Northern Nevada
“Retail in Reno/Sparks is absolutely off the charts,” statedGary Johnson, senior vice president at Colliers International in Reno. “We have over 3.5 million square feet on the drawing board. We usually average between 350,000 and 450,000 square feet of absorption per year, so that’s a huge number for us. We have four big boxes currently under construction (two SuperWalMarts and two Home Depots), plus an R.C. Wiley.
Retailers are bringing in big bucks and using them to go after choice locations.”
Roxanne Stevenson, retail analyst at Grubb & Ellis/Nevada Commercial Group, agreed. “Things are really busy here,” she stated. “We have close to 900,000 square feet currently under construction.” Figures from the fourth quarter 2003 showed the Reno market with nearly 10 million square feet of rentable retail space and a vacancy factor of 6.4 percent. As retail follows rooftops in Reno’s housing boom, the hottest areas are the Northwest corridor, Spanish Springs and the South Reno submarket, including Damonte Ranch.
“Reno has been on the radar screen for about two years now for retail in general,” explained Stevenson. “We’ve seen growth in quick-serve restaurants, and interest from national retailers, either expanding or repositioning.”
Projects currently underway include: The Village at Double Diamond (137,000 sq. ft.) anchored by Smith’s; Southtowne Crossing at US 95 and Damonte Parkway (126,000 sq. ft.) with a Kohl’s, bank and restaurants; a center at I-80 and Robb (90,000 sq. ft.) anchored by Scolari’s; South Virginia Commons on Virginia St. south of Del Monte (137,000 sq. ft.), a power center with tenants Linens-n-Things, DSW Shoes and David’s Bridal; a 102,000-square-foot center at Robb and Mae Ann; and the 300,00-square-foot Rialto center in Spanish Springs.
In downtown Reno, work has begun on a condo project next to the Truckee River that will feature retail shops on the ground floor. “Downtown Sparks and the area around Victorian Square are also coming alive,” noted Stevenson. “Both downtown areas are gaining focus and momentum.”
Just south of Carson City in Douglas County, AIG developed a power center last year anchored by Best Buy, and Johnson reported that it has been successful in picking up activity from Carson City and the Lake Tahoe area, as well as from Minden and Garderville. The success of this project has led AIG to start planning a similar center nearby.
Plans for two large retail projects in the Reno/Sparks area have been announced. A Texas developer has 160 acres in escrow and plans to develop an 800,000-square-foot open-air center. It has been getting strong interest from high-end retailers not currently in the Northern Nevada market, according to Stevenson. In Sparks, Red Development, based in Kansas City, has applied for permits to turn a closed factory outlet center on 100 acres at I-80 and Sparks into a lifestyle center.
“Even though the Reno market is strong, it would be hard for it to support two large lifestyle centers with the same tenant mix – for example, two Pottery Barns and two Williams Sonoma stores,” said Stevenson. “Whoever gets out of the ground first will have the advantage.” Johnson agreed, noting, “Both these projects are attracting interest from the kind of tenants we’d like to see come here. However, because of their size and the complexity of negotiations with these high-end retailers, either one would take a little time to develop.”
Southern Nevada
With over 33 million square feet of retail already on the books, Southern Nevada had over 1.1 million additional square feet under construction in the first quarter of 2004, with plans for another 2.2 million square feet in the next 24 months. John Restrepo of Restrepo Consulting Group estimated the retail vacancy factor for the first quarter at 5.3 percent. Kit Graski, senior vice president of Voit Commercial Brokers, put vacancies at closer to 3.5 percent; in either case, available retail space is low relative to national averages.
Restrepo expressed concern about the ratio between absorption and completion in anchored strip centers. The completion figure for the first quarter of 2004 was 371,000 square feet. However, the first quarter’s absorption of 159,000 square feet was significantly lower than the quarterly average for 2003, which was approximately 713,000 square feet. “This 43 percent ratio of absorption to completion may be a cause for concern,” said Restrepo. “We’ll just have to wait and see. Comparing the first quarter of 2004 with figures from a year ago, we do seem to be lagging behind, but that doesn’t mean the market is unhealthy. However, if it continues, there is a potential to increase the vacancy rate by the end of the year.”
Restrepo explained that a low vacancy rate causes developers to see an opportunity to make money in the retail market. If they all start constructing projects at the same time in the same market, it can raise the danger of overbuilding, at least in the short term. “Developers are faced with difficult choices,” said Restrepo. “If they don’t jump in when the market looks good, their competition will get there first. And if they choose to wait, prices will go up. In addition, banks are now throwing money at them, encouraging them to borrow for retail projects. So, even if they know the vacancy rate will be higher than they would have liked when the project is completed, it might still be worth it to stay in the game.”
Graski discounted many of these concerns. “There is no danger of overbuilding,” he stated. “Every year 60,000 more people move here, and we need to have more retail coming online to serve them. I think we’re fine.” However, he did point out a trend that may cause trouble for small investors wanting to make money in the retail market. Many projects now being proposed are smaller strip centers with less than 50,000 square feet and without any anchor. “These spaces are not substantially preleased, so they can be risky,” warned Graski. “Years ago, there wasn’t much funding for these projects, but now financing is abundant and small investors may be partnering to develop this type of small center, perhaps on a piece of land they got in a 1031 exchange. They should be cautious, since so many similar retail centers are being proposed at the same time. They may not be aware that other people are planning to do the same thing in the same area.”
In the Southwest submarket, the vacancy rate went from 1 percent last year to about 6.5 percent in the first quarter of 2004. “Developers were building in anticipation of growth, instead of in response to it,” said Restrepo. The Henderson and Northwest submarkets have the most healthy statistics, because they were most underserved historically and have now caught up with demand. The submarket with the most projects planned for the immediate future (1 million square feet) is North Las Vegas, in response to Aliante and peripheral developments surrounding it.
Restrepo sees national trends affecting Southern Nevada, including the shift from department stores to superstores and other big-box retailers. “In 1995, 62 percent of money spent on retail sales took place in department stores and only 20 percent in big-box stores,” he noted. “In 2003, department stores captured 40 percent of sales, versus 39 percent for warehouse and superstores.” Mall owners are turning to prime discounters such as Target and Kohl’s to replace department store chains and bring in more customers, said Restrepo.
Graski pointed out many of the projects currently coming online are big-box developments. “There is very little shop space planned in the large retail centers,” he said. “For example, a 400,000-square-foot center may only have 30,000 square feet set aside for small tenants.” This figure would seem to agree with statistics showing that mom-and-pop stores are getting squeezed out by large supercenters and discounters.
Coupled with the increased popularity of Internet shopping, these trends indicate changes ahead for the retail market, both nationally and in Nevada. However, for the immediate future, developers and leasing agents alike are enjoying the boom in retail construction.