because it buys the land around its developments and uses the synergy of existing buildings and tenants to draw new businesses to new buildings, according to John Ramous, vice president of operations.

Building on spec has benefits – business owners don’t always know what their needs are 12 to 18 months ahead of time. But if a developer doesn’t have a project already in the works, in the permitting stage or under construction, business owners are going to go to the competitor, said Roberts of Panattoni. “Primarily, we’re still building on spec because we’ve had so much success in both Northern and Southern Nevada with spec projects. They haven’t stood long without being leased.”

Build-to-suit has its benefits, too. The user occupies the building immediately, for one thing. Even so, “We feel there’s enough demand to build speculatively,” said Tolles. And it takes away the concern of trying to quote rents or lease rates a year before the building will be ready for the user. “It’s hard to quote a rent if you’re about to build, because you haven’t bid out to all the sub-contractors yet and you don’t know where costs are going to go – they can literally switch every two weeks.”

Challenges Cause Creativity

The types of new construction are changing. Alderson recently spoke to a developer in Southern Nevada contemplating a multi-story warehouse. “That’s something you just don’t see here. You see that in more congested markets like Tokyo where land is so scarce and it’s so densely populated.”

But with land hard to find at both ends of the state, developers are trying new things. One alternative is multi-use flex buildings with more office space. Putting office space over industrial means developers can build up, offering more square footage on the available land.

In the current market, locations and products that have been white elephants in the past are starting to move, according to Alderson. Older buildings that were considered obsolete or were just plain overlooked are getting a second chance. Making use of a building in an in-fill location means a company’s employees don’t have to commute as far as they would to new developments outside of town or in neighboring communities. Consequently, some buildings are being rehabilitated, while others are being torn down to make way for new structures.

Who Will Come?

Typically, users are East Coast and Midwestern national companies looking for a West Coast presence. They may be distributors or manufacturers who want at least one distribution center to service the 11 western states. Both Northern and Southern Nevada are perfect locations, situated as they are with rail, freeway and air access and in close proximity to major metropolitan areas, such as San Francisco and Los Angeles. Add in Nevada’s business-friendly tax structure and the Silver State is usually on a company’s radar in first or second place, competing only with Phoenix and perhaps the Inland Empire in Southern California.

Is California still in the game? Yes, said Tolles. “A lot of these companies get their goods via ship, so they either go to the port of Long Beach or the port of Oakland. If the majority of their market is in Southern California but a little bit of their product goes to Arizona or Utah, it may make sense to stay in Southern California. However, if a lot of their product is going to the Northwest, or there’s an even distribution between the Northwest, Arizona and California, then Reno can make more sense.”

If We Build It, They Will Come

Nevada has been the land of plenty for business – the government is business-friendly, and the state has a favorable tax structure and available land. However, if the scarcity of available land continues to drive prices up, and if lease rates follow, how does Nevada stay competitive?

“We are expanding in Nevada, and we are absolutely looking for more industrial land we can build on to maintain the competitive edge with California. We want to be less expensive and easier to do business with,” said Roberts of Panattoni. “If the price of land continues to go up, Reno can’t compete against Sacramento. Our rates won’t be cheaper, so people won’t see the need to move here.”

Even with the volatility of the market and increasing costs, the level of activity is encouraging. “It seems the economic engine of the country is still very strong, because companies are comfortable expanding and taking on new distribution centers, which means demand for their goods is still very high. However, it’s still a risky business to be a developer,” said Tolles. “There are always a number of people building the same thing you are and competing for the same users. But, I’ve been here 12 years and I’ve never seen the market this hot.”