Is Northern Nevada’s commercial real estate sector in the midst of a comeback?
Although residential real estate’s woes received most of the attention during the downturn, the recession also inflicted plenty of pain on commercial real estate as rising vacancies crushed new construction activity and speculative building.
Industrial, office, retail — none was immune to the overarching reach of what was considered the worst recession in Nevada’s history.
With Northern Nevada seeing increased economic activity, including the arrival of some high-profile companies, however, commercial real estate in the region is seeing a rising tide effect, according to industry watchers.
“The announcements are really driving everything, and the Tesla effect as well as Switch absolutely legitimized Reno as a viable area for industry and technology,” said Ted Stoever, vice president of land and investment for Colliers International’s Reno office. “Ultimately, what’s driving (activity) is job creation opportunities and all the ancillary businesses that go with that.”
As one of the leading industries in Nevada, the hit to the retail sector during the recession was especially tough for the state.
Vacancy for retail in Reno-Sparks peaked at 17.3 percent in the first quarter of 2013, according to commercial real estate service firm CBRE Inc. Since then, the vacancy rate has gone down to 12 percent in the first quarter of this year. A vacancy rate of 7 percent to 8 percent is typically considered healthy for retail. Reno’s Central/Airport market, which includes the surrounding areas of Reno-Tahoe International Airport, continues to post the highest vacancy rates in the area at 24.2 percent.
Retail is also at an interesting juncture given the impact of "disruptive" innovations — business models that disrupt existing markets while creating new ones. Online retail operations such as Amazon, for example, have led to the closure of several physical stores for more traditional competitors. This has led to consolidation and reduction of stores for various sectors, whether it be electronics, sporting goods or office supplies. Whereas once you had multiple big box stores in the area for electronics, for example, now you only have Best Buy.
“Some of the retailers leading up to the boom don’t even exist anymore, like Circuit City and Good Guys,” said Rick Casazza, a senior vice president with Colliers specializing in retail. “What you’re seeing is a lot of big box stores now down to one or two companies (in their retail segment).”
The good news for Reno-Sparks is that retail saw a strong first quarter during the first three months of 2016. Net absorption, which refers to available space that as been filled, totaled 192,188 square feet for retail in the first quarter, already exceeding the annual totals for 2015, according to CBRE’s latest quarterly retail report. The absorption was driven by the sale of the former Lowe’s retail location on Oddie Boulevard in Sparks to Renown Health, which represents nearly 178,000 square feet of space. Even with the Renown deal taken out of the equation, absorption was still a net positive — the fifth consecutive quarter of positive absorption, according to CBRE.
Retail also posted one of the biggest job gains for the state in March, helping lower the state’s jobless rate to 5.8 percent for the month, according to the Department of Training, Employment and Rehabilitation.
The surge in restaurants was particularly notable, said Brian Bonnenfant, project manager at the University of Nevada, Reno Center for Regional Studies. Outside of the Renown deal, absorption predominantly came from shops, with 31 percent of leases accounted for by restaurants. Strong restaurant performance is especially helpful from a taxable sales standpoint, Bonnenfant added.
“Bars and restaurants keep chugging along and that will be insulated from the internet (competition in retail),” Bonnenfant said. “I’m just concerned about when it hits the saturation point as it seems like we’re growing bars and restaurants faster than the population.”
Retail construction activity also remains stagnant due to an overabundance of supply in the market combined with low rates and high construction costs, according to CBRE. There is adequate demand, however, for improvements to existing centers such as the 19,500-square-foot expansion at the Outlets at Sparks, also known as the Legends at Sparks Marina.
With the cost for leasing, also known as lease rates, seeing a sharp uptick since the second quarter of 2015, construction is also expected pick up in the near future if vacancy rates continue to fall.
Strong corporate activity in Northern Nevada continues to make the industrial segment the most valuable player of the commercial real estate sector.
Projects such as the Tesla Gigafactory and Switch’s SuperNAP — the world’s largest data center once finished — as well as news that cloud computing company Rackspace is eyeing the area have given Northern Nevada a much needed boost on the technology side as well as some corporate cred.
“Industrial is definitely leading the way,” Bonnenfant said. “The economists and everyone else said industrial would bring us out of the recession and would recover the quickest, and now you’re seeing vacancy rates drop and speculative construction happening again, which is the sign that the market is heating up.”
Dermody Properties, for example, has broken new ground on its LogistiCenter I-80 West speculative project at the Boomtown area just behind Cabela’s. The 800,000-square-foot project will feature four buildings and focus on tenants ranging from 30,000 to 200,000 square feet, said Eric Bennett, first vice president at CBRE.
“This will be the first speculative project built in west Reno to take advantage of the mature labor market in northwest Reno and the close proximity to California,” Bennett said.
Although names such as Tesla and Switch typically get most of the attention, one stalwart of the local industrial sector continues to deliver for the greater Reno-Sparks area. Distribution accounted for 70 percent of all transactions in the fourth quarter of 2015, according to Colliers International.
“At the end of the day, it’s packers and pickers,” said Greg Shutt, a vice president with Colliers International. “It’s logistics.”
Bennett also pointed to sizable expansions such as ITS Logistics' 625,500-square-foot facility and pet item supplier Chewy.com’s 566,600-square-foot facility, with several more announcements expected during the second quarter.
Although e-commerce poses a challenge for traditional retail, it dovetails nicely with the logistics operations of big box stores as far as growing the region’s distribution infrastructure.
Manufacturing demand also continues to spill over from California at a steady pace. The recent announcement of a minimum wage hike by California is further adding to already strong activity, Bennett said.
After ending 2015 with a vacancy rate of 6.1 percent, according to CBRE, the market is seeing a lack of industrial space of 100,000 square feet and below. Available “Class A” or prime industrial space at this size range is “almost nonexistent,” according to Colliers International.
The need is fueling new construction in the industrial segment, which has diversified beyond just brick and mortar retailers.
“The industrial market is healthy and growing (and) we are seeing a nice balance between speculative development and tenant demand that we did not see during the recession,” Bennett said. “While we continue to attract (brick and mortar retailers) at a steady pace, we can now throw into the mix e-commerce, manufacturing and data centers.”
Office is oftentimes considered a late bloomer.
“It ramps up late and it slows down late,” said Tim Ruffin, executive vice president at Colliers International.
Office kicked off 2016 with absorption rates for available space being relatively flat, according to CBRE.
More specifically, the Reno area saw vacancy increase by 9,728 square feet, also known as negative absorption, while posting a vacancy rate of 15.8 percent during the first quarter of this year.
Colliers International calculates its numbers differently than CBRE but Ruffin says 10 percent is usually the vacancy rate for a healthy office market. Overall, 2015 was a good year for the segment, according to Ruffin. Building sale prices last year were significantly higher than 2014.
“Rents have been rising for the last two years consistently,” Ruffin said. “We’re probably two and a half years away from a healthy market.”
Given how much the recession impacted the office segment, that is not a bad timetable, according to Bonnenfant of the Center for Regional Studies. Bonnenfant pointed to the vacancy rate for Class A office space, which is nearing the single digits at 10.9 percent in the first quarter based on the latest CBRE numbers.
“Office was one of those segments that people said would take 10 to 20 years before the extra supply is absorbed,” Bonnenfant said.
The three dominant markets for office in the area are downtown, Meadowood and South Meadows, each with their own niche tenants from related industries, Ruffin said.
The big blemish for the office segment last year was the absence of any new construction. That’s changing this year with McKenzie Development’s new four-story, 40,000-square-foot building in Reno. It will be the first speculative Class A building of more than 30,000 square feet that has been built since 2008, according to Ruffin.
There’s also a growing trend in the area of repurposing or converting retail big box buildings into office space. In addition to Renown’s purchase of the former Lowe’s space, Saint Mary’s converted a former Reno Scolari’s store into a medical campus.
Looking ahead, the trends look positive for the area, commercial real estate watchers agreed. Reno-Tahoe International Airport added several new flights and routes while also posting its first passenger growth in a decade in addition to record cargo hauls. Nevada also was the No. 2 most popular destination for movers in the West according to United Van Lines’ 2015 National Movers Study.
For Northern Nevada, a big part of it involves the national attention gained from big economic development wins such as the Gigafactory, Ruffin said. Ruffin recounted a comment by the daughter of a couple from Seattle while dining in a restaurant about selling their home in Palm Springs and buying one in Reno instead.
“The whole perception of investing in Reno has changed,” Ruffin said. “The expectations from Tesla haven’t materialized yet but investors are coming in because of the perception.”