Nevada is growing, with the in-migration of both residents and businesses, and the concentration of new industry in metro areas. As population and industry grow, the economy remains cyclical, ups and downs balancing each other out. Industries grow and contract, according to demand. During the pandemic, the need for office space dropped significantly, while the need for warehousing, logistics, last mile distribution centers, and anything involved with delivering product to a locked down population exploded in growth.
Commercial development followed suit. The demand for warehouses and industrial product grew exponentially. As land availability shrinks, commercial use pushes beyond city boundaries, eventually stopped by topographical concerns (Reno’s bowl, hemmed by mountains) and statewide by government-owned land.
Economic shifts determine which commercial real estate industry is growing fastest–industrial, retail, office, or multifamily. Dermody Properties started business in 1976. “I’ve had experience going through four different recessions,” said Michael Dermody, CEO. “That shows you different vantage points to change.”
Changes in industries and developments are less cyclical and more structural, said Tina Quigley, CEO, Las Vegas Global Economic Alliance. “They reflect how our economy has evolved and diversified. Predicting change can be difficult, but we know areas where we are seeing growth and that is what’s driving demand, and development, today.”
The “It” Properties
It’s that one property, the one all the companies in that industry want to locate in. It’s hot, but it’s not a new concept.
The District at Green Valley Ranch was developed in the early 2000s. Its mixed-use status made it a destination; it’s a combination of residential, retail, and office, which hadn’t been done before in Southern Nevada.
The next big “It” development was Downtown Summerlin, a walkable, urban destination with access to restaurants, retail, recreation and entertainment. “We consider Downtown Summerlin an “It” destination given its annual visitation of more than 22 million,” said Kevin Orrock, president, Las Vegas Region, Howard Hughes Development Corporation. “
Today’s shiny example of an ‘It’ product is The UnCommons, that Matter Real Estate is doing,” said Phil Ralston, president, American Nevada Company. “It will have a mix of residential, office, restaurant, retail. They’re trying to incorporate all the things that are current and attractive, whether that’s in employee space or in restaurant areas, or bringing in new products.”
In Northern Nevada, The Village at Rancharrah is a 115,000-square-foot project made up of 60,000-square-feet of retail and restaurants in Reno’s old Southwest. Similarly, Downtown Damonte is a 73-acre shopping center focused on foot traffic and cyclists.
Not every “It” product is successful straightaway. Some struggle, like Tivoli Village, a mixed-use development of retail and office space, that struggled with location and not quite enough traffic to the development.
“In general, if I were to say what’s ‘It’, where people want to be, it’s really industrial no matter where it is, “ said Doug Roberts, partner, Panattoni Development. “Really it’s finding the land to do these developments. Frankly, I think a lot of residents and governments are a little exhausted by the industrial push because there’s a lot of pushback by communities on it.” Which makes sense. Vacancy rates for industrial properties are a historic lows—1 percent. If someone builds a building, it fills.
With high demand and low availability of land, cities are looking to optimize what land there is. So are developers. Urban sprawl is giving way to density. Twenty years ago, developers created buildings with surface parking. Today, structured parking is necessary in order to put available land to best use. “
Looking at projects like The UnCommons, Matter Real Estate’s modern office space with food, fitness and retail opportunities for workers, structured parking is a must. A physical difference that has occurred over the years because of the cost of land and the need for density to create the value associated or tied to the cost of that land,” said Ralston.
Beyond Downtown
As commercial development spreads outward from the urban core, developments tend to locate near residential developments to reduce employee commute times. “That’s a really big deal, especially before the pandemic,” Roberts said. It was common for businesses to ask where their employees were going to live and how far they’d have to travel for work. Locating residential near commercial seems counterintuitive, but employees want short commutes.
Historically, “It” developments work to be all things to all users. If the business isn’t located near necessary services, it provides them on site. In 1986, Dermody Properties created the first childcare facility in the state within a business park. Today that’s common. In 1986, it was unique.
Historically, the K-Mart warehouse in Sparks and the JCPenney facility in Stead were huge facilities with additions like restaurants. People wanted to work there in the ‘60s, said Dermody.
“The change in location supports changes to commercial development,” said Orrock. “[Examples include], office buildings that accommodate cycling with bicycle storage, office buildings that are situated in walkable environments close to dining and other entertainment offerings.” That’s important for employers when competition for employees is high.
Downtowns rely on density to build new. Types of commercial development tend to group by industry, but not always. Industrial can exist right at city center—Panattoni built a last mile distribution center for Amazon on a site in downtown Las Vegas to service that area.
There are changes to types of industry and developments as industry moves out from downtowns. “It depends on the type of development, but when we look at developments like Tivoli Village, The District or Downtown Summerlin, what we see is heavy integration of uses,” said Quigley. Mixed use properties have strong live, work, play draws.
Destination Retail
In northern Nevada, where retail lagged after the Great Recession, Sparks saw a burst of development just east of the Pyramid Highway, including Sparks Galleria, Sparks Crossing, Galleria Station planned development neighborhood, and Spanish Springs Town Centre, a grocery-anchored outdoor mall.
“They’re outdoor strip centers, you might even argue kind of borderline lifestyle centers, and in that same decade is when the effort to develop the Legends mall first got going,” said Armando Ornelas, community services manager, City of Sparks.
Legends is a definite “It” property, 1 million square feet of retail space, restaurants and movie theaters adjacent to the Sparks Marina, anchored by Scheels and it just opened Legends Bay Casino. The marina itself is a development that turned the cleanup of the Helms gravel pit and petrochemical contamination from the tank farm across the street, into a premier destination.
Historically, commercial development in Sparks was principally along the west side of Victorian Avenue and the Prater corridor in the decades before the ‘70s.
“Most recently you saw industrial development essentially between north of the freeway between Sparks Boulevard on the west and the city boundary on the east, kind of parallel to Vista from the freeway up to about Prater. That’s the most recent industrial development in Sparks,” said Ornelas. Now Foods occupies a storage, distribution and manufacturing operation there.
“There really isn’t a lot of land left for industrial development within the City of Sparks,” said Ornelas. There are planned developments in northern Sparks, which have recently requested to add distribution and warehousing as permitted use on some of their acreage.
Use
Land use changes as commercial development and industry needs change over time. Over the last several years, industrial and multifamily products have been in high demand. “The land values associated with those have continued to escalate, the rental rates have continued to escalate, the values have continued to escalate on the finished and stabilized properties, and that wasn’t always the case. Some of that is attributable to the population growth, some of that is attributable to the fact that there was a time when southern Nevada was not necessarily an acceptable place to invest in the eyes of the broader capital markets whether it was as an investment or as a loan,” said Ralston. “That’s changed, and now Southern Nevada attracts large scale capital from national and international resources that now deem Southern Nevada acceptable to invest in.”
Sparks originated because of industrial use. The railroad ran through the area, and the area with the machine shop and roundhouse became Sparks. Just south of the railroad tracks and I-80 is an older industrial development associated with the railway. “You could say that industrial development really occurred in that area between the border with Reno and the City’s eastern boundary in kind of a west and east pattern,” said Ornelas. “As you moved east, that industrial development interchanged with each generation of development.” For example, K-Mart’s old, million-and-a-half square foot warehouse is still in use, with new tenants.
Warehouse design and use has changed. In the ‘80s, 24-foot clearance was common. Today it’s not uncommon to see 36-to-40 foot clearance, said Roberts. There’s more product in buildings, more dock doors; buildings are designed to make it quicker to bring product in and turn it around for delivery to the customer.
Today’s warehouse design factors in environmental impact, using windows in concrete walls to maximize use of natural light, using solar to power buildings.
“Probably the most pressing need is for more land for distribution, warehousing and other industrial uses,” said Ornelas. Because as the region becomes move of a logistics hub, and e-commerce becomes more integrated into online retail, Northern Nevada’s position as logistics hub for the Western states becomes supercharged.
“Another example of how demographic trends, in this case, the need for goods right away, have transformed an industry to be more reactive,” said Dermody. Expect drones as part of the delivery process, which means Reno-Tahoe International Airport and Reno Stead Airport become advantages in attracting industrial users.
For the last several years industrial and multifamily product have been the leaders in performance in Southern Nevada, said Ralston. Only recently have office buildings started going up again, after the Great Recession left spec office buildings standing vacant for too many years. New builds are primarily Class A premier space. “These are office developments that are renting at the higher end of the market,” said Ralston. “There have not been many average rental rate, average cost type developments recently.”
New developments in office space suggest commercial development is cyclical, especially with regard to the type of development–industrial, retail, office–at least with respect to the ups and downs of that industry.
“There’s speculation about where multifamily is and where industrial is in each of their cycles,” said Ralston. “That the consideration of how much can we keep increasing rents on apartments and have it be sustainable, and some of that might be tied to homeowner price and some of that might be tied to in-migration. The industrial sector seems to think there is still some longevity in their ability to sustain the current rental rates which are much higher than historical rental rates, and to sustain new development.”
In fact, the industrial sector may really be limited more by land availability than by cost to build or rental rate acceptance by the market. Industrial land base is not plentiful, Ralston noted, and there have been escalating prices. Before the crash there was an auction attempted by the City of Henderson at $4 per square foot and nobody bid. Recently, he noted, there are trades north of $30 per square foot in Southern Nevada.
“I’m not an expert on any of these topics, but just some speculation in the marketplace is how long can that last?” Ralston asked.
Reuse
When it comes to commercial development in Sparks, for the most part there’s smaller scale development and investment, and a lot of existing users in industrial areas are renovating buildings, partly due to scarcity of land, partly to reuse and re-imagine the properties.
One favorable trend is adaptive reuse of old commercial space. Reno Public Market, a new community center with space for local makers, artists, and food, opens fall 2022. In Sparks, a similar concept is taking shape in the old Lowe’s store on Oddie, with ties to the Burning Man community, and the intent of including restaurants, a brewery and housing.
Reuse allows cities to grow without expanding past natural borders. It’s also a way developers can bring old properties back to life with new, creative uses.
Where retail is brick and mortar, the draw today is destination. Fewer big box-anchored retail centers are being built as e-commerce thrives. Industrial developments may be at 1 percent vacancy. It’s not unusual to see retail developments at 10 to 12 percent vacancy, said Roberts. The centers doing well have made themselves into destinations.
Affecting Change
Current trends affect people within developments.
“Market changes are obviously a key factor, but in the last decade, I believe that for office development, social changes are having a bigger impact,” said Orrock. “While there is an emphasis on collaborative and flexible spaces, we found adjusting the vast open floor plan design is key as many industries have found the bullpen can be a distracting and difficult environment to work in.”
Today commercial developments take users into consideration, accommodating hybrid and remote work schedules, something developers in the past didn’t have to consider. Developments try to match location with where the workforce is, and density is desirable as land supplies dwindle. Employee spaces are changing; there are rooms for rest, rooms for mothers, rooms for health and wellbeing. Twenty years ago, there were fewer amenities, but workers weren’t at a premium.
Sustainability is key, and along with environmentally conscious footprints, there’s a move to create dual uses of features like structured parking, so by day building workers use it and at night and on weekends it serves as events parking.
Cities and residents want more attractive buildings. Where 30 or 40 years ago commercial buildings were one color with maybe an accent stripe, today they’re attractive buildings with better facades, said Roberts. It matters to the city, to the workers, and to the company, because the building may be their storefront, and therefore their image.
“Commercial development has a good future if it’s well thought out and planned,” said Dermody. “Today all of us live in a very interconnected environment, so what you develop and how you help people—we have to make sure developments are compatible with everything else going on. So, the future is companies working closely with governments and local jurisdictions to get the best use out of [commercial developments].”
In Brief
Nevada is ranked in the top five in the nation for infrastructure according to a recent SmartAsset study. Nevada has the second-lowest average of power outages and ranks sixth-best for access to broadband internet service.
