Jun 15th Issue
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Feature Stories - Jun 15th, 2009
 Industrial Specialists Examine the Market by Frank Albano It’s a great time to be a buyer, tenant or even a landlord. That’s the good news. It’s a bad time to be a seller. That’s the bad news. When oversupply and soft demand cross, sellers lose and buyers win. In 2005 and 2006, Nevada was buoyed by the industrial boom and backed by confidence that the bubble would not burst. Currently, lack of investor confidence has brought the industry to a halt. But that’s true of other aspects of the economy as well. Nevada’s industrial market has an up-side that many are hoping will allow for a quick way for the market to stabilize. Nevada’s product base in the South and the North’s reputation as a quick and efficient transportation and distribution hub serving the 11 western states, are both pluses for our state. The other important thing to remember is jobs, which go hand-in-hand with a stable economy.
Brokers Weigh In
Southern Nevada“Things are slow in the Las Vegas Valley industrial market,” stated Dan Doherty, SIOR, senior vice president of Colliers International - Las Vegas. “I haven’t seen such a drop in land and lease rates in 20 years,” he added. “It’s a game of catch up.” Donna Alderson, SIOR, senior vice president of CB Richard Ellis, agrees with that assesment, “We’ve turned the clock back by ten years on lease rates and that’s a little disenchanting. The good news is that, despite the higher vacancies, we were never an over-built market and as a result we aren’t going to see vacancies in the double digits.” “The buyers have started to see blood in the water”, said Pat Marsh, SIOR. Colliers International Senior Vice President Marsh added, “I don’t know how much lower prices can go.” Marsh, however, is looking on the bright side, “I don’t think prices will go much lower and it can only go up from here.” “There are tremendous opportunities in our market for tenants and buyers right now and I believe there will be throughout 2009,” commented Susan Borst, director of industrial properties at Commerce CRG, Cushman & Wakefield. She continues, “Lease rates and sales prices are at levels we haven’t seen in several years – I think that we are near the bottom. From a sales perspective, the smartest buyers will strike just before it hits bottom to get the trophy properties at today’s prices. The market has definitely been challenging for many of us, but this correction gets us back to a healthier more sustainable and competitive environment.” Stephen Spelman, vice president of Lee & Associates, said, “There is 100 million square feet of inventory and about 8.5 % to 10 % vacancy rate right now.” Spelman added, “8.5 % is healthy only when there’s no new product being built. Since we have been traditionally a growth market over the last 10 years, what we have is a lot of downsizing.”
Northern NevadaWhile the vacancy rate may seem high in Southern Nevada, the Northern part of the state is undergoing an even more challenging industrial market “In the Reno area, we are experiencing a high vacancy rate.” Frank Gallagher, SIOR, principle of Commercial Partners of Nevada went on to state,” We are hovering around 14% to 15% vacant.” Dave Schuster, CCIM, SIOR, senior vice president with Grubb & Ellis | NCG said, “We are currently down by 50 % in terms of absorption.” Schuster continued, “So the economy is affecting the Northern Nevada industrial market.” “We are not seeing any speculative development at all and very little build to suit activity in the industrial industry,” noted Gallagher. “We have 3.1 million square feet of Class A, distribution space coupled with our business friendly tax climate,” said Aaron Somer with the Colliers Reno Industrial Property Group. Somer added, “Being on I-80 and within a one to two day truck drive to major western markets presents opportunity for companies.” “We’ve seen a measure of up-tick in industrial activity,” stated Mike McCabe, senior vice president of Colliers Reno, “which bodes well for Northern Nevada’s economic development.” He added, “Companies are taking this opportunity to redesign and optimize their supply chains.” “What we are seeing in the market is effectively 30 cents a square foot when you include the incentives,” said Gallagher. “We are seeing some activity in the market but still it’s a tough market. Those distribution companies aren’t moving ahead at all,” he added.
By the Numbers
Southern NevadaBrian Gordon, a principal with Applied Analysis, commented on the latest market trends in Southern Nevada, “Shifts taking place within the marketplace has construction activity in the industrial sector approaching a near standstill as little to no pre-leasing activity is taking place and financing for new developments is challenging to obtain. Expect continued softness in existing product as distributors see reduced inventory levels and businesses tied to the leisure, hospitality and construction sectors attempt to cut costs at every level.” Applied Analysis Project Manager Jake Joyce commented, “While the latest average asking rent decline is a clear indicator of contraction within the sector, effective rates are sliding further. Negotiated concessions and shorter lease terms are resulting in price declines reaching into the double digits. Going forward, accelerating asking rent declines will be more prevalent while vacancies will likely remain above 10 percent throughout 2009. As these adjustments take place, aggressive and well-positioned national and regional distributors may find value in locking in below-market prices, hoping to time the market during a trough.”
Northern NevadaIn Reno, only 32,000 square feet of industrial construction was completed this past quarter in the Tahoe Reno Industrial Center (TRIC) at the Riverview Commerce Center (Phase 2), a multi-tenant, office/warehouse, flex project. Given current market conditions, Reno’s industrial construction pipeline is currently empty. While there remains a significant number of industrial developers with land and speculative development plans, there remains little push to move forward with construction at this time. This is true despite the significant decreases in construction costs. Net absorption in Northern Nevada registered a negative 1,000,859 square feet this past quarter. Despite seventeen completed lease transactions totaling 566,582 square feet and five sale transactions totaling 119,989 square feet, the first quarter of 2009 continued a trend of strong market contraction which started in the fourth quarter of 2008 (negative net absorption of 904,683 square feet).
Moving Forward
Absorption rates are a trickle, leaving millions of square feet of brand new construction, and an oversupply of existing space. All of this and more have led to a buyers market. In turn the economic downturn has put pressure on developers, rates and a frenzy of competition to capture the small amount of business out there. Landlords are cutting deals and using incentives to move product; tenants and buyers are working the economic downturn in their favor. But landlords are convinced of a market rebound and are reluctant to sign long-term leases. And while there is no new speculation construction there is a little movement in the build-to-suit market. The business cycle feeding frenzy has unearthed a new competition - sub-leasing. This has taken its toll as new product cannot compete at sub-lease rates or with landlord incentives for older products. The up-side is that fewer companies are leaving the market; this is slowing the business back-to-market push. Many are hopeful that positive net absorption rates and expansion will be seen again this year. As past recessions of 1979, 1987 and 1999 have run their course, so will this one. By 2010 and 2011, industrial market stability and jobs should return. Inventory will be absorbed. Additionally, vacancy rates will decrease as per square foot rent rates increase. Speculative construction will once again return. Banks will lend again and bargain hunters will see the oversupply and cheap rates dry-up. 
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