LV feels industrial squeeze

Plunging vacancy rates signal supply-constrained market

By Jennifer Shubinksi / Staff Writer

The amount of available inventory in the industrial market is rapidly diminishing and future supply could be constrained because of land and construction prices, industry experts said.

Vacancy rates for the industrial market continued to drop in the fourth quarter, indicating a high-demand, supply-constrained market and a market that could face challenges going forward, local brokers said.

The valleywide industrial vacancy rate settled near 4 percent at the end of 2005, although numbers vary between firms because of the research methods used.

Researchers at Grubb & Ellis went so far as to say that industrial development in Las Vegas is on the brink of extinction as future projects continue to deplete an already shrinking industrial land supply.

Xavier Wasiak, senior vice president, said while that statement might push the envelope a bit, it gets the point across that finding and developing an industrial product is becoming an ever increasing challenge.

"Land right now is just so expensive, there aren't developers out there buying large parcels, even if it was available, because it doesn't make sense," Wasiak said. "It is a little dramatic, but it's not too far off the mark."

Developers who were able to buy land six to eight months ago in the $5- to $6-a-square-foot range are now getting projects under way. There is an estimated 4.5 million square feet of industrial space under construction, Restrepo Consulting Group reported, which hopefully will somewhat ease the supply crunch.

But developers now looking for land are facing prices $8 to $10 a square foot, making it a challenge to compete with projects that have lower land costs.

"To have to compete with the people that four months ago bought land at $6 a square foot, makes it really difficult," Wasiak said. "Plus the rental rates in North Las Vegas haven't escalated as quickly as land prices have."

Rental rates will have to go up to keep up with land costs and construction costs. How much is yet to be seen, but costs of development have almost doubled, industry experts said.

In the fourth quarter 2005, asking rents were 66 cents per square foot (not accounting for operating expenses) compared to 57 cents during the fourth quarter 2004, reported John Restrepo, principal at Restrepo Consulting Group.

A continued challenge to industrial users is finding space -- especially when that space is being bought up with intentions of grander plans, such as a condominium or mixed-use development.

Geoffrey West and Jeremy Green, both vice presidents of CB Richard Ellis Las Vegas' private client group -- industrial properties, recently sold an eight-acre industrial park at Rancho Drive and Meade Avenue for $27.75 million.

"We have, as a team, focused on industrial investment, but educated ourselves on the mixed-use market because of its impacting values," West said.

Raising prices mean some industrial uses will get pushed out of the more expensive submarkets and some users may have to be farther away from the center of town, he said.

"Those that don't have to be there will pay a premium or will be forced out," West said. "It will be a ripple effect, people that are displaced will go to the next adjoining submarket."

The total amount of industrial space taken up in 2005 nearly doubled the 10-year historical average of 3.6 million square feet, Applied Analysis reported.

"The industrial real estate market completed one of its strongest demand cycles in history as several factors ignited the fire," said Brian Gordon, principal at Applied Analysis. "For projects coming on line in 2005, record-low interest rates during the design phase 12 to 18 months prior provided additional incentive for development and absorption."

Going forward, the supply constrained market could impede the valley's attempts to diversify its economy, Restrepo said.

Market experts point out there is a healthy amount of for-sale industrial product in the construction pipeline, but limited for-lease distribution space exists.

"While the spec industrial market remains strong, we are definitely monitoring the amount of investment in the for-sale industrial market and rapid land costs because of their potential impacts to our for-lease market,¨ said Vic Donovan, managing partner at Colliers International, Las Vegas.

Jennifer Shubinski covers real estate and development for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at (702) 259-8832 or by e-mail at js@lasvegassun.com.

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