“Industrial real estate across the country is doing extremely well right now. Las Vegas is out performing, but it’s not exclusive to Las Vegas,” said Garret Toft, executive vice president, industrial, CBRE. “We’re seeing a period of very strong demand from tenants and users at a time where we’ve been developing quite a bit of industrial. But, demand is outpacing [supply] and there’s a bit of a lag in deliveries of new projects in 2022.”
It’s not just southern Nevada or Nevada in general that’s seeing such a strong demand for industrial products.
“There’s always an exception to the rule, but right now, southern Nevada, our surrounding markets of Phoenix, southern California, Salt Lake and Reno are all seeing similar record numbers, so we’re not an outlier,” said Paul Sweetland, senior vice president, industrial, Colliers Southern Nevada. The majority of deals, around 90 percent, are speculative development.
The market is hot statewide. Properties are being snapped up. This means there are more people who want industrial commercial real estate (CRE) than there is product to go around. Partly that’s due to the time it takes to get properties entitled and projects built, and also because many projects under construction in 2020 were delayed by pandemic shutdowns and slowdowns, and by material procurement issues in the construction industry.
“That has led to a very tight supply of new construction coming online in 2022,” said Toft. “The demand is as strong as I’ve ever seen it, and you’re seeing rent appreciation in some cases as much as 30 percent over the last year.”
Vacancies in Las Vegas are under 1 percent, and the same is true in many major metro areas on the West Coast. Investor demand is also extremely strong as industrial commercial real estate properties are now a favored investment class for institutions. “On top of that we have issues in a lot of the major metros, including Las Vegas, where there’s a real scarcity of land that is, near-term, serviced with utilities people can develop,” said Toft.
Northern Nevada is also booming. “We experienced a record-breaking 2021 across the board,” said Joel Fountain, senior vice president, industrial, Dickson Commercial Group. “[For] infill transactions, sales were up 89 percent from 2020 to 2021. We rounded out the year just shy of a billion in sales here, just over $900 million. Gross absorption is up 24 percent from year-to-year and we wrapped up with 8.8 million square feet of direct absorption.” That’s including buildings leased, buildings sold and owner-user acquisitions.
The record-breaking 2021 left 2022 with a shortfall of inventory in northern Nevada and a challenging vacancy rate of only 2 percent.
“The bulk of new construction coming up out of the ground is scheduled for the later part of 2022, that will house new opportunities for tenants in our market,” said Fountain. “We’re stuck with a shortfall in inventory right now, making it challenging to find buildings for tenants to expand or locate in our market.”
Less than a decade ago, industrial commercial real estate wasn’t so hot. In fact, nothing was even being built. Between the end of the Great Recession and 2015, there was a hiatus in industrial building. Then in 2015, spec development in southern Nevada started back up, with developers hoping to lease up warehouses before they were fully built.
“At that point, the [southern Nevada] market had about 110 million square feet,” said Toft. “Fast-forward to the end of last year and we were about 150 million square feet, a tremendous amount of growth in that time. [We’ve], actually absorbed, more than that because the vacancy rate today is lower, so there’s been more demand than that incremental 40 million square feet.”
It’s expected over the next couple of years the region will see another 20 million square feet come online.
So, what has the market so hot? The biggest driver is regional distribution, which could be e-Commerce, or third party logistics companies distributing regionally for customers. But there are other traditional and non-traditional users looking for space.
“What we saw coming out of lockdown was, all of a sudden, a major interest from manufacturers. Our market hadn’t really seen manufacturers show up looking for space but we had seen a pickup there. Food and beverage has been active, the demand’s pretty broad based,” said Toft. “In the industrial market here, for years, there had, certainly, been regional demand. But, there was also a large local presence with the trade show companies, convention services, users servicing the resort [industry]. That is a much, much smaller piece of the pie today.”
Some non-traditional users of industrial properties are moving into the northern Nevada market. Food processing manufacturers are taking on space. In addition, medical device manufacturing, tech demand, cold storage, data centers and last mile solutions are all coming in.
“Those are some of the non-traditional users we’re seeing [who are] actively pursuing industrial space in our market,” said Fountain.
Outside metro areas there’s a demand for last mile facilities. These are, essentially, local delivery and need to be centrally located so they can deliver product within the hour, or as needed.
Delivering products is established. Returning products is becoming a trend. Reverse logistics is something companies are beginning to consider.
“Sometimes you order something and need to return it and it stays with you,” said Sweetland. “Sometimes it’s ‘send it back’.” That requires figuring out reverse logistics, which should eventually create a new demand for industrial space.
“We have tenants that are leasing space today that won’t be delivered until some time in Q1 or Q2 2023, which is something that I’ve never seen before,” said Toft.
Properties are being built, and space is coming but, near term, it’s tough to find industrial CRE if there’s a need for it to be up and operational in 2022.There’s also a question of where it will be located.
“There’s limited supply of land in all parts and all submarkets of Vegas, hence the increase in activity at APEX, because it has somewhat more ready, available land for development,” said Sweetland. “If there’s any industrial, or potential to be industrial, zoned land anywhere in town, it’s being looked at right now.”
For a long time, most industrial land available was in the north part of the valley where the majority of construction activity is centered and expected to remain for the foreseeable future.
“Developers are trying to go anywhere they can around the Valley here to bring on some additional space,” said Toft.
There’s expected to be activity in the West Henderson area where developers are trying to find any private land possible on the outskirts of town to build buildings, as long as there are utilities in place. But those areas are only a fraction of the supply compared to what will happen ultimately in North Las Vegas and the APEX area, according to Toft.
APEX Industrial Park is the northernmost point for industrial land, and there have been multiple land purchases by everyone from speculative developers to end users. Some end users already in place include Ball Corp. and Kroger.
“Due to the fact that the Speedway [Industrial Center] is nearly fully built out, APEX is the next frontier or destination,” said Sweetland. “Water is being brought up through south APEX, Miner’s Mesa. That’s why Kroger, Dermody, VanTrust and some others like Ball Corp. [are moving there], because of the utilities coming in. We’ve been staring at that map for years and years and years and it finally happened. The Speedway [Industrial Center] had to be basically fully absorbed for APEX to start to really take off.”
Over the years APEX hasn’t gained much traction, partly because it’s only recently been serviced with utilities. It sat empty for years, other than being some use to heavy industrial users. Now, as the Valley is running out of industrial land, even on an infill basis, there’s starting to be development there. CBRE is working with VanTrust Real Estate which will ultimately deliver 4.5 million square feet of industrial space. Another area of APEX called Miner’s Mesa will house several Fortune 500 companies that are developing their own facilities there. Other areas where industrial development is headed include Eldorado Valley, and south of Las Vegas near Jean and Sloan.
At northern Nevada’s Tahoe-Reno Industrial Center, the largest industrial park in the world, there’s currently approximately 1.3 million square feet of spec buildings under construction and scheduled for 2022.
“Speculative development buildings are being built with the intention to lease them up and 2 million square feet of new construction within the park is scheduled for 2023. [This is] including a proposed cold storage spec project out there, that’s the first of a kind for our market,” said Fountain.
Trends in Industrial
Even before the pandemic hit, retailers were making a move to warehouses to fulfill online sales. That trend is continuing with a bump from COVID that accelerated demand.
“I don’t see the trend stopping any time soon, but I think retailers have also recognized that it’s not going to be an exclusively online thing. There’s always going to be some brick and mortar for certain types of businesses,” said Toft.
“In our world, on the industrial side, we’re still seeing a surge of e-Commerce related businesses locating and expanding within the market,” said Fountain. “Still, distribution is the primary driving demand for bulk warehouse space and, just as the national trend, there’s not quite as much activity for retail big boxes.”
Ever since Tesla was established at Tahoe-Reno Industrial Center, there’s been activity with ion battery-related industries, ancillary companies related to manufacturing and recycling of lithium-ion battery parts and product, and that trend is continuing.
Northern Nevada continues to be the distribution hub to western sates, though the ability to support demand for properties and anticipated future growth for industrial space in the market is hindered by scarcity of land. Future building is heading east and south of Reno, into Fernley, located on I-80, and there’s increasing demand in Carson City, Minden and Gardnerville.
One trend in industrial is bigger – bigger, taller, with more space for parking. During the last cycle of spec building industrial CRE, 300,000 square feet was probably one of the larger buildings delivered in the market, said Toft. Today a couple developers are planning million square foot facilities.
“Buildings are getting bigger, especially on large distribution facilities. Clear heights are getting higher, moving to 40-foot clear height on the interior,” said Toft.
There’s demand for trailer parking space, and auto parking. Toft added, “Over time you’ll probably continue to see more and more automation built into tenant’s operations, but that’s not to happen overnight, and today many of these tenants are still hiring and needing auto parking for employees.”
“One of the things that’s changed with the trends is, Vegas has become more of a distribution hub,” said Sweetland. “It has seen an increase in more institutional credit and capital, larger tenants in square footage, meaning they’re taking down more space, and larger in credit [worthiness].”
Vegas has relied heavily on more organic or service industry, casino-related type tenants, according to Sweetland.
“What we’ve seen recently, [are] regional tenants that will service the region, and not just our local economy. They’ll service southern California or Phoenix or other parts of the Southwest from Vegas because the rents are a little cheaper here than they are in southern California.”
Where Reno has long been considered a transportation/distribution hub for the western states because of the confluence of highways and railroads and because of the drive times to other major metro areas, Vegas hasn’t traditionally been considered a hub despite its location. In part that was because trucks came into the city full of products needed by the gaming industry, but because southern Nevada didn’t have a lot of manufacturing, they usually left empty.
With manufacturers starting to take industrial space in southern Nevada, there’s product that can go back out on the trucks. The exodus of companies leaving California to escape taxes and regulations and heading for southern Nevada to set up shop still need to get their product to their markets; another reason Vegas is becoming more of a distribution hub.
Current demand for industrial properties is, in part, high due to demand from companies that have learned from pandemic-caused supply chain issues it’s important to have safety stock inventory on hand. E-Commerce should continue to grow, as well as regional distribution and last mile solutions.
“I think demand’s going to be strong for the foreseeable future,” said Toft. “We do have a lot of supply coming, but we’re starting from a very low vacancy rate. Even if we have a year or two where demand isn’t as strong as its been, I think the market’s going to be in pretty good shape.”