Monday, November 23, 2009

Local Company Growth is the Key to Northern Nevada’s Economic Health

Dan Oster - Industrial Specialist
Posted by: Dan Oster
Industrial Specialist
775 336 4665

As a member of the Industrial Properties Group, Dan has participated in the sales and leasing of a wide variety of Industrial properties from 1,000 to 700,000 sqft in Northern Nevada. Dan's primary goal is to provide unsurpassed customer service to the clients he represents.

When news of US Ordnance’s recent procurement of over $500 Million dollars worth of contracts to produce machine guns here in Northern Nevada hit the news (, we all should have cheered! While we did not have any part of the commercial real estate transaction which allowed for the expansion mentioned in the article, in the long term this company’s good fortune will no doubt contribute to all of our success. They mention a commitment to hiring local, buying local and continuing to invest in this area. Economic success in the region is created by many individual success stories. Each expansion brings more jobs, more investment, more opportunity in a myriad of different ways. When our neighbors win, we all have a better chance of winning. So, three cheers for US Ordinance!

Wednesday, November 18, 2009

REITs and Private Equity Firms to the Rescue

Chris Shanks :: Investment Properties Group Posted by: Chris Shanks
Investment Analyst
775 336 4620

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

When is our economy going to recover and how is it going to happen? I’m sure many of you hear this question almost every day; it’s a topic that haunts households, board rooms, conference rooms, and pretty much every room across the country. To find the answer to a problem one usually only has to look as far as the source. The residential and commercial real estate booms were ultimately what led to our economy’s decline. Overly optimistic underwriting, irresponsible lending, and the market’s perception of real estate as a risk free asset created an insatiable appetite for new commercial loans. The demand for new loans was met with huge amounts of capital flooding the commercial real estate market. In-turn the ample supply of debt caused prices to inflate beyond the true fundamentals. Now, as pricing retreats most of our lending institutions are realizing tremendous losses in the form of writedowns and have minimal, if any, new capital to lend. It’s evident that real estate balance sheets need recapitalization in the form of increased equity. The only question is, “where is this capital going to come from”?

The Government, and more importantly the Treasury, has made attempts to inject equity into the system. The creation of programs like the Troubled Asset Relief Program (TARP) and the Public-Private Investment Program (PPIP) has been relatively unsuccessful in cleaning up the balance sheets. Many argue against the participation of our government in the capital markets, but what’s undeniable is the fact that these programs have yet to yield tangible results. Japan found out the hard way that when you depend on government relief programs, and grossly underestimate the amount of capital that is needed to fix the system, the desired results can take a long time to come to fruition. While the US is creating policy much quicker than Japan did in the late 1990s, the same problems still exist. There isn’t enough capital circulating in the market to fix the problem. I’m making the argument that the capital is there, it’s just on the sidelines. Consumer confidence and the lack of a defined bottom in real estate pricing, have kept a majority of the discretionary income out of the market. If a real bottom is to be reached, then lending institutions are going to have to get legacy assets off of their balance sheets.

One of the major problems facing our lending institutions is that they are not in the business of real estate management. They may underwrite it and lend on it, but when it comes to running it and performing the necessary tasks to get properties cash flowing; they’re lacking. The wave of foreclosures to come will create a log jam in the banks operations unless they have a quick and relatively painless avenue to dispose of the loans/properties. That’s where the REITs and Private Equity Real Estate firms will play a vital role. Their livelihood is made on the acquisition, management, and disposal of real estate. REITs alone have raised $19 Billion in new equity year to date, and there is an estimated $173 billion waiting on the sidelines in Private Equity Firms. These will be the willing market participants who will relieve lenders of their troubled assets. Lending institutions most likely will have to be willing to take a loss on a majority of their troubled loans. However, they will benefit from the freeing up of the required reserves they had to maintain on the troubled loans, as well as in the new loans that will be created through the new acquisitions.

If the lending institutions, and the Government, allow this scenario to unfold, it will create a domino effect. Being able to acquire real estate at depressed values would allow existing investment companies to exit these under-water legacy assets and it would provide a real market bottom for new investors. Once a bottom is established and properties can be valued accordingly then lenders’ balance sheets will become more predictable and they will be more willing to lend. This in turn should jump start the real estate market as well as the economy in general. New businesses will require more space, lowering the vacancy number, which will increase real estate rents and values. Once values begin to increase then development will ensue and hopefully a healthy market will emerge from the ashes of the last. While this might paint an overly optimistic scenario, what are our alternatives? Lose a whole decade to stagnation?

Monday, November 16, 2009

Special Report - Reno/Sparks Industrial Market

Carl Zmaila :: Industrial Properties Group

Posted by: Carl Zmaila
Industrial Specialist
775 336 4623

First to crumble, last to recover:

During the boom years prior to 2007, the local flex market became overheated from demand for space by contractors, sub-contractors and other suppliers for the construction industry – not to mention home furnishing and other similar companies. With the housing crash and subsequent demise of the global economy, these users of flex space were hit the hardest. In fact, the Associated General Contractors of America published a report indicating Reno/Sparks has the most devastated construction sector of any metro area in the nation. Many of these companies have closed their doors. Many others are struggling to survive. Frightened landlords are not only dropping rates to win new tenants, but reducing rates on existing leases just to keep space occupied.

Right now two trends are creating what little activity exists in the flex market. Some tenants are taking advantage of the depressed rental rates and moving to newer, higher quality properties. Others are taking a shotgun approach, sending "Low Ball Offers" to numerous landlords to see who is willing to bite the bullet. Both methods are proving effective in getting deals done, albeit at effective rates that are even lower than asking rates that have been reduced significantly during the past twelve months.

The small amount of activity that is occurring belies the fact that the flex market continues to contract rather than expand. With the unemployment rate above 13% and continued uncertainty in the national economy, most tenants are simply staying put with short term renewals, downsizing or vacating the market altogether.

Heard on the Street:

The most compelling story we have heard regarding the flex industrial market comes from Bay Tool and Supply, a construction supply company. The owner of this particular company gave his employees a month to come up with a reasonable plan on how to keep the branch open. At the end of that month, the manager reported that he and his employees were unable to come up with a plan. The branch was closed two weeks later.

By the numbers:

What is the status of the northern Nevada flex industrial market? Well, when compared with the third quarter overall industrial market vacancy rate of 14.93%, a 29.09% vacancy rate in the flex industrial market is staggering. The flex market consists of approximately 4,435,515 sf and makes up about 6.5% of the entire Northern Nevada industrial market.

Historically, new flex developments tend to lease more easily than older projects. That paradigm, however, has changed and developers who built or bought after 2005 are having a very difficult time stabilizing their projects. Proforma constraints, shell spaces and a lack of general business growth are hampering occupancy for post 2005 class A flex industrial projects. Consequently, the difference in asking rates between Class A and B spaces has shrunk as owners of Class A spaces have lowered their asking rents to compete for the few tenants shopping the market.

In fact, there is a compression on the market as a whole. Everyone is grouping closer together on asking rates. Higher quality spaces are constrained by economics, while lower quality spaces are constrained by functionality. Most tenants and landlords are constrained by capital. Those who aren’t, are at a great advantage.

Large reductions in asking rents have begun to stabilize. The ask/deal spread (the difference between asking prices and the effective deal rate) has continued to fluctuate anywhere between 10 and 20 percent on completed transactions.

The vacancy rate in South Reno, Northern Nevada’s premier submarket, conveys the challenges facing the flex industrial market. Compared to 26.85% for the Sparks submarket and 23.04% for the Airport submarket, the 35.89% vacancy in South Reno shows that even though some tenants are "flying to quality" it is still not enough to outweigh those simply staying put, downsizing, or folding up. The lack of new deals in the flex industrial market is further evident when the market is segmented by construction date.

Although, functionally obsolete buildings with deferred maintenance are fairing the poorest at a 36.3% vacancy rate, one might not expect to see buildings built in the last decade to come in at second at 35.42% vacancy rate. It is clear that economic movement is slow and real estate decisions are coming at an even slower pace.

Simply put, the tenants that are comfortable making a real estate decision are able to capitalize on market conditions but those tenants are scarce.

Who is succeeding?:

Although it is difficult to say anyone is successfully navigating the turmoil in the Northern Nevada flex industrial market, tenant and landlord alike, some are doing better than others. What tactics are working?

Due to the large amount of available spaces, some buildings are not being shown because marketing materials, signage, and what ever message a landlord is attempting to convey to current and prospective tenants is not clear and concise. When a tenant is looking at a list of well over twenty potential properties, nothing gets a property struck from the list faster than lack of clarity.

Another important step landlords can take to maintain and hopefully increase occupancy is having the vacancies move-in ready. Aesthetic and low cost functional improvements need to be applied to the building: Clean carpet and paint, working windows and doors, trimmed landscaping, and among other things the exterior and interior of projects should be free of debris. The simple fixes are a necessary tactic for tenant attraction and retention. If a building falls into a class C or D building class, major renovations may be necessary to compete for tenants.

The clearest key for flex industrial parks to achieve lower vacancy rates is a responsive property management and leasing team. The few renewals we have seen go to other properties are due to a lack of responsiveness by the landlord’s representatives. Even though many tenants are not in a position to capitalize on current market conditions, one thing that may cause them to take a second look at the market is a lack of old fashioned customer service from their present landlord.

It is obvious when looking through the data that the projects that are outperforming the general market and their asset class are ones that are tightly and efficiently managed. Everyone is working harder for less including tenants; that is just the reality of today’s world.

Flex Industrial- Any industrial zoned building or industrial zoned park that has an average unit size smaller than 15,000 sf.
Class A- Generally built after 2000, with 200 amps of 3 phase power, in a well located submarket, outside of the flood plain, with functional space including modern columns and clear height. Dock doors are a major advantage.
Class B- Generally built after 1980, with 200 amps of 3 phase power, in a well located submarket, outside of the flood plain, with functional space. Dock doors are a major advantage.
Class C- Generally built before 1980, with 200 amps of 3 phase power, in the flood plain, with functional obsolescence.
Class D- Metal buildings or buildings built in the 1970s, with major functional obsolescent and deferred maintenance issues.

For a printable copy of this report, please click here.

Thursday, November 5, 2009

What is the Status of the National Industrial Market?

Carl Zmaila :: Industrial Properties Group
Posted by: Carl Zmaila
Industrial Specialist
775 336 4623
Randyl Drummer of Costar recently released the national industrial numbers. Industrial real estate vacancy for the third quarter of 2009 stands at approximately 10% with a negative net absorption of 44 million square feet (there are 44 million less square feet occupied).

Although Costar sees continued pain for the industrial market for the next two years, Industrial vacancy should peak around 11%; the worst is probably behind us. Some burn off of unneeded capacity will continue but development is at a stand still, hopefully creating balance in the market.
To read an in depth analysis of the national industrial market please click here to see Randyl Drummer’s entire article