Analysis - Apr 16th

Northern Nevada Industrial Market Outlook

by Dave Simonsen

Overall, we finished last year with good numbers. Total annual gross absorption of just over six million square feet was only slightly shy of the prior year’s notable 6.1 million square feet. Activity was very strong at the beginning of the year but slowed by year end. We headed into 2008 with little momentum and plenty of concern about the overall economy and whether tenants will surface to turn the tide of rising vacancy. We saw deal volume drop below average in the third quarter 2007. That trend continued in the fourth quarter, with only 21 transactions of 5,000 square feet or more. Typically, we see almost twice that number quarterly.

Net absorption of 2.8 million square feet was respectable in terms of historical levels, but only 71% of the 3.9 million square foot record set in 2006. With gross absorption in both years being almost identical, the question rises as to why net absorption was so much lower. The answer: a number of tenants vacated existing facilities to move to larger spaces during 2007, so the ratio of gross to net absorption was not as favorable as the previous year. The majority of the spaces vacated were in Sparks, resulting in that submarket suffering negative net absorption of more than a million square feet – the only submarket experiencing a decline in occupancy at year end. Although spaces were vacated, dampening net absorption, the extensive internal market growth last year is encouraging because it shows that existing companies like and want to continue to operate in Northern Nevada.

These vacated spaces, together with the unprecedented speculative construction (three times the prior 5 year average) caused the overall vacancy rate to end the year at a four-year high of 9.16%. Even though Sparks suffered the exodus mentioned above, its vacancy rate at 8.08% was lower than the overall rate. Ironically, the highest vacancy rate at year end was the I-80 East Corridor - a whopping 19.65%. This is the result of most of the 1.6 million square feet of speculative construction in that submarket remaining vacant today.

The I-80 East Corridor wasn’t the only submarket seeing record-setting construction. Stead and Spanish Springs also saw their share of both speculative and built-to-suit construction, resulting in more than 5.6 million square feet of space being added to the overall market. This represents a growth rate of more than 9% during 2007 and brings total market size to 68.4 million square feet.

For the most part, asking rates have held steady, although we’re beginning to see some asking rate reductions and we’re also seeing a widening gap between asking and effective rates, particularly on new, larger spaces. With slackening demand and a plethora of new space, developers have become more competitive. We expect the bidding wars to accelerate during 2008, especially with 2.4 million square feet of new space still sitting idle and an additional 1.75 million square feet currently under construction. It remains to be seen whether landlords and sublessors will suffer a few nicks and scrapes or if it will become even more competitive.

In summary, the statistics for 2007 were “respectable” but did not give us much encouragement entering into 2008. There remains a lot of questions on the minds of developers, brokers, lenders and most importantly……..tenants. When one listens to the news, it is understandable why tenants continue to sit on their wallets. We do see some tenants looking at our market, but more are needed. Vacancy will rise into double digits once the new speculative projects currently under construction are added to inventory but we should finish the year back in single digits as space is absorbed in the second half of the year.