The industrial market’s direct vacancy in greater Reno increased by 80 basis points to 4.53 percent at the end of the third quarter of 2018. It was carried by 715,821 square feet of positive net absorption, a relatively below average figure, as well as by an increase in new deliveries. Notwithstanding, pending transactions currently underway in the fourth quarter should mitigate the increase in the market’s overall vacancy.
Mike Nevis, Kidder Matthews
Tenant demand in the third quarter was robust for spaces with less than 50,000 square feet. Transactions that involved Class A space accounted for 84 percent of the total gross absorption. The North Valley was the best performer of all the submarkets, resulting in a 35 percent decrease in availability. The I-80/East submarket, however, recorded a substantially negative quarter due to deliveries/new availability pushing the vacancy to 12 percent. Sublease availability was static for yet another quarter, which demonstrates stability in the market. The average transaction size in Reno decreased slightly to 53,195 square feet. Heading into the fourth quarter, the market witnessed an increase in inquiries and tours involving more than 200,000 square feet. This gave existing landlords confidence that vacancies and new deliveries will be leased in the short term.
The quarter’s most notable lease transaction was S&S Activewear, which leased 802,113 square feet at 9550 North Virginia Street from Panattoni/CALSTERS. This transaction marks the largest speculative lease ever completed in the state of Nevada. Panattoni was about 75 percent underway on construction when the lease was executed. S&S Activewear will add about 350 jobs to the region.
Rental rates continue their upward pressure as inventory levels remain low. Overall asking lease rates rose to $0.53 per square foot blended across all product types, which is a 15 percent increase from the prior quarter. These rising rates, particularly in Class A product, are causing tenants to renew their leases versus relocate.
The most notable year-to-date investment sale in the Reno area was Prism Realty’s acquisition of more than 1 million square feet at 9460/9470 North Virginia Street for $81.1 million, or $76.46 per square foot. This sale set a new area high for bulk product. The seller was a joint venture between Panattoni and CALSTERS. Cap rates for Class A product continue to compress and currently range from 5.2 percent to 5.3 percent.
There was more than 1.4 million square feet of industrial speculative or build-to-suit construction delivered to the Reno industrial market this quarter. The majority of this space is in the North Valley and I-80 East submarkets. There is an additional 1.6 million square feet under construction, which will be delivered between the fourth quarter of 2018 and the second quarter of 2019. The most active developers in the area continue to be Panattoni Development and Dermody Properties. That said, Scannell Properties and Conco Development have begun speculative development this year as well.
The Reno industrial market continues to be an attractive option as a Western regional hub for both Internet fulfillment and manufacturing occupiers. With an ability to deliver to about 75 million customers within 24 to 48 hours, the low cost of operations and a great quality of life, the future for Reno industrial continues to look optimistic.
— By Mike Nevis, senior vice president and partner, Kidder Matthews. This article first appeared in the November 2018 issue of Western Real Estate Business magazine.