Wow. The Northern Nevada commercial market is popping! Investment properties and the industrial sector are leading the frenzy, followed by the strong multi-family market, with retail and office lagging just behind, having suffered the most during the recession, and still with much improvement to make.
We all learned in high school economics any and every market is driven by the key principles of supply and demand. While this Economics 101 basic is still key, in 2010, during the deepest pit of the recession, we learned there are actually three key market drivers: (1) supply; (2) demand; and (3) availability of capital (money).
How can this be? The truth is, the lower interest rates are, and the easier it is to get a loan, the more transactions in the marketplace you are going to see. Hence, we’ve seen the Fed keep interest rates historically low for the past seven years, an unprecedented move; some would say they are propping up and manipulating the nationwide economy. The truth is the availability of capital shifts demand, which affects supply.
We track all of the commercial sales in Carson City, as we have for 15 years now. Our market is small enough to get our arms around and offers good examples on the basic principle of supply, demand, and availability of capital: Land, in particular, can be the most difficult to finance in any market, so let’s study trends in the land sales arena. In 2007, at the height of the “boom,” there were six commercial land sales in Carson City. We joked at this time that all you needed to get a loan was a pulse. Translation, and stated politically correct: capital was readily available. In 2008, the year our economy exploded, there were no commercial land sales, and in 2009, there was one. In 2010, we improved, working our way back up to three sales. So you can see the inability to finance drove the market to freeze solid, with no sales at all in 2008 when the financial markets came to a halt. Did demand dry up? It did, but that was in large part due to the fact there were no financing options available.
This microcosm may be interpreted in many ways, but you can look at the sales history for every investment type, from commercial buildings to 10-plus multi-family units, and the data is undeniable. The commercial lending market froze solid in 2008, and it didn’t even begin to unthaw until 2010. It wasn’t until 2012 we saw lending parameters even try to resemble “normalcy.” There was some cash on the sidelines, so some transactions trickled on, but the bulk of the activity was gone.
Here’s another market driver quandary for you, again based on the basic principle of supply and demand: Did you know that Northern Nevada boasts more industrial square footage per capita than any other area of the country? At first glance, this may not be surprising. After all, the Tahoe Reno Industrial Center (TRIC), just east of Sparks, is the single largest (by land area) industrial park in the world. Our region boasts the unique distinction of being one day’s truck travel time to the seven western states. What’s interesting is even with these amazing facts, and our surprisingly low population of approximately 700,000, we are still almost out of precious warehouse/industrial space. The industrial vacancy rate for the Reno/Sparks market is hovering around 8.5 percent, and in Carson City we’re at 7 percent (7 percent is considered the crucial marker between a Landlord vs. Tenant’s market).
Why does any of this matter? Our ability to get a handle on current market drivers, for our region, our state, and our country, boil down to pertinent facts like whether our remaining vacancies along Carson Street or in Carson City are going to fill up, when North Carson Street’s retail tragedy turns to triumph, and when we can expect to see new industrial construction (soon!), which means many of our friends and neighbors find gainful employment, just a five minute drive from home. Monitoring and understanding market drivers on both a local and national scale help us advise clients as to when is the best time to consider building a new apartment complex, strip mall, or even a car wash or drive-thru site.
Gone are the days of “Build it and they will come.” This outdated philosophy led to many of the worst financial disasters of 2008-2010. An investor with a successful track record tells you “Timing is everything,” and it is. But there is no substitute for research and smart planning. Investors interested in riding the current rise, making speculative investments, and hoping the current boom lasts forever are one-trick ponies. When it comes to smart investing, take advantage of affordable financing when it’s available, but use it only on a truly wise investment, don’t buy simply because you can or because you’re pressured into an unwise investment by a 1031 exchange. Financing, a key component to demand, is available — and our hot market is open for business.
Brad Bonkowski and Andie Wilson are Broker/Owners of NAI Alliance Carson City, a commercial real estate brokerage. They may be reached at 775-721-2980.