Press Release: Industrial Team775 336 4600
ACTIVITY:
Although less impacted by the global economic downturn than local retail, office and land markets, the Reno/Sparks-Fernley industrial market limped along during 2008, with waning activity and steadily increasing vacancy. Gross absorption of 878,277 square feet during the fourth quarter brought the total for the year to just 3,480,512 square feet, 71% of the annual average for the previous eight years. Over 1.3 million square feet (39%) of market activity occurred in the largest submarket, Sparks, while activity in the North Valleys and East I-80 Corridor submarkets fell from almost 4msf during 2007 to 1.4msf in 2008. This is a reflection of the absence of big-box users in the market that had driven both build-to-suit (BTS) and speculative construction in those areas during the previous two years. The largest transaction during 2008 was just 208,000 square feet and only six other transactions were larger than 100,000 square feet, which dropped the average transaction size to 35,528 square feet from 51,029 square feet a year earlier.
NET ABSORPTION:
Although net absorption during Q4 was positive, it was a paltry 31,658 square feet, bringing the total for the year to 652,849 square feet. This is less than a third of the average for the previous eight years and, if not for almost 1 msf of net absorption in Q1 (most of which was the new 873,000sf PetSmart building), the entire year would have seen negative net absorption. The North Valleys and the East I-80 Corridor totaled more than 2 msf, which was offset by more than 1.4 msf negative net absorption in all other submarkets. This irony (those two submarkets had the highest net absorption but lowest gross absorption) is the result of BTS transactions counted in late 2007 as gross absorption which resulted in buildings accounted for as net absorption during the early part of 2008 when they became occupied (e.g. PetSmart). With no significant BTS projects in the hopper for 2009, we should see a more meaningful correlation between net and gross absorption during the coming year.
VACANCY:
The vacancy rate at the end of 2008 reached a record 12.79%, almost a 40% increase from the beginning of the year. Most of the increase, however, occurred by the end of the third quarter, when it stood at 12.74%. More irony: almost 52% of the vacant space is in the two submarkets mentioned above that had the lowest gross absorption and highest net absorption during 2008. Why, because most of the unprecedented speculative construction completed during the past two years occurred in these two submarkets…and much of it remains vacant.
CONSTRUCTION:
As the economy worsened and the year wound down, so did construction. Only 77,873 square feet was completed during the fourth quarter, almost all of which was BTS. This brought total construction for 2008 to almost 3.6 msf, 76% of what was planned last January. Most of the shortfall was in speculative construction, down to 1.9 msf from the 3.0 msf planned. Not surprisingly, there is virtually NO speculative construction planned for 2009 and planned BTS construction of less than 100,000 square feet.
LEASE RATES:
At the end of Q3 we observed some softening of asking rates, particularly for sublease space, as well as a widening disparity between asking rates and effective rates. With most economists predicting a prolonged economic downturn, this trend continued during the fourth quarter, as more sublessors and landlords wanted their space to become the “next deal made.” We expect the bidding wars to accelerate during 2009, due to more than 3.4 msf of new speculative space still sitting idle, a mounting supply of sublease space and the prospect of more companies defaulting on their leases, leaving landlords with unanticipated vacancies.
OUTLOOK:
Although the current economic woes are the most threatening since the Great Depression, the abiding hope as 2009 commences is that we may begin to see a glimmer of recovery by year’s end. With a net absorption rate of 2.1 msf/year (average 2000-2007), we theoretically have more than four years’ supply of industrial space and that doesn’t include space yet to become vacant from companies that might downsize, default or otherwise leave the market in the coming months. So, even if the economy does begin to rebound before the end of 2009 we probably wouldn’t see any meaningful speculative construction until the vacancy rate gets back to single digits and lease rates restore developers’ confidence. Add to that the lag time for actual construction and we probably won’t see any speculative reach the market until late 2011. There is a wild card, however. As our neighbor to the west wrestles with its monumental deficit, it is sure to look to business to bear a lot of the cost. That may drive companies into our market, much like what occurred in the early nineties. So, in spite of the current economic crisis, the long-term attractiveness and viability of our area for industrial users buoys our confidence that we will be among the early beneficiaries when the US economy begins to turn.
