As U.S. Industrial Space ‘Evaporates,’ Secondary Markets Count Gains And Side Effects
Reno, Nevada, hasn't historically been known as a warehouse and distribution hub. That's now changing, as the supercharged national industrial market drives users, developers and investors ever deeper into many previously looked over places.
Industrial inventory in the region has surged 25% over the past five years. That growth has led to new job creation, an expanded tax base and negative side effects.
Residents have been voicing concerns regarding traffic, climate concerns, safety and noise stemming from the increase in industrial uses. Those complaints in part led the Reno City Council to unanimously shut down plans for a 1,500-acre master-planned community dubbed Prado Ranch, which would include 3M SF of industrial space near a residential area.
"Adding more houses and warehouses are adding more problems that are ongoing in Lemmon Valley," Linda Donohoe, a 50-year resident of the area said in a voicemail played during a lengthy Zoom meeting ahead of the vote.
In a list of objections that also included the potential for flooding and pollution, resident Tammy Holt cited her concern about the truck traffic that would be generated by the industrial portion of the development.
"Semitrucks versus children," she said, then did a sound impression of a truck horn: "Mee! Mee! Mee! Nah."
The council member representing the area also argued the industrial space wasn't compatible with the neighborhood.
The industrial portion would be the size of three Meadowood Malls — the largest retail property in the region. Council members questioned the developer, Lansing-Arcus LLC, about such issues as air quality and traffic. In the end, the cons outweighed any pros.
Much of the action in the hot industrial market has been in the largest U.S. markets, but e-commerce-inspired demand for space has been so intense that absorption and development have mushroomed in secondary and even tertiary markets nationwide, including places hardly known for their industrial assets until now.
"Historic is the word that comes to mind," said Kidder Mathews Executive Vice President and Managing Director Mike Nevis, who heads the company's Reno office.
"The Reno industrial market is experiencing historically low vacancies and historically high absorption, development is on fire, rents are rising and cap rates are falling," Nevis said. "We've never seen anything like it."
As of Q4 2021, overall industrial vacancy stood at nearly 1.8%, down 91 basis points over the course of a single quarter, according to Kidder Mathews data. That's also down from 8% in 2015 and a high of 15% in the years right after the Great Recession. Rents have also spiked from around $0.35 per SF in 2016 to nearly $0.60 per SF now.
Net absorption during the fourth quarter was about 3.6M SF, more than the previous three quarters of 2021 combined. Altogether, industrial tenants took a net of about 7M SF last year in Reno, a staggering amount considering that total inventory of the market is about 99M SF, up from around 78M SF as recently as the beginning of 2016.
"The development pipeline's been pretty robust in recent years, but we've absorbed in excess of our construction deliverables," Nevis said.
Reno's growth story is the same one being seen across the U.S., with one dominant catalyst: e-commerce. The demand for industrial space in greater Reno kicked into high gear during the pandemic, as did development, after a short pause in the first half of 2020.
"We didn't see much [in] the way of speculative construction until about 2015, and then on average every year we've delivered anywhere between 3M to 4M SF until last year, when the total shot up even further," Nevis said.
Reno is seen as an alternative to more expensive markets in California, gaining ground with such other intermountain markets as Las Vegas, Phoenix and Salt Lake City, according to Rich Lachowsky, a Newmark director of Salt Lake City research and national industrial.
"Even though they're a bit of a drive time away from the ports, those markets still offer a huge cost savings compared to California," Lachowsky said.
The pros from this industrial growth include more revenue for local jurisdictions and job creation, with the latter also seeing higher wages than is typical for warehouse and distribution jobs.
"We've seen a serious uptick in what warehouse workers are offered, one that I've never seen before," Nevis said. "That's a win for the local economy. The warehouse guys are willing to push the numbers to get the workers in a constrained labor market."
This secondary market industrial growth is a result of the selling-out of larger logistics hubs.
E-commerce surged early in the pandemic to as much as 15.7% of total retail sales, with no signs of a slowdown. Demand for distribution facilities has scrambled markets everywhere, not just the traditionally large ones, such as Southern California, Chicago or New Jersey.
In the Inland Empire of Southern California, for example, demand is high and supply short, putting upward pressure on rents. About 29M SF of industrial is slated for delivery in the region over the next five quarters, but vacancy is nevertheless forecast to stay flat, with current vacancy rates hovering under 1%, according to Colliers data.
"Rental rates and land values continue to outpace construction cost inflation, driven by the insatiable need for industrial and distribution space across the entire Western U.S.," Colliers Senior Executive Vice President Tony Phu writes in RE Business Online.
In Chicago, industrial demand in 2021 totaled a whopping 44.9M SF, 69% greater than the previous record year, pushing vacancy at the end of the year to 5.4%, according to Colliers. Though not quite as robust, demand is also high in northern New Jersey, driving the market to a 4.1% vacancy rate.
“The supply-and-demand imbalance is more significant than I have seen,” Society of Industrial and Office Realtors CEO Robert Thornburgh told The New York Times. “There is limited inventory of industrial space. It is almost evaporating before your eyes, if you are even lucky enough to know about it.”
It's not just Reno that is witnessing firsthand the explosion of industrial across the U.S.
"The top growth markets check off nearly all the demand drivers, such as Phoenix, which is one of the top regions for population growth and also one of the top markets for manufacturing growth," CBRE Senior Director and Global Head of Industrial & Logistics Research James Breeze said.
Nashville, Las Vegas and Salt Lake City also check all the boxes, as do Greenville, South Carolina, and Louisville, Kentucky, Breeze said, because they can reach large population concentrations, manufacturing hubs, and also boast inland port and air cargo capabilities.
The international logistics bottlenecks are also having a positive impact on smaller markets as well, experts say.
"Ports on the East Coast are experiencing tremendous demand, with as much as a 20% increase last year in container traffic, as product has been re-routed through the larger Panama Canal to avoid West Coast ports," said Black Salmon Managing Director Stephen Evans, whose company invests in industrial properties.
Evans cites Richmond, Virginia; Charleston, South Carolina; and Savannah, Georgia as places benefiting from this increase in traffic, though industrial growth in those places does face obstacles, he said.
In greater Richmond, residents have raised environmental concerns about the Upper Magnolia Green mixed-use development in Chesterfield County. It includes a sizable industrial component, which has residents concerned over how the project would change the semi-rural character of the area for the worse.
Near Buffalo, New York, community resistance to a $300M Amazon distribution center ultimately led the retail giant to look elsewhere in upstate New York. The objections included the impact on traffic and pollution.
Even so, greater Buffalo is a growth market for industrial development, according to Pyramid Brokerage Co. commercial real estate agent Judith Lubecki, with a 6.3% vacancy rate. Much of that space is obsolete, and so "most major developers in the region have plans for speculative new builds," she writes.
Not every growth market has seen much pushback, however. Colliers Research Manager John Stater, who is based in Las Vegas, says there haven't been many objections to the area's industrial growth.
Last year, the market saw 7.7M SF absorbed, and 4.8M SF are now under construction, with a 3.3% vacancy rate.
"Vegas is a pretty young city, and there's still a lot of vacant land to work with," Stater said. "Also, the city has done a pretty good job of planning, nudging industrial growth mostly in directions that don't clash with residential growth. Industrial still has a lot of growth ahead here."
