Industrial properties are those that support industrial uses, meaning either the land intended for development or the buildings intended for uses ranging from distribution and logistics to warehousing and manufacturing, to services that support the local community.
Metro areas in Nevada are becoming increasingly land-constrained, and developers are turning to infill properties to construct industrial buildings or heading to the outskirts where there’s room.
Zoning defines industrial property in municipalities. Residents don’t want industrial use inside neighborhoods, and companies don’t want to be there. But properties aren’t necessarily designated on municipal master plans from the start. They’re zoned by cities as those cities grow, creating pockets of use: residential here, retail nearby to create community, industrial on the edges to service that community. And just because it’s zoned for industrial or residential doesn’t mean it’s set in stone. Zoning can be changed if a different use is considered better.
What Is Industrial?
“First off, if you’re lucky enough to find a piece of property that’s zoned industrial, then that’s an industrial property,” said Larry Monkarsh, managing member, LM Construction Company.
That doesn’t mean it’s going to be successful. The old location-location-location mantra applies. “So to quote the guy who trained me—my father—you want to be near a major interchange. You want an airport nearby if at all possible, and rail, if possible. Doesn’t mean there has to be rail to the property, but those are the neighborhoods you can typically be welcomed into.”
“Typically, [industrial property] will be in proximity to traffic corridors, so the major arterials, the streets that are large enough to have industrial traffic with trucks and cars,” said Phillip Dunning, partner, Panattoni Development Company. “It has to have a certain size. We want parcels that we can build an efficient building on. It has to have a limited amount of slope. And zoning is interesting because every jurisdiction across the U.S. has a different zoning or entitlement process.”
“So a lot of this is master planned, but that’s not to say you couldn’t take a piece of property you feel ripe for industrial development and have different zoning attached to it so it is conforming land use,” Monkarsh said.
Nonconforming land is a little harder to change. That’s property that doesn’t meet all the current requirements for the intended use in that jurisdiction. Developers tend to avoid that situation; following the path of least resistance makes it easier to get zoning and develop a project.
Every city has a master plan, and overlays help them consider the best use of land when zoning. Master plans and overlays indicate where cities want to see areas develop as business corridors or industrial areas. “You would think they would just go in and zone everything the way they want it,” Dunning said. “But this offers them a lot more control. It’s part of what makes the process hard.”
All of that to say that property being used for industrial uses has to be zoned industrial. How that’s done is determined by the municipality, and it’s important to that municipality for what it provides to the community: jobs, logistics, and a tax base, said Reed Gottesman, SVP, regional manager, Schnitzer Properties. So municipalities protect industrial space.
Where Is the Land?
Zoning can be changed, or the property could already be zoned industrial or situated around other industrially intended land, making it perfect for that use. But that suggests that land can be found to begin with. Land for every use is constrained in Nevada.
“There’s a limited supply of infill land, generally smaller parcels in the southwest areas from 1 to 5 acres in other parts of Southern Nevada,” said Dunning. “But they’re very rare. They’re not always in the overlay you want. They’re not always an ownership structure that’s willing to sell.”
“Land exists here, but well-located and available industrial land is definitely constrained,” said Gottesman. “There are a few large pieces of land suitable for industrial development left in our market, certainly within what I would consider infill. There are scattered smaller pieces still available, and much of what’s left is more challenging pieces to develop on.”
Gottesman calls scarcity a double-edged sword. It protects against overbuilding while constraining economic growth in the community. Limited supply and ongoing demand drives the price of land up.
Because so much Nevada land is held by the federal government, the process of buying through occasional auctions is long and complicated. Appraised value can be higher than intended use warrants paying for. It can also take two to three years to get through the process, and the appraised value doesn’t always align with the costs for the intended use. It’s one reason land speculators will buy and hold land until a developer comes looking for it. Because developers don’t want to take on the risk of a property where they may not be able to build what they want. That would mean having capital tied up in land they can’t develop, and if they can’t use it for what they want, neither can their competitors—which means they probably can’t sell it.
“The cost of construction is fairly fixed,” said Dunning. “It fluctuates a few percentage points either up or down. The timelines for construction are fairly known and fixed. The market for lease rate or the value of the building is set by the market, so you can’t change that. The only thing you can change is the cost of the land to make it both affordable for construction or development.” So when land is scarce and prices high, projects aren’t financially feasible.
Land in Northern Nevada is very constrained, with little infill available. So development is heading east out of Reno along I-80 into Fernley, some 30 miles away, accessible by interstate and rail. On the road to Fernley, there’s Tahoe-Reno Industrial Center (TRIC), 10 miles from the center of Reno.
“People continue to build buildings and develop on those lots that were carved out of the mountainside there, so TRIC is filling up if it’s not already full, but I think there’s another release of land that they’re looking at,” said Monkarsh. Part of that land is going to a large data center that just broke ground.
Among challenges to finding developable industrial land statewide is infrastructure and ownership. Getting utilities out to industrial property past municipal boundaries can take years. In Southern Nevada, the Apex industrial park in North Las Vegas has room for future development. It took years to get utilities to the park, but development is now happening there.
Some developers are working in Sloan, 18 miles southwest of Las Vegas; others are buying land outside Jean, 20 miles south of Vegas. There are rumors that land bought in Southern Nevada near the California border may be intended for industrial use. Southeast of Vegas is Eldorado Valley, set in the Mojave and slated for industrial.
Projects Needed
Northern Nevada is still building industrial projects while dealing with land constraints. But Southern Nevada is seeing a slowdown.
“The market was supercharged over the past few years, and we saw this unprecedented rent growth and demand for industrial real estate,” said Gottesman. “That led to a wave of new development, especially in large stuff—big boxes went up. Now I think we’re normalizing. We’re absorbing this large amount of newer big-box product that came to market.”
Another piece of the story behind slowing development is, again, land constraint. Building in Southern Nevada municipalities is on infill land, which is very limited. Land that isn’t infill is pushing out beyond the boundaries of cities. That’s where places like Apex come in, with room for bigger projects.
“But again, we’re going to go through this cycle where less will be developed,” said Gottesman. “Right now the market is absorbing space, but the market has to absorb these large spaces that are available and vacant that were delivered over the past year or so.”
Schnitzer Properties still has extensive properties in the region, and is finishing up several projects from their Southwest Beltway Commerce Center at nearly 262,000 square feet, to the Dean Martin Commerce Center just under 155,000 SF, which includes an incubator project. While it’s expensive to build and management intensive, Schnitzer Properties is uniquely set up to make it work. “We saw an opportunity in that incubator space and so far, so good—there has been great activity,” said Gottesman of the property that was recently delivered.
There’s still demand for properties under 250,000 square feet, or even smaller. That works for LM Construction. Their sweet spot is 30 to 100,000 SF buildings; most popular with end users is 20- to 50,000 SF.
“So we’re staying in that realm. A lot of developers jumped to the big box when there was a need, but we’re staying with our bread and butter, which is those small to middle-sized buildings for small businesses and smaller developers that aren’t interested in owning a million square feet out there, but may be interested in having an 80,000 square footer in the portfolio.”
It also works for Schnitzer Properties. “Smaller sizes is where our company comes into play. The market continues to be very healthy. Smaller sizes below that big box product had very limited development for those mid-size and smaller users. So the market is absorbing pretty much in size ranges. That’s a good thing, but there’s just more newer large stuff where there’s less inventory of the mid-size and smaller ,” said Gottesman.
Panattoni is currently in land development in Northern Nevada, but not yet constructing additional buildings. In Southern Nevada, they’re remodeling a 120,000 SF building, one of two purchased. The smaller building they sold. The larger building they’re seeking a tenant for, while the remodel replaces the outdated, too-large office space with the flexibility to put in whatever size the new tenant wants. All while in escrow for land for their next ground-up development.
Always the Money
The cost of land for industrial development is the basis for everything. “It’s the beginning of what affects everything when we’re considering development,” said Gottesman. Cost affects building design, ultimately affecting rental rates necessary to make the project make sense financially. If land is too expensive for industrial use, it needs to be rezoned for a denser use, like residential or multifamily, depending on how the municipality wants to use it.
“The cost of land affects what will be built on it,” said Gottesman. “Every site has a certain use that is good for it, and that would be how we value the land.”
There are three factors when analyzing a development project. One is the price of land. Related is the lease rate that developers can charge once a building is on that land. The other is the cost of the money, the interest rates on the loan. There’s also construction costs.
“The cost of land is one of the major factors that plays into the analysis because you can only afford to pay so much if the lease rates aren’t high enough to sustain the higher price of the land, and if the interest rates on the loan are also expensive, then it can be tough to get your project to pencil,” said Monkarsh. “So oftentimes we can back into what we feel we can pay for the land based on those other factors and say, ‘Wow, the income and the expenses don’t warrant the price you’re asking for your property, and here’s what we can pay.’ That’s not very popular at times, but that is how we tend to analyze deals, and land is a major component of that.”
Today’s Market
There are still opportunities for industrial properties in Nevada today, but markets aren’t static. They change with demand, and demand is currently being driven by the cost of construction toward outdoor storage. Developers may only want a 30,000 SF building but surrounded by 3 acres of yard.
Not that such a parcel is any easier to find. And given the price of that land, it’s unusual to see it used for outdoor storage rather than being built up with a building. “But there are some very successful developers out there that their business model is just that, and we currently have a client doing that—a 15,000 SF building on an acre and a half of yard,” said Monkarsh. It’s a popular trend, and given the scarcity of land, difficult to accommodate.
“What’s happening right now is a lot of people are just paving their lots and fencing them and advertising them for either secure parking lots or for storage. Because when you’ve got a good piece of dirt but can’t afford to build on it, that’s a good alternative.”
In Southern Nevada, the oversupply of industrial projects has driven up the vacancy rate. “Once the vacancy rate is high, then as a developer owning projects with vacancies, we start to get more aggressive in the leasing, or it drives the lease rate and concessions in favor of the tenant. The tenants have great opportunities in the market to lease buildings at a significantly lower rate than in the previous six months,” said Dunning.
The market is starting to see a slight influx of manufacturing in Southern Nevada, and a tremendous demand for data centers in the south and starting in the north. “What our community probably needs is more manufacturing and light assembly,” said Dunning. “That would be great for our market, for jobs.”
So what does the next 12 to 24 months look like? Dunning suggests that, with the construction pipeline having decreased significantly, less product will come online. As the pipeline shrinks and tenants absorb more space, the vacancy rate will decline. “We’ll finally see the bottom of the bell curve of lease rates and concessions. The next 12 to 24 months will start seeing rent appreciation to the point where the market supply will get constrained, and lease rates will start to increase, and we can get back to the business of development.”
