Industrial Properties: How’s the market, and what lies ahead?
While I hear that other industrial markets such as the Inland Empire and other submarkets of Southern California, Salt Lake, Phoenix, Seattle-Tacoma and Portland have seen rents come back up and in some cases get back to pre-recession rates, the northern Nevada market is not healing as quickly.
Vacancy rates for the industrial sector are still hovering at close to 14 to 15 percent, which is where we have been for the past year or so, and industrial building purchase and lease pricing is not showing signs of moving upward quite yet. The good news is that it is no longer getting worse each quarter and there seems to be more consistency developing in the business. There are also rumblings that many industrial property owners feel that, while it will not happen quickly, lease and sale pricing is most likely going to rise within the next couple of years. In a recent conversation with Travis Durfee, market officer for Prologis, the largest industrial property owner in Northern Nevada, he said, “We are forecasting flat to minor lease rate increases in the next two years, but an 8 to 9 percent spike at around the three-year mark.”
Another interesting phenomenon that has developed is that there are not as many price-point breaks in relation to size compared to how it used to be in a healthy market. It used to be that you had price-point breaks that were as follows: Under 5, 000 square feet, 5,000 to 10,0000 square feet, 10,000 to 30,000 square feet, 30,000 to 50,000 square feet, 50, 000 to 100,000 square feet, 100,000 to 200,000 square feet and 200,000 square feet and larger.
Now it is: Under 10,000 square feet, 10,000 to 30,000 square feet and 30,000 square feet and larger.
A tenant in today’s market can basically get the same screaming low rates per square foot for 35,000 square feet that they can for 400,000 square feet or more. For property owners that can offer 30-foot clear heights, state of the art ESFR sprinkler systems, and maybe one or two other key amenities, their niche submarket may be a bit stronger as they have far less competition and there are not near as many options for tenants that require these spec. However, the rates for those buildings are not substantially higher, maybe just fewer concessions and a penny or two per square foot difference effective over a given term or rate schedule.
The industrial sale pricing is also low but, it hasn’t been pounded down quite as low as the lease pricing. The market is in turmoil as the lease rates or net operating income does not come anywhere close to supporting the cost to build, hence the lack of build-to-suit projects and any ideas of a speculative industrial project. This also makes it very difficult to find investment property where a seller is willing to take a low enough number to make the investment pencil with today’s low lease rates. The current lease pricing for existing inventory is so low that companies are often taking more space than they need and starting to think about making strategic moves to take advantage of the current situation and set themselves up for the next five to 10 years. There are also great opportunities for those that wish to purchase as an owner-user of a building. We are seeing more activity in that area in past six months or so.
Bottom line: If an industrial property owner wants to do deals in the next year, they will unfortunately be forced to compete with the current pricing offered by the larger institutional landlords on high-quality, well-managed product. We don’t like the current scenario any more than our building owner clients do as it drastically effects our business and as “the true inflation rate” across the board is rumored to be pushing 20 to 25 percent, building owners and anyone tied to this business are not maintaining cash flows with increases anywhere close to the rapidly increasing cost of gas and groceries. All we (owners of commercial or industrial property and anyone tied to northern Nevada real estate) can really hope to do for the next year or two is break even on cash flows and work to position yourselves for the years ahead. It will take a focus on continued hard work and fighting like a dog to be involved in as many potential real estate decisions as possible. Activity is picking up and more businesses are doing better every day but, most still do not have much optimism that the fundamentals in northern Nevada will be changing in regards to industrial real estate any time soon. What does that mean to me? If you are a current property owner and have survived the past few years, congratulations! You have done better than many others and keep doing whatever you have been to survive a bit longer and keep hoping for the uptick, or cut your losses and get out, but be prepared to do so at very low numbers. To beat the market and fill or sell your industrial property, you need to pay attention to every detail: proper building configurations and layouts that work for most users we see in the current market; benchmark maintenance and presentation; lightning fast responses to all inquiries; and marketing efforts that go beyond the norm. One of my clients and friends, Jan Prochazka of FN Nano, a newly founded nanotechnology start-up, puts it well when he says, “If you have no money, you replace it with work.” I believe that applies well to anyone owning or handling industrial property these days. Even if you have money, hard work still seems to work better than anything else. If you are a buyer as an investor or as a business owner-user, this is as good of a time as any if you have the ability and desire to spend the capital required to obtain a loan at today’s 30-year historic low rates with lots of inventory to choose from. Just make sure you focus on quality property. If you are an owner-user the quality will provide for a far better exit strategy someday when you need to unload the asset. If you are a tenant, re-negotiate and renew your lease now or go find the new location that will work for your business for at least the next five years and lock in at today’s historic low lease rates for the next five to 10 years. Whatever you do, just make sure you have a hard-working, knowledgeable brokerage team on your roster when you try to make sense of how to best approach the ever-changing northern Nevada market and expect them to provide solutions to the seemingly insurmountable challenges and decisions. If you are an industrial real estate broker, try to keep smiling. No matter who you are, don’t forget to spend time with your family and friends, remember what is most important in life, and keep it all in perspective!
Brad Lancaster works in industrial property sales and leasing with Miller Industrial Properties. Contact him at 775-690-0535 or firstname.lastname@example.org.