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.

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