The National Industrial Real Estate Market
Nationally-based, independent commercial real estate investment and valuation firms rank the national industrial real estate sector as leading all other national commercial real estate sectors based on investor returns, occupancy levels, and rent growth factors – and by a notable margin. Net operating incomes have risen significantly as basic economics of pervasive low supply and high demand pressure rents up, and as lease renewals are being reset to market rates.
Both the e-commerce explosion and the increase of global trade drive a large amount of the demand for strategic warehousing. These factors have made the national industrial real estate sector the most highly sought-after commercial real estate asset group by institutional investors and smaller portfolio investor groups alike. Cap rates on portfolio sales are trading at record pricing, which is yet another factor in rising rents, as new ownership group strive to maximize their operating income to recover from the pretty prices for which industrial portfolios are trading.
So while the national picture for industrial real estate is very rosy, how does the West match up as compared to the rest of the country? The Western region currently has the highest average industrial rent rates of $7.36/sf or $0.61/sf/Mo. This average is influenced by extremely high rents at the seaport areas as well as the very strong capital markets of LA, San Francisco, Portland, and Seattle.
Western tertiary markets such as northern Nevada have lower average rents. The West has the lowest national vacancy of 5.89%, with Reno’s vacancy closing out 2017 at 5.86%. Cap rates paid by investors in the West also led the nation at 5.73%, with much lower rates being paid in the capital market prime cuts areas. Nationally, cap rates fell in year-over-year comparison, but the West Coast fell the least at only 4 basis points. So, looking at the data, the West is at the top of the heap in all measures of industrial real estate performance, in the top commercial real estate sector.
The Northern Nevada Market
Now, how does our local market compare? Based on the Western average, northern Nevada’s rental rates are comparatively low, with the brand new, top-of-the-line industrial product being offered at an asking rate of $0.37/sf/Mo. This is especially significant when you compare Reno’s vacancy as right in step with the low Western average, yet with pricing still well below the average. Area cap rates are also comparable with the Western regional average.
So what’s the big takeaway? In comparison to the national landscape, northern Nevada’s industrial real estate market is one of the leading real estate markets in the hottest national real estate sectors today. Looking ahead, the operating economics driving the growth seem to be stable with moderate growth projections continuing for the next few years. Northern Nevada’s industrial market is well into the expansion phase of the real estate market cycle, and as long as demand continues and supply stays in balance, the current expansion phase should continue for the short to medium term.
We do not foresee the current inventory balance being upset with an oversupply of product due to overdevelopment occurring as happened in 2006. Developers are watchful to avoid being caught out with large new inventory and a shrinking demand. These factors all combine for a growing, thriving industrial real estate market continuing through 2018 and beyond for northern Nevada, as our area continues to rank right along with the other western market leaders leading the nation in every category.