Feature Stories - August 2002

Advice from the Experts

Predictions for Nevada’s Industrial Market

by Stacie Griffin and Kathleen Foley

Patty Wade, Northern Nevada

The economy and recent events have proven difficult for many industries —including commercial real estate. In some areas around the nation, such as the Bay Area, landlords have been forced to give away one full year of rent to attract businesses to projects that were once fully occupied. Stories such as these represent the effects the economy has had on some of our strongest markets. How is Northern Nevada’s industrial real estate faring? To help provide a pulse check on the industry, Patty Wade, president and co-owner of Reno-based Wade Development Company, shared some key statistics as well as her insights as a commercial developer of nearly 10 years. Wade Development Company currently owns and is developing nearly 10,000 acres in the Northern Nevada region, including the 5,000-acre Nevada Pacific Industrial Park in Fernley, the 3,000-acre Lakes of Dayton Valley Master-Planned Community in Dayton and the 1,500-acre Northgate Master Plan in Northwest Reno.

(Nevada Business Journal): What are some of the trends in Northern Nevada’s industrial real estate market?

(Wade): Over the past decade and up to the year 2001, Northern Nevada has experienced very positive and diversified industrial growth. Manufacturers, distributors and some high-tech operations, including Quebecor World, Cisco Systems and Aztec Cyberspace have fueled this growth. Relocations and expansions of industrial operations to Northern Nevada have declined over the past nine months (due primarily to Sept. 11). However, in the last eight weeks, Wade Development has experienced an increase in both prospective company inquiries and site visits. This is a positive indicator.

(NBJ): What is driving the area’s growth?

(Wade): Through the year 2000, Northern Nevada’s steady growth has averaged 3 million square feet of net absorption per year. Northern Nevada’s central location, which permits next-day delivery to 80 percent of the western states, is one major factor in this growth. Our relatively inexpensive land, pro-business government and tax structure and quality of life also attract companies and drive growth.

(NBJ): Are industrial parks sitting empty? If so, do you predict they will continue to do so until the economy rebounds?

(Wade): At a current 10 percent overall vacancy, Northern Nevada industrial parks are hardly sitting empty. In fact, our Fernley-based Nevada Pacific Industrial Park currently has zero vacancy. Our vacancy rates have risen from a low of 7.1 percent in 2000, but this increase is nothing close to the dramatic vacancies being experienced in several areas of California.

(NBJ): What regions, or states, are companies leaving to relocate to Northern Nevada?

(Wade): California companies do relocate here each year, just not to the extent many people expect. Most of the expansions to Northern Nevada for both manufacturing and distribution operations tend to originate from the Midwest or eastern regions, including New York, Virginia, Georgia, North Carolina and Ontario, Canada. Typically, their motivation for moving to Nevada is greater cost efficiency when servicing customers on the West Coast.

(NBJ): Do you predict lease rates for industrial space will increase or decrease?

(Wade): My prediction is that lease rates for new industrial space will remain stable for the next 12 to 18 months. At that time, we may witness an increase in rates for new space. I expect lease rates will decline, at least slightly, over the next few years for older space.

Overall, Wade remains optimistic about the commercial real estate market in Northern Nevada. She believes the region will continue to enjoy a healthy pace of growth, especially as the economy stabilizes, consumer confidence increases and corporate profits improve.

John Restrepo, Southern Nevada

The Las Vegas Valley’s commercial real estate markets continue to absorb the twin impacts of a slowing national economy and the aftermath of the Sept. 11 terrorist attacks. As a result, all three commercial sectors – office, industrial and retail – are experiencing reduced demand. This is expected to lead to a significant scaling back in the amount of new construction over the next several quarters. Rising vacancies, tight lending standards and competitive pressure on lease rates are leading some analysts to forecast several quarters of slow growth. Others expect tax cuts, lower interest rates and other fiscal stimuli by the federal government to end the recession sometime in 2002. Some market watchers are also predicting the present cutback in building activity will translate into shortages of leaseable space when the recovery commences.

The U.S. Department of Commerce forecasts a decline of 1.8 percent in total construction spending nationwide during 2002. For tourism-dependent Southern Nevada, the decline in construction is likely to be steeper. In all categories of commercial real estate, vacancy rates in Las Vegas rose throughout 2001, and lenders have become increasingly reluctant to finance new speculative development. Accordingly, projects that are financed will have to be supported by strong fundamentals: location, financial strength of the developer and compatibility with market demands.

The estimated 1,759,000 square feet of industrial product under construction during the fourth quarter of 2001 represented a 16 percent decline from the third quarter. The lack of access to capital is likely to result in a continuing drop in actual and planned construction over the next several quarters. The silver lining to this situation is that, with reduced demand encountering reduced supply, rents may remain stable at their current level of about $0.63 per square foot per month. A generally stable asking lease rate should be well received, since much of the attraction of the Las Vegas industrial market to regional and national tenants has been its price-to-value ratio.

As the national economy continues to slow, it is expected that demand for industrial space in the next three to nine months will decline. There are already signs, however, that many of the major developers in this market are looking beyond this decline. When the economy rebounds, there is a possible danger that the Las Vegas industrial market will lack a sufficient level of supply. Developers with desirable product in place are already asking for more in base rents, indicating that they see tightness coming. However, the increasing caution on the part of local and regional lenders, combined with the fact that large national and regional lenders have been tightening their lending for speculative, multi-tenant space, will likely limit the number of new projects initiated during the next few quarters.

Accordingly, our recommended watch phrase is "cautiously optimistic."

Dan Doherty, Southern Nevada

The following represents a brief summary of some of the more prominent projects planned or under construction in Southern Nevada, compiled by Dan Doherty, an industrial specialist for Colliers International Las Vegas office:

•  Majestic Realty/Thomas & Mack Company – Under construction on an 856,000-square-foot built-to-suit facility for GES Exposition Services, built on a 53-acre ground lease.

•  EJM Development Company – This California-based developer is in the final stages of a 300-acre assemblage located in Section 3 on the south side of the I-215 Beltway. This mixed-use development will encompass retail, industrial and office products.

•  Centra Properties – In conjunction with Panattoni Development, Centra is under construction on a 278,000-square-foot distribution building, which will be the first building of a 545,000-square-foot project.

•  Harsch Investment Properties, LLC – In design stages of a 36-acre project, located near Cheyenne and Revere. This mixed-use industrial project will consist of 160,000 square feet.

• RDS/Insight, LLC – Under construction on a 37-acre mixed-use development located at Cheyenne Ave. and Simmons. This project will consist of approximately 450,000 square feet.

•  Operating Engineers Pension Fund – The Golden Triangle Industrial Park has just added the fourth building to its 317-acre master-planned industrial park.