The credit crisis, economic recession, negative job growth, high unemployment rates and a recovering residential industry all are wreaking havoc on Nevada’s industrial real estate market. Consumer confidence and spending are down. Numerous businesses have downsized, tabled expansion plans or closed.
“The market, which historically has been geared for growth, now is dealing with a local, regional and global economy that’s affecting new development as well as performance of existing properties,” said Jeremy Aguero, a principal analyst at Applied Analysis, a Las-Vegas based financial advisory and economic consulting firm.
“Soft,” “challenging” and “uncertain” describe today’s industrial, experts said.
“It’s a great time to be a tenant right now,” said Mike McCabe, senior vice president—industrial group, at Colliers International—Reno. “It’s not a fun time to be a landlord. It’s hard to justify a purchase.”
Today’s Market
Compared to the same time last year, demand for industrial real estate is down throughout the Silver State due to lost jobs and decreased consumer confidence, said Dan Doherty, senior vice president—industrial division, at Collier’s International—Las Vegas. Vacancy rates are up, into the double digits, meaning supply has outpaced demand. Some, but not many, projects are being developed or constructed, and little of those, if any, are spec, those built in anticipation of finding a buyer. Developers are waiting for the industrial inventory to absorb and land prices to fall before starting on new product. Leasing is slow, and rents are down.
Southern Nevada
In Southern Nevada, local issues affecting the market include declining gaming revenues, off-and-on construction on the Strip and a huge downturn in the retail segment, Doherty said.
While the industrial market is under-performing, it remains relatively healthy compared to other commercial real estate sectors, such as office and retail, said John Ramous, vice-president of operations for Harsch Investment Properties, a real estate investment, development and management company with a regional office in Las Vegas.
Of the region’s industrial submarkets, central Las Vegas Valley is the strongest, as companies want opportunities close to the Strip, the major activity hub, Ramous said.
“Where that was very tight one to two years ago, it has softened, and prospects or tenants want to come back to that,” he added.
Henderson also is generating demand. The city has a solid infrastructure, highway access and amenities, and its industrial product is accurately priced, Ramous said.
Industrial inventory in Southern Nevada totals about 105 million square feet, twice that of 10 years ago, Aguero said. About 11 percent of that inventory—11 million square feet—remains vacant. That vacancy rate is nearly double the 6 percent it was 12 to 18 months ago.
Most of the vacancies are in smaller buildings (2,000 to 5,000 square feet) and mid-size buildings (5,000 to 20,000 square feet), as these product types got overbuilt prior to the market shift. At that time, steep land costs deterred development of large buildings (50,000 square feet and up), as they wouldn’t be feasible financially.
Development and construction activity is about one-third or one-fourth of what it was a year ago, Doherty estimated, and that primarily is projects that were financed and under way long before the economic downturn. For example, Harsch Investment Properties, instead of starting on planned industrial projects, has pushed them out at least 12 to 18 months. Harsch develops primarily multi-tenanted, light industrial parks along with some big-box projects.
“Our own portfolio has seen higher vacancy, so we want to make sure there’s continued demand. At the levels right now, we’re reluctant to break ground on anything,” Ramous said.
Leasing of industrial space in Southern Nevada is slow and, recently, has begun operating in reverse, Aguero said. In 2009’s first quarter, Southern Nevada experienced a negative net absorption of 1.4 million square feet, according to Applied Analysis data. This means square footage from tenant move-outs surpassed square footage of new space occupied.
Companies moving into smaller or less-expensive spaces accounts for most of the leasing, Doherty said. Some out-of-town companies are moving in, but not to the extent they did 18 months ago.
Some local companies, however, are expanding their operations. Priority Plastics, for instance, is moving from a 40,000- to a 102,000-square-foot facility. Freeman Co. plans to vacate its 300,000-square-foot space for a 420,000-square-foot space being built for it.
Actual, or effective lease rates (those indicated on the lease) are down about 15 percent, asking rents, about 10 percent.
Except for a few user-buyers of industrial space, property sales are stagnant, Doherty said.
Northern Nevada
Although Northern Nevada’s industrial vacancy rate has increased and other indicators have worsened, the core market itself remains healthy, said Par Tolles, president of Reno-based DP Partners, a Reno-headquartered real estate development and asset management company focused on industrial and office. The core market excludes the Tahoe Reno Industrial Center (TRIC), which comprises the entire eastern submarket. With 30,000 acres of developable land in its industrial complex, TRIC skews Northern Nevada data.
Total industrial inventory in the north is about 71 million square feet. An oversupply of nearly every industrial product type exists, however, most of the region’s vacant inventory is in big-box (300,000+ square feet) industrial spaces, McCabe said. Before the economic downturn, retail drove larger buildings, which were more affordable to build when construction costs were high. Today, however, demand for those is depressed.
The vacancy rate, which includes TRIC property, is 14.5 percent, for a total of 1 million square feet. This is due to tenants contracting into smaller spaces, closing or consolidating operations or leaving the market. Tenants that recently halted local operations include BrightPoint (159,500 square feet) and Entertainment Distribution Co. (100,276 square feet).
Like Southern Nevada, in the fourth quarter 2008 and first quarter 2009, the industrial market experienced a negative net absorption. In the first three months of 2009, about 1 million square feet were negatively absorbed. “You have to expect that in a market like it is today,” McCabe said.
Nevada’s northern region has experienced increased industrial activity by third-party logistics providers, including ITS Logistics, Kuehne+Nagel Logistics and Jacobsen Cos. This likely is due to more and more companies outsourcing their distribution functions to cut costs.
Despite significant decreases in construction costs, new development is at a standstill, McCabe said. In 2009’s first quarter, only 32,000 square feet of industrial construction were completed, according to Colliers—Reno. Projects begun before the economic dive, however, are being completed. Reno-based DP Partners, for example, has put a moratorium on spec development in 2009, Tolles said. The company develops everything from self-storage to flex space to big box distribution, spec and build-to-suit, in primarily Northern, but also in Southern, Nevada.
“It is really, really difficult to finance any kind of spec building right now, if not impossible,” Tolles said.
Leasing is taking place, many of them existing tenants relocating or downsizing. Yet, some are strategic moves by firms to occupy new space. Earlier this year, Bush leased 85,875 square feet; Diapers.com, 85,566; and NewGistics, 72,500.
While asking rents for industrial space have remained static, effective rates have come down, indicative of a tenant’s market, McCabe said.
The industrial sale market is inert, primarily due to difficulties obtaining financing and uncertain property values.
“To finance new ($3+ million) projects today, you have to come up with 30 to 40 percent equity,” McCabe said. “That makes it difficult to make properties pencil, especially when you have depressed rental rates and a lot of vacant lease properties on the market.”
Current Trends
The economic squeeze on many businesses and the industrial market currently favoring tenants are causing tenants to opt for shorter-term leases, which is a mistake, Doherty said. They should ask for the longest lease-term possible, which will increase concessions, lower annual increases and afford them with a lower initial lease rate, he added.
“Even if you commit to a lease term longer than you’re comfortable with, in the next two to three years, we will see rent growth again, which makes it easy to get out of space if you don’t need or outgrow it,” he said.
Some tenants are subleasing part or all of their space for the remainder of their leases. These subleases tend to be short term, for about two years or less.
Renters are demanding concessions from their landlords—for new or mid-contract leasing rates, upgrades, smaller or larger spaces, and others. Landlords, sometimes, are accommodating. Concessions may include a percentage off the rent, free rent for a certain time period, flat rent for some years, moving allowances or increased tenant improvement dollars.
“Because leasing rates have come down, landlords are, in general, being much more open to different possibilities within their projects,” Ramous said. “They’re being much more aggressive in deal-making.”
“It’s being much more offensive as opposed to being defensive, and being of front of brokers and prospects much more than you needed to in the past,” he added.
Expected Recovery
Nevada’s industrial market likely will worsen before it turns the corner. It likely will struggle throughout 2009 and into the first half 2010, many experts predict.
“I think there is a little more pain to be felt within the market,” Tolles said.
For recovery to occur, consumer confidence must increase and new jobs must be created. Debt and equity must loosen up, too.
The state can expect to see increasing bankruptcies and foreclosures in all the commercial real estate sectors, which will depress industrial market activity.
Southern Nevada
Before industrial growth can continue in Southern Nevada, it will need to experience a reduction in the number of homes for sale, completion of CityCenter—four luxury high-rise residential condos on the Strip—and stabilization of the tourism economy, Aguero said.
Vacancy rates likely will increase in 2009. Lease and sale rates are expected to decline up to an additional 10 percent through at least 2009, maybe into 2010 as well. Negative absorption likely will continue through 2009 but to a lesser degree. Leasing likely should pick up in early 2010.
Sales won’t happen until financing becomes easier to obtain and some purchases are made to establish value.
Before a substantial amount of new industrial can be built, existing inventory must be absorbed. Therefore, an up-tick in construction won’t take place for at least another year, and significant new construction, for another two to three years. When building starts, it’ll be selective and in strong submarkets. We likely will see more environment-friendly industrial buildings.
“I think that people are posturing themselves so once the market shifts back to the good, they’re going to seek sustainable ways,” said Tony Dazzio, senior vice-president of Burke & Associates, a full service general contrator based in Southern Nevada.
Northern Nevada
According to the experts, vacancies likely will increase in 2009. When development and construction accelerate, Northern Nevada will likely see smaller, multi-tenant buildings. Big-box construction likely won’t come back online again until early to mid-2010 at the earliest. The use of “green” building practices also is expected to heighten.
Leasing likely will pick up this year in the third or fourth quarter. Rental rates are expected to remain in the 10- to 20-percent below levels throughout 2009 and into 2010 until some vacancies are absorbed. Sales will gain momentum once leasing picks up, credit is easier to obtain and new projects can be justified financially.
“It’s going to be another year to work our way out of it,” Tolles said.
