Jerry Doty  /   July 11, 2019

Build-to-Suit Space Boosts Net Absorption

• Industrial net absorption was more than 1.8 million square feet in the second quarter
• Amazon.com and Sephora build-to-suits accounted for most of the quarter’s positive net absorption
• Industrial vacancy increased to 3.4 percent at midyear

Southern Nevada’s industrial market posted 1.8 million square feet of net absorption in the second quarter of 2019, with the bulk of that net absorption coming from two build-to-suit projects in North Las Vegas. Year-to-date, net absorption was 2.88 million square feet, while new completions of industrial space was 2.81 million square feet. Vacancy in the market increased to 3.4 percent. The weighted average asking rate decreased by $0.01 to $0.74 per square foot (psf) on a triple net (NNN) basis.

According to the Nevada Department of Employment, Training and Rehabilitation, Southern Nevada’s industrial job market added 10,800 jobs between April 2018 and April 2019. Over this period, Southern Nevada added 6,800 jobs in the construction sector, 1,900 jobs in the transportation and warehousing sector, 1,100 jobs in the wholesale sector and 1,000 jobs in the manufacturing sector. Unemployment in the Las Vegas-Paradise MSA was 3.7 percent in April 2019, down from 4.8 percent in April 2018. From April 2018 to April 2019, total employment in Southern Nevada increased by 26,100 jobs, a 2.8 percent increase.

New completions of industrial space in the second quarter of 2019 totaled 2,236,028 square feet, most of it in the warehouse/ distribution sector and mostly in the North Las Vegas submarket. Approximately 91 percent of this space was preleased at completion. An additional 4.4 million square feet of industrial space is slated for completion in the third quarter of 2019, with approximately 37 percent of this space preleased.

Industrial net absorption was 2,883,444 square feet in the first half of 2019, better than the 1,865,345 square feet absorbed in the first half of 2018. The Valley’s highest net absorption in the first half of 2019 was in North Las Vegas at 2,524,024 square feet, followed by the Airport submarket at 259,187 square feet and Southwest at 156,591 square feet. Net absorption was negative during the first half of the year in the East Las Vegas and Northwest submarkets.

Southern Nevada’s industrial vacancy rate increased to 3.4 percent in the second quarter of 2019. The Valley’s lowest vacancy rate at midyear was 2.6 percent in the Southwest submarket. The Valley’s highest vacancy rate was 5.7 percent in Northwest submarket. The Airport submarket showed the largest quarterly decrease in vacancy at 0.8 points. The largest quarterly increase in vacancy was in East Las Vegas, at 1.4 points.

The industries that were most active in occupying space in the first half of 2019 were involved in transportation, services, wholesale and manufacturing. Local companies took 30.5 percent of the leased square footage we tracked. Companies headquartered in the Great Plains took 18.1 percent of the space occupied, Midwestern companies 11.2 percent and Southwest firms 10.9 percent. This quarter continued the trend of the broader national appeal of Southern Nevada’s industrial market that began in 2018.

At midyear 2019, the weighted average asking lease rate for industrial space was $0.74 psf NNN, an increase of $0.08 from one year ago. On a quarter-over-quarter basis, asking rates increased by $0.17 psf for flex properties, $0.03 psf for incubator properties and $0.02 psf for light distribution properties. Asking rates decreased by $0.01 psf for warehouse/distribution and by $0.02 psf for light industrial properties.

Investment sales of industrial properties appear to have peaked in 2018. At midyear 2019, industrial investment sales volume was $168.6 million in 32 sales totaling 1,437,000 square feet at an average sales price of $117.39 psf. Although investment sales were strong in 2018, there was a trend of diminishing sales over the course of the year, and this trend continued in 2019. It is notable that prices for industrial buildings have increased dramatically over the past five years. The average cap rate at midyear 2019 was 7.1 percent, higher than in 2018.

Warehouse/distribution space was the name of the game at midyear 2019, as companies scrambled to adapt to the new logistics paradigm imposed by e-commerce. Warehouse/distribution properties had 2.3 million square feet of net absorption at midyear on 2.5 million square feet of new completions. The bulk of net absorption came from the completion of two build-to-suit buildings located in North Las Vegas. Warehouse/distribution vacancy was 2.8 percent at midyear, down from 4.8 percent at midyear 2018.

Southern Nevada’s light distribution sector continued to show incremental progress at midyear 2019, with 231,145 square feet of net absorption and a very low vacancy rate of 3.4 percent. Completions remained light, with 154,636 square feet of new completions at midyear. The market has finally responded to these improvements, with light distribution properties that were under construction or planned totaling 438,125 square feet, compared to only 58,100 square feet of forward supply in midyear 2018.

The light industrial sector posted 279,586 square feet of net absorption in the first half of 2019, a considerable improvement over the first half of 2018’s net absorption of negative 74,873 square feet. Like the light distribution market, the light industrial market showed continuous improvement over the past three years. This improvement passed without much notice by developers. Other than
the 750,000-square foot Google data center now under construction in Henderson, which is a special case, developers have yet to warm to the light industrial sector

Incubator space posted negative 1,072 square feet of net absorption in the second quarter of 2019, nudging net absorption down to negative 23,466 square feet in the first half of 2019. While nothing to get excited over, this was actually an improvement on the negative 97,551 square feet of net absorption recorded in the first half of 2018. Incubator vacancy was 5.6 percent, lower than one year ago. The flex market fared better, with 77,909 square feet of net absorption in the first half of 2019 and a vacancy rate of 7.1 percent.

Southern Nevada’s industrial market showed growth in the first two quarters of 2019, though much of the Valley’s net absorption came from just two large industrial build-to-suits. The second half of 2019 should see the completion of an additional 5.1 million square feet of industrial space, with approximately 31 percent of that space pre-leased. Industrial vacancy rates will continue to increase in the second half of 2019 unless leasing activity picks up.

“Industrial vacancy rates will continue to increase in the second half of 2019 unless leasing activity picks up.”