Nevada’s industrial sector has been the hottest of all market segments statewide. Due in large to Nevada’s reputation of being business friendly, more companies are looking to move to the Silver State. And with a high demand for warehouses of any and all sizes, low vacancy rates and extensive preleasing activity, industrial development in Nevada has remained strong even in light of the recent pandemic. Yet, despite its sure footing, the industry is facing serious challenges and, as is true with anything, what goes up, must come down.
From land scarcity, to rising interest rates and significant delays in the supply chain, industrial development may have reached a peak in Nevada. Although dependent on a number of factors, many developers agree that a slowdown to more historic norms is on the horizon. “Right now, we are seeing very strong demand and we are still seeing pre-leasing activity, which is probably in the 50 to 60 percent range on new construction,” said John Ramous, Nevada partner at Dermody Properties. “Prior to COVID it was not uncommon in our industry to build a spec building and expect to have it leased within six to twelve months after we developed it. But [now we] continue to see preleasing activity on the majority of new construction. I do see a bit of a slowdown from a peak, which is not surprising. It is comparable to the market [that] was very strong prior to the pandemic.”
Slowing Down
The COVID pandemic impacted nearly every sector of business in Nevada, and largely in a negative way. However, while some industries shifted or shut down completely, the demand for industrial development surprisingly went up. Large companies like Amazon saw a golden opportunity for expansion which resulted in robust industrial demand throughout the state and created historically low vacancy rates.
“In both [the] north and south we are under 1.5 percent overall vacancy on average, which is phenomenal,” said Ramous. “In a traditional healthy market, you would see anywhere from a 4 percent vacancy rate [or] maybe a little bit higher. That is still healthy because you want to have a balance of product. What we are seeing [now] is that there is still a short supply of logistics within the state, probably more [in the] north than south. [In southern Nevada] we have quite a bit of development going on, much more so than in northern [Nevada]. When those deliver over the next 12 to 18 months, we do expect the vacancy rates to creep up.”
A major contributor to the expected slowdown of industrial demand in Nevada involves challenges of capital. “Many developers are having difficulty finding capital partners, and if the capital is available, the cost of funds has increased significantly from even just one year ago,” said Reed Gottesman, senior vice president and regional manager at Schnitzer Properties. “Put that together with the increased cost of land, increased cost of construction, and stretched out timelines to complete projects, and it is becoming much more difficult for developers to move forward with confidence.” Unfortunately, there are more expected interest rate increases on the horizon as the Fed attempts to combat inflation.
“I think this year we will continue the trend of having a difficult environment for capital and debt,” said Doug Roberts, partner at Panattoni Development Company. “As interest rates continue to rise (we expect another two [or] three interest rate increases by the Fed), it is going to be a pretty choppy year. But again, the fundamentals are as good as I have ever seen.”
The Supply Chain
Delays in the supply chain are also significantly impacting Nevada’s ability to go vertical on many projects. Although this was a problem prior to the COVID outbreak due to dependence on overseas manufacturing, it became exasperated during the height of the pandemic.
“Lead times remain a challenge,” said Mathias Hughes, vice president, investment officer at Prologis. “Electrical gear is still taking upwards of a year to procure, and structural steel remains difficult [to obtain]. Concrete and labor to deliver these buildings is still a challenge. Prior to the early stages of this recovery, we were able to assume a building would be built in about seven months. That has elongated now to 12 to 13 months. The success of those projects is driven in large part by procurement activities to try and get switch gear, electrical equipment and dock equipment. Labor has not been as much of a concern, but I think that goes hand in hand with those supplies because if you cannot get them fast enough, you do not need a crew as large.”
To limit the impact of lead times on supplies necessary for projects, developers are ordering supplies earlier than ever.
“Overall, it is really planning ahead,” said Ramous. “What we typically have to do is, sometimes as early as us buying the land [or] very shortly thereafter, even though we are still going through entitlements or other things, we may have to lock onto [certain products] and preorder them far in advance just so they meet our schedule when we start building the building.”
Another method developers are hopeful will ultimately cut down on wait times for products is by seeking manufacturing plants closer to home.
“’Just in time’ now is ‘just in case,’” said Roberts. “I need to have the stuff next to me ‘just in case’ I need it. And that is forcing companies to want to be near their manufacturing facilities. A disruption of a port in Shanghai that comes over to LA, Long Beach or Oakland or through the Panama Canal, causes massive logistical issues. It is better to have the stuff manufactured in a nearby country rather than having to worry about [it] coming overseas, not to mention the geopolitical issues that are going on.”
Land Scarcity
Warehouses of all sizes are in demand throughout the Silver State. “In Las Vegas, demand is very broad based, and we see customers looking at 100,000 square foot spaces all the way up to million square foot spaces with about a 1 percent vacant market as a whole,” said Hughes. “But if you build a well located, modern functional warehouse, you are going to be in pretty good space. In Reno the sweet spot typically has been that 100,000 to 250,000 square foot space and I think we still see that demand.”
Despite the flexibility in Nevada’s demand for warehouse size, there is a significant scarcity of developable land with over 80 percent of all land in Nevada being federally owned and managed by the Bureau of Land Management (BLM). Paired with the challenge of locating topographical appropriate land with access to water and infrastructure, Nevada industrial developers are facing significant constraints on where they can build.
“The infill land that we own and will develop on [in southern Nevada] is irreplaceable,” said Gottesman. “There are few to no parcels of size left that are well located and ready to be developed. This obviously drives the cost of land up. On the positive side, it makes what we already own more valuable. Land scarcity is a concern for the future economic wellbeing of this valley that so many of us here call home. There are going to be constraints on economic development if we do not solve this land issue.”
The land scarcity in Nevada has not only driven the price of available land up, but also the estimated costs of developing it. In addition to communicating rising costs to clients for projects with tenants in place, developers have to weigh the cost of projects for those without set tenants. Often, the price of land is so expensive that it stifles a developer’s ability to make a project pencil.
“There are no infill sites left,” said Roberts. “If you want to build a 200,000 square foot building in Reno or Las Vegas where you are in the zone of the resort corridor, you just can’t find the land. If you could find the land, it would be so expensive you could not build.”
The most obvious approach to addressing the limited availability and cost of land is through another Nevada Lands Bill. And while Nevadans are hopeful that legislation will ultimately be passed to release more federally owned land for development, no one can definitively confirm if and when that will happen. Consequently, developers are looking for creative ways to maximize what is available in order to meet demand.
“A lot of times we will buy sites that are very infill because they need to be there for their delivery service and sometimes it involves buying land with buildings on them to tear the buildings down,” said Roberts. “That is not unheard of these days, especially in LA or New York, or if you are doing a multi-story building in Brooklyn or the Bronx. You have to tear buildings down to build new buildings. That is just a reality. There is no other way to service the market.”
Developers are also looking for more remote areas to build warehouses where land has already been released by the BLM. Although not always ideal, looking outside of densely populated areas in both northern and southern Nevada is providing developers with unique opportunities to service Nevada’s industrial market. “In a perfect world, we would love to have infill land as close to labor as possible and we have been challenged with that even before the pandemic,” said Ramous. “In Reno you cannot find any infill locations, and in Las Vegas you cannot find any sizeable parcels over 10 or 15 acres infill. What naturally happens and continues to evolve is that in southern Nevada, Apex becomes the more focused opportunity to expand. It is definitely farther out, but it becomes very viable now and going forward over the next 5 or 10 years to build out Apex.” Northern Nevada developers are also looking for areas of opportunity in particular in the Tahoe Reno Industrial Center outside of the Reno area.
A Positive Outlook
The industrial sector in Nevada has been a focal point of fast paced growth for the Silver State over the last few years. Even prior to the pandemic, which resulted in a stark increase in demand, the industry was strong due in large to Nevada’s reputation of being business friendly and attracting businesses from neighboring states that are buried in red tape. And although what goes up must surely come down, a return to historic norms for the industrial market still bodes well for Nevada.
“The industrial market in Nevada remains healthy and still remains a great place to do business,” said Hughes. “Despite entitlement challenges and supply issues, we still can deliver a functional product. We can still deliver a class A product in strategic locations with great freeway access and that is a bright future. Neither market (northern or southern Nevada) is overbuilt. If you were around in 2007, [when] we had the financial crisis where there was a lot of home building, there was a bubble. [But] I do not think that is something likely [to happen] in industrial Nevada. The pre-leasing [activity] has been great and there have been a lot of high-quality customers moving into the market. It has been transformational and positive over the last nearly decade.”
