Tom Miller, CCIM
Is the Reno-Sparks Industrial real estate market overbuilt?
It has been widely reported recently that the Reno-Sparks industrial real estate market is currently overbuilt, with rising vacancy rates. Many manufacturers and distributors are picking up on this reporting and looking to take advantage of the market. While no one can responsibly argue that the economy isn’t in a downturn with industrial space absorption down accordingly, the broad brush statement that the overall market is overbuilt, vacancies are up and landlords are scrambling to make deals just isn’t an accurate accounting of the market today.
We agree that certain industrial market sectors are overbuilt with serious landlord competition for deals in those sectors, but this is not a market-wide condition. Market vacancies vary widely across the Reno-Sparks sub-markets. Market size sectors have vacancy rates that vary widely as well. These are critical factors that anyone in today’s market looking for space should understand.
The South Meadows submarket in the big-box size range has a current vacancy of just over 2%. That is virtually full. Whereas on the other end of the spectrum, the I-80 East corridor, specifically the Tahoe-Reno Industrial Center has a vacancy of over 20% and has over a million sf of new space coming on line soon. This is a 10 fold difference in vacancy rates across 2 sub-markets within the same size catagory.
The main reason for the condition that exists in TRIC’s big-box market today is due to market dynamics. The considerations to develop a new project, analyze market needs, locate financing partnerships, develop plans, offer on – study – close on land and construct the product takes years. The projects in TRIC were kicked off a few years ago when things were booming. In short, it takes a while to stop an oil freighter at full speed. No new projects will likely be popping out of the ground in 2008 and maybe not even in 2009. But absoption wil occur in this growing market. The interesting part of this equation is that if the economy turns around faster than expected, we could see a struggle to locate a lot of choices in big box space until new inventory catches up with new demand. Watch what pricing does if that occurs.
Back on point; To further add some understanding to the subject, we should understand that the glut of space in TRIC that generates the large vacancy rates is all big-box space. Due to the massive size of that vacant space, this market size sector has a dramatic impact on the overall reported vacancy rates for the area. One new large distribution center coming on line of (say) 600,000sf totally offsets the positive impact of 30 – new 20,000 sf leases / purchases. The net impact on the overall vacancy rate is zero.
We have actually found that the smaller sized spaces as well as older warehouse space is generally in far better balance and while landlords are accommodating to a degree due to the overall slowdown in activity, the landlord concession packages certainly reflect the far stronger market in the smaller sized spaces. In fact, actually trying to find a buy in today’s Flex space (under 10,000 sf) market is not easy.
So while it is easy to say, the Reno-Sparks market vacancy rates are quite high, users of warehouse / manufacturing space would be better served to recognize that times are good to be buying anything right now and they should consult with their industrial real estate professional to look into their particular size needs and see what the market is offering.
Just bear in mind that to make a general statement that the entire industrial real estate market over all sub-markets and all sizes is overbuilt with landlords scrambling for any possible deals just isn’t the case.