Rental rates rising as industrial inventory dwindles in Northern Nevada | nnbusinessview.com

Rental rates rising as industrial inventory dwindles in Northern Nevada

Rob Sabo
Special to the NNBV

RENO, Nev. — A 31 percent year-over year increase in rental asking rates for Class A and B properties is putting the squeeze on local industrial tenants in Greater Reno-Sparks.

The average asking price for industrial space of 46 cents per square foot is up 11 cents from a year ago, and while larger national companies in the region can better shoulder the additional rental costs, it's causing consternation among local companies that are due to re-sign expiring five-year leases, says Mike Nevis, senior vice president and partner with the Kidder Mathews Reno industrial team.

In some instances, Nevis notes, new lease terms are up as much as 40 percent from five years earlier.

Rising rental rates are due to the Reno market's rapidly dwindling inventory of top-tier industrial space, which is now at or below 4 percent in certain product classes and submarkets. Prior to the regional recession, overall vacancy topped out around 4.5 percent, Nevis notes.

"We are still seeing upward pressure on rents, and that is really a factor of the declining overall vacancy," he says. "Tenants are having an increasingly hard time trying to locate space — there's just not a lot of it out there in certain segments of the market.

"Rents for Class A (buildings) has been more aggressive over the past year because it is newer and nicer product, but we also are seeing Class B rates jump as well."

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Major projects in the works

Though inventory in the region is dwindling, limited new construction is happening, and Dermody Properties and Panattoni Development Company are the two primary developers who are bullish on Northern Nevada.

While the capital sources that funded many new regional industrial projects prior to the recession, such as pension funds and life insurance companies, are still hesitant to venture back into Northern Nevada, Nevis says, Reno's largest industrial builders aren't backing off.

Panattoni's North Valley's Commerce Center encompasses more than 1 million square feet and is all but built out. Two of the buildings sold in the second quarter for $81 million.

Panattoni's next project is at the corners of Longley Lane and Airway Drive. Longley Commerce Center, a 271,000-square-foot building divisible to spaces of 8,000 to 50,000 square feet, is the first new building in years to cater specifically to smaller users.

Pre-leasing inquiries into Longley Commerce Center have been brisk, Nevis notes.

"Panattoni feels confident that it is a product sector that has continued high demand," he says. "What's concerning for a lot of smaller service companies is that no one is building smaller product under 20,000, and inventory is extremely limited."

Dermody Properties' main projects in Northern Nevada are LogistiCenter at 395 in North Valleys and LogistiCenter at I-80 at Boomtown.

LogistiCenter at I-80 is a four-building industrial park that includes two buildings that are complete and leased by Patagonia and a national manufacturer of building products. Construction is commencing on the third and fourth buildings, which are available for lease. The park encompasses a total of 803,000 square feet.

The second phase of LogistiCenter at 395 includes a new building of 436,000 square feet that will be completed in December, with a third building totaling 405,000 square feet planned for future development.

'We have to be proactive'

Michael Dermody, chairman and chief executive officer of Dermody Properties, says future wide-scale industrial development in greater Reno-Sparks hinges on the region's ability to ensure adequate labor and affordable land.

"Labor is one of the underpinnings of our whole economy," Dermody says. "Not just availability, but quality as to what businesses can expect. No one is going to take an industrial building unless they have a workforce that can work in it. Northern Nevada is fortunate to have a very good labor force.

"Next to labor you quickly get to issues such as schools and education," he adds. "Whether you are building a building, are running fulfillment at Amazon or have a white-collar job at a tech company downtown, those groups all look for a strong educational system."

Back in the 1960s, Dermody says, businesses began locating in Northern Nevada for both inexpensive land and access to a ready labor force. Those factors still hold true — although land is becoming more of an issue.

"I have often thought, 'How can land be limited in the seventh-largest state in the union?'" Dermody says. "A lot of companies coming in now, they are from places where you have to commute two hours to get to land or their facility. We are fortunate that our commutes are still very appealing.

"Development is desirable in areas where people can work where they live, shop and have their children in nearby schools. That is one reason why the North Valleys has such tremendous potential," Dermody adds. "In Northern Nevada, we have to be proactive to keep up on our infrastructure, such as traffic mitigation."

Despite the region's potential, market pressures aren't expected to ease anytime soon — Nevis predict as much as 2 million square feet of new leases will be signed in the third quarter of 2018, further tightening the vacancy rate and pressuring rental rates.

READ MORE: NORTHERN NEVADA REAL ESTATE JOURNAL, JULY 2018

This is the third in a four-part series of stories scheduled to be published in the July 2018 edition of the Northern Nevada Real Estate Journal, which the Northern Nevada Business View publishes on a quarterly basis to provide various real estate market updates across the region.

Part 1, published July 18, is here: Reno-Sparks apartment rents soaring; monthly average tops $1,300 in Q2

Part 2, published July 19, is here: Despite Northern NV’s tech boom, office market development lagging

Part 4, published July 26, is here: Reno’s retail market heating up as interest soars for space in planned projects