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You are here: Home / Uncategorized / Industrial Market: From Too Little to Too Much

Industrial Market: From Too Little to Too Much

March 1, 2010 By Nevada Business Magazine Leave a Comment

The industrial real estate landscape in Nevada has turned upside down over the last 24 months, going from too little to, thanks to the turbulent economy, too much.

The result has not been pleasant. Nor is the situation expected to reverse itself any time soon.

Nevada “is definitely suffering” from the overage, according to Doug Roberts, Senior Vice President/Project Principal, Panattoni Development Company, Inc. in Reno. “I think the word overbuilt is correct. Developers who started projects during 2006 and 2007 most likely faced difficulties,” he said. Developers look at absorption, or the amount of space leased in a given year, he explains. Midway through the decade absorption was moving “at a pretty good clip. Most folks, us included to some degree, didn’t think it would abate to the degree that it did because there was so much construction going on.”

Once the construction stopped, however, “it was too late,” Roberts notes. “The spigot had already been turned off on the tenant need.” He estimates that there is now three to four years of standing product before the market will return to previous norms. “Rents have gone down, values have gone down, and that has caused problems for everybody across the board.”

The shortage of demand for industrial space “is certainly having an impact,” according to Brian Gordon, a principal in Las Vegas-based Applied Analysis, a business advisory services firm. “We were an area that had historically low vacancy rates just two and three years ago, in the low single digits. Now Southern Nevada is facing a vacancy rate of about 13.7%, which computes to about 14 million square feet of available space, more than we’ve ever had in our history.” The base of inventory is also larger than ever, leading him to predict “an extended period of correction and recovery.”

How to correct it? “Certainly there has to be improvement in the national economy,” Gordon notes. “You have to start there. When you talk about increased inventories and general improvements in business activity, some of that natural correction will impact Southern Nevada and its industrial market.” At the same time, improvements locally such as a turn-around in the construction industry or increased regional or local distribution will help absorb some of the excess capacity.

Gordon estimates 14 million square feet of vacant industrial space in the state, with another 5 million square feet in retail and 11 million more in office space, for a total of just over 30 million square feet. Industrial, then, represents roughly 46% of all the available inventory. “But remember, the base of industrial inventory is over 100 million square feet, substantially larger than office and retail.”

Applied Analysis has predicted that the turn-around is going to be measured in years and not months. “During the past year we saw about 3.8 million square feet of negative net absorption, meaning that much space opened up,” Gordon reports. “Since we’ve tracking this data back in the early 1990s we’ve never seen a year of negative (absorption), or a net move out of industrial space. So these are clearly unusual times, and the correction period is going to span beyond 2010.”

“When the inventory rises, the price is going to go down,” notes Michael Lyons, Senior Vice President for NAI Las Vegas, a commercial real estate brokerage firm. “The other thing is that there is no one building now. I don’t think there is going to be anybody building for a couple of years, at least.”

Lyons stops short of using the word stagnation, pointing to what he calls “some brighter points, such as the fact that there is space available. Two or three years ago, and even up to a year ago, we had, probably fewer than 10 buildings available that were over 100,000 sq. ft.” He believes Nevada is “more affected by the national economy than we used to be. I have been doing this since 1979, and I have seen some dramatic changes in the market. I think we’ll continue to see some, but I don’t think that there is going to be anything positive for 12 to 18 months.”

According to Lyons, industrial vacancy rates citywide are 13% to 14%, as compared with 4% to 5% a couple of years ago. The current rate could edge up some more, he suggests. “Keep in mind that the vacancy rate does not include subleases, so it could certainly go higher.” A contributing factor, he notes, is always unemployment, “and nationwide it might be closer to 20% than the reported 12% to 13%.”

The “hardest thing to read,” according to NAI Las Vegas Vice President Ben Millis’ estimation, “is how low these (vacancy) rates will go. If they go so low that there can’t be any development for three or four years until there is substantial absorption than this will last a little bit longer. We don’t normally jump back until the housing market makes significant gains.”

Inland Port

Southern Nevada has been spoken of for many years as an eventual inland port of great importance to the region. Some have suggested that the abundance of vacant industrial space may bring such buzz to an end.

Millis says he believes “the very opposite. The big problem with us having an inland port two years ago was that we didn’t have enough space and we were competing with markets that, at the time, had lower land costs than we did. We had 3% to 4% vacancy for a while, and that discouraged people from coming here because it was such a landlord’s market.”

The state’s chances of becoming a strong inland port have increased, in Millis’ estimation, “because we have become more competitive. There is more space available and significantly lower lease rates for the people coming in, plus they’re able to get better concessions than they ever were in the past.”

Millis concedes that it is “painful for people who own industrial properties here,” and “not wonderful for the brokers, either. But in order to have a robust industrial market here we need to have space available, and we need to have competitive lease rates.”

Gordon, likewise, does not believe that Southern Nevada’s opportunity to become an inland port is gone. “The impetus for the inland port really was the limited access on the West Coast, and the delays that can take place in terms of importing goods. Assuming those characteristics remain in place, we are still a viable option for an inland port. Granted, we have much more space than we had at one point, but really the inland port is to increase distribution time lines and not so much about the availability of space. I think that’s why they started thinking about it: the delay and the amount of time it takes to get through those ports on the coast really triggered their looking into these inland ports like Southern Nevada.”

“It still is something that needs to be looked at,” says John Ramous, Vice President of Operations for Harsch Investment Properties, a real estate investment, development and management company whose portfolio includes over 21-million square feet of office, industrial flex, and retail commercial space. “Right now the key is creating jobs, but once we get through this in the next two to three years and things stabilize you still have the same factors that have impacted us historically. The government owns the land around us.  That’s not going to change.  You still have the economic engine of Southern California from the southwest, and you need that.” A Southern Nevadan inland port to alleviate the pressure on some of the ports in California, he adds, is “clearly going to be some years away.”

Back to Normal

Some of what the state needs to do to get back to normal, says Panattoni’s Roberts, is simply “pure patience. Time heals all wounds.   I think the lenders have be pretty patient with the developers knowing that it is going to take more time to lease their projects.” Being too quick to act, he warns, could only exacerbate the problem.

“If a lender takes a building back and tries to sell it or lease it, it will just depress values overall,” Roberts points out. “We have seen that to some degree, but in most cases (lenders) have been pretty cooperative in helping developers get through these projects. Nobody wants these things to be a total loss.” In time, he predicts, “the economy will come back, and so developers should do their best not to panic.  Lower rates would be great. If a tenant gets too good of a deal it’s not good for anybody, because eventually the landlord will lose that building and the tenant.”

The current situation, Gordon says, “creates challenges for those who own property and are looking for tenants and may not be able to find them. There is certainly opportunity for businesses that are considering relocation and/or expansion given the downward movement in price points and increased availability.” Ultimately, the situation proves to be a double-edged sword. “For those who are holding the space it is a difficult operating environment. But for those who are looking to occupy space there is certainly an opportunity that exists.”

“There is no doubt that the industrial real estate market was hit hard in Las Vegas as a result of both the housing crisis and the global economic recession,” said Mo Sheahan, Director of Corporate Communications for ProLogis, a global provider of distribution facilities. “However, we are seeing signs of stabilization and customer activity in the industrial sector. Even though the market may remain soft for some time, (with) declining rates, increasing vacancies (and) increasing abatements, we have confidence in the future.”

Too Much Space?

“I wouldn’t say there’s actually too much,” suggests Harsch’s Ramous. “We have to put a couple of things into perspective. There are different areas: industrial land, industrial space, small bay (typically 5,000 to 10,000 square feet), mid-bay (from 10,000 to 50,000 square feet) and big box (over 50,000 square feet).” He claims that there is really not a lot of big box space still available, calling it “one of the more healthy parts” of the industrial sector.

Pointing to ProLogis having leased 309,000 square feet in Las Vegas to Canadian furniture manufacturer Foliot Furniture in late January, CIP Real Estate’s recent lease of over 84,000 square feet to Cox Communiations, as well as other recent deals, Ramous notes that “with activity like that all you need is a handful of large users to come in and big box space will probably” diminish greatly. Indeed, he estimates vacancy at under 10% now, with “a number of users out there now sniffing around.”

The small bay segment has proven “a little more challenging,” Ramous notes, “because there you compete with a lot of smaller bays (and) industrial condos, which are a dime a dozen. The question is that a lot of them may not be ideally located, and so they may always be vacant.” While the vacancy rate for small bay varies, he adds, based on industry estimates it now sits at the mid-teens to the low 20s, depending on sub market.”

Filed Under: Uncategorized

Paul Krakovitz: Intermountain Healthcare

Edward Vance: EV&A Architects

Scott Arkills: Silver State Schools Credit Union

Tonya Ruby: Cox Media Las Vegas

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