The industrial real estate market has been crucial to the economy throughout the coronavirus pandemic as its stability has been driven by demand from e-commerce companies as consumer spending habits have shifted away from brick-and-mortar retail to online.
That shift may be permanent as Nevada’s economy begins to recover from the pandemic. But some brokers believe retail real estate will rebound as more people return to work and seek to spend time shopping and dining out with friends and family.
Whether those changes are permanent or not, Rod Martin, executive vice president with Majestic Realty, believes demand for warehouses and logistics facilities will remain “really strong” in Nevada.
“What’s really happening is, for years we weren’t a region known for bulk deliveries, but with e-commerce that has changed the whole game,” Martin said.
Martin said 200,000-square-foot buildings and smaller facilities remain in demand in southern Nevada, but ecommerce companies are now looking to lease or build warehouses in the 500,000 to 800,000-square-foot range.
“A lot of these e-commerce companies have targeted Las Vegas” because of the ability to acquire land for build-to-suit projects that are not only larger in footprint, but height as well, Martin said.
Martin highlighted the North Las Vegas submarket where almost every project is being designed and built to suit to meet the needs of e-commerce companies. Other Las Vegas submarkets, such as the Airport and Henderson, have attracted some very large users, including FedEx and Kroger.
Late last year in northern Nevada, Panattoni Development completed Nevada’s first Amazon last-mile facility in Reno. The 145,602-square-foot building serves as the final distribution hub prior to delivery to customers, enabling shipments to be delivered as quickly as possible.
Urban Outfitters’ built-to-suit project in northern Nevada allows the retailer to ship to customers and outlets across the country.
Demand in northern Nevada continued to be more diverse than simply large warehouses to include flex space, distribution hubs and manufacturing facilities.
“It is absolutely a broad-based rally within the industrial property sector,” said Brad Lancaster, first vice president industrial services and shareholder with Kidder Mathews in Reno.
“Demand continues to outpace inventory in all size ranges of industrial,” Lancaster said. “This has been the case for the past few years and, if anything, demand is actually increasing since the pandemic began.”
In southern Nevada, distribution warehouses operated by Fanatics, Amazon, Bed Bath and Beyond, Sephora and other companies have opened and are thriving in North Las Vegas.
Martin said it’s not just demand for space by large users that is driving the industrial market, but smaller distributors needing so-called “last mile” warehouses to get goods on the last leg of their journey to their final destination.
Mathis Hughes, vice president and market officer Nevada with Prologis, agreed that the “demand metrics have remained strong” as Nevada has dealt with the negative impacts of the coronavirus.
“It is really going back about five years for really good demand in both Reno and in Las Vegas,” Hughes said. “Our demand has been broad based, and we see lots of users in different sizes.”
Hughes added that there has been, “robust activity in the big box segment (500,000 square feet and above) but there has also been a lot of homegrown users in that 20,000-square-foot range and up. I would not point to one segment and say one is outperforming the other.”
In terms of the 20,000-square-foot and higher range, Hughes said users in these smaller sizes range from Fortune 500 companies to homegrown local users.
“We see construction, we see home improvement, we see durable goods companies,” leasing or buying these facilities, Hughes said.
Martin agreed, saying Majestic Realty is building two warehouses shy of 100,000 square feet in total in the southwest submarket near Decatur Boulevard and the 215 freeway that should be completed in June or July.
He said interest in their buildings and others in the area has been, “driven by companies serving the resort corridor.” Martin added that the southwest submarket is dominated by these companies, including laundry services, food suppliers and other firms that are vendors to the casino industry.
Gregory Johnson, CEO of Odyssey Real Estate Capital, said Las Vegas and Reno, “are going to continue to expand in a pretty big way.”
“The bigger industrial buildings are in favor here,” Johnson said. “I expect that demand will continue for the next two to three years.” Johnson added that, “as fast as you can build it … it will lease up.”
Coronavirus and Real Estate
The coronavirus and its effects on the Nevada economy have changed the way we conduct our everyday lives, from restricted access to casinos, to wearing masks inside the supermarket or staying at home and buying goods online.
Despite the struggling economy, industry brokers believe the long-term effects from the pandemic on the industrial real estate market will be minimal.
“COVID touches every part of our lives and I think industrial real estate is no different,” said Hughes. “Some of our research shows it has really been an acceleration of e-commerce.”
“Our customers are looking at this and realizing how important a resilient supply chain is in this market,” Hughes added. “If we have runs on certain items in the stores, they have to make sure they can supply that safely and efficiently for everyone.”
To some degree, Hughes said, it’s true the coronavirus has increased the need for warehouse space to meet the demand.
“As it relates to industrial real estate, we haven’t seen an adverse impact on the market,” Martin said. “That’s not to say we won’t see it, but it has had a greater impact on the retail market.”
Lancaster said there have been no signs of any negative effects to the industrial sector so far, but he wouldn’t be surprised to see some effects if the pandemic continues.
“Many of the occupants of industrial space are tied to industries that have been directly affected by the pandemic in some way,” Lancaster said. “If this goes on for two plus years, I think we will see some negative effects eventually. However, there may be replacement occupants and enough demand to level that out.”
Vacancy and Demand
Due to the large amount of new construction recently delivered in Las Vegas, the vacancy rate as the industry entered a new year stood at 4.6 percent, a modest increase from 3.4 percent for the same period last year, CBRE data showed.
In northern Nevada, the vacancy rate stands at 3 percent, a decline from 4.2 percent as the region continues to post net absorption growth of more than 1.2 million square feet, pushing the year-end total to 4.3 million square feet.
The 120-basis point decline represents the largest drop in the vacancy rate in three years and data from Odyssey Real Estate Capital projects the vacancy rate to hold steady, or even decline slightly as demand continues for these properties.
Tenant demand for some leases over 100,000 square feet is expected to help keep the vacancy rate low, with substantial leasing activity from warehouse and distribution tenants. In northern Nevada, which includes South Reno, Sparks and four other submarkets, the overall asking price is 55 cents per-square-foot.
Hughes said the difference between the two Nevada markets is that northern Nevada has traditionally had a customer base that needed larger warehouses.
“We see a lot of users in the 100,000 to 500,000 square feet space historically,” Hughes said. “In Las Vegas, that’s kind of a new trend. Coming out of the Great Recession most of the users were in that small range. We’ve seen a lot more demand for larger spaces.”
“Is there really a difference in the customer base today?” Hughes asked. “I don’t think so, as Las Vegas has caught up on large facilities.”
As we look at the under-construction net activity in both markets, Hughes said, “We have seen a steady stream of new supply.”
“So, while the numbers are pretty robust with low vacancy rates, I think the supply side is a pretty compelling story. [I don’t] think we are going to run out of viable product,” he added.
Pre-leasing is also definitely a trend seen in Nevada’s industrial real estate market.
“I would not tie that back to a lack of supply,” Hughes said. “I think it’s the increased sophistication of these facilities, where there is lead time of eight to nine months to set them up. You have a layer of sophistication of these facilities.”
“I don’t think necessarily its supply driving pre-leasing as much as the sophistication and the evolution of these facilities, “ Hughes added.
Johnson said that activity has led to a significant range in lease rates in submarkets statewide.
Those rates range from a high of 87 cents per square foot per month in the central and airport regions of Reno, to 56 cents per square foot in Sparks. In the southern Nevada submarkets lease rates range from $1.01 per square foot on average in Henderson to 60 cents per square foot in North Las Vegas.
Development and Investment Opportunities
Significant deals that have defined the industrial market include one of the largest leases the Reno industrial market has ever seen signed for a 997,004-square-foot build-to-suit project for an undisclosed company under the name “Project Zephyr.”
The Class A distribution facility is part of Dermody Properties and Reno Land Company’s new development at The Park at McCarran located east of the Reno Tahoe Airport at Mill Street and McCarran Boulevard.
The industrial buildings are designed for industrial, logistics and manufacturing companies. They will accommodate e-commerce operations, have ceilings between 32 feet and 36 feet and are located about a mile away from Interstate 80, making the buildings convenient for shipping and logistics operations.
Geodis Logistics, a global logistics company, has also signed two renewal deals totaling 452,908 square feet in Sparks, while also signing a new lease for 255,000 square feet on South McCarran.
In southern Nevada, demand for space in the North Las Vegas and Henderson submarkets continue to be strong entering 2021. The two areas, combined with the airport region, reported more than 1.6 million square feet of leasing activity.
Ez-Flo International’s 213,989-squarefoot lease and City Electric Supply Company’s 95,513-square-foot lease, both at Northgate Distribution Center, were the most recent significant leases in North Las Vegas.
Investment sales carry on at a steady pace in the first quarter as CapRock Partners continued its acquisition of properties, acquiring a 12.95-acre industrial parcel in the southwest submarket.
After successfully petitioning the rezoning of the site at the junction of South Riley St, and West Hacienda Ave., CapRock acquired the land from a local investment group to develop a three-building industrial park totaling 230,000 square feet.
The speculative industrial park, which is expected to be complete in early spring 2022, will include a 132,450-square-foot industrial facility, along with a 75,836 and 21,976-square foot building.
CapRock, which entered the Las Vegas market in 2017, has also acquired a five acre site and has begun construction on Tropical Logistics, a two-building 1.1 million-squarefoot logistics complex. Both projects are in North Las Vegas.
Panattoni Development sold its 616,150-square-foot, fully leased building at 12300 Bermuda Road in Henderson to Stockbridge Capital Group. Additionally, Huntington Industrial Partners sold a three-building 343,820-square-foot complex in North Las Vegas to Lincoln Property Company for $48.6 million.
California Migration
Similar to trends seen in the state’s housing market, brokers and developers say they’ve seen an increase in demand for warehouse space from companies seeking to move from California to Nevada.
“Absolutely, the state of California and their approach with business owners and taxpayers is forcing many to consider Nevada and other states,” Lancaster said. “However, we are also seeing many companies interested in northern Nevada coming from other states and some from outside of the U.S.”
Lancaster attributed the interest in the area to its, “locational advantage (along Interstate 80) to serve and distribute to 11 western states faster and more efficiently than is possible from any other location.”
“We see a lot of people coming over the hill in both southern and northern Nevada,” said Hughes. “There are a lot of different reasons why people are coming from California. But we do see net migration from California.”
Johnson said, of 25 recent showings of his company’s two buildings for sale at the Cheyenne Industrial Center in North Las Vegas, all but three of the showings were with firms from the Inland Empire or northern California.
“Businesses are looking at Phoenix, Salt Lake City, Las Vegas and Reno and asking, ‘What’s the best deal for me?’” Johnson said.
