Looking forward in 2018, a big focus in CRE is on the industrial sector. Industrial investment momentum outpaces overall CRE as investors continue to expand holdings. Industrial production in the US increased 3.6 percent year-on-year as reported in December of 2017.

The manufacturing industry has seen a consistent increase in the U.S., and as e-commerce continues to grow, the need for ‘big box’ buildings has expanded. Demand for bigger warehouses is being spurred by brick-and-mortar retailers such as Target, which is stepping up efforts to compete with e-commerce giant Amazon. With an ever rising need for next-day and same-day delivery, there has been an explosion in secondary markets near population centers and logistic hubs.  The U.S. industrial real estate sector “continues to far outperform all other segments in the industry” and has seen record levels of rent growth, construction, and occupancy, Colliers found in a Q3 2017 report.

But E-commerce and shipping aren’t the only factors of industrial market growth. Other waves of change are centered around large manufacturing projects and companies moving to these secondary markets. One huge industrial project, that influences the economic and cultural landscape around it, is Tesla’s Gigafactory.

Through leveraging Reonomy data, we analyzed pricing and sales changes in commercial real estate sales in Nevada around the Gigafactory. By looking at the sales growth of specific asset classes in a surrounding area, we can see potential impacts of the factory and the ripple that creates on commercial sales and pricing.

As the area continues to attract more economically beneficial industry development, pricing will likely continue to increase, and office, retail and multifamily space will become more competitively priced.

As the industrial sector in the U.S. continues to grow, we leverage Reonomy data to take a deeper look at the changes in Nevada and just how strong returns can be if you have the opportunity to invest in a game-changing industrial property.

Tesla & Gigafactory growth effects

The northern Nevada region has continued to see substantial growth over the last few years. As big tech companies continue to move infrastructure to smaller and less developed cities, growth in Nevada, a close neighbor of tech hub San Jose, has continued to inflate.

Reno has experienced exceptional growth in the past few years, and the proximity to the Gigafactory created by Tesla and shared with Panasonic is a large contributing factor. Tesla broke ground on the Gigafactory in June 2014 outside Sparks, Nevada, and has been attracting more people (employees, other tech companies, retailers) to the area each year. While not yet complete, the Gigafactory is being built in phases. Tesla can begin manufacturing immediately inside finished sections while continuing to expand the factory.

The changes that Tesla has stimulated in the Nevada economy and the development of Reno and other surrounding cities have been referred to as the “Tesla Effect.”  In 2014, Applied Economics presented a study to Nevada Governor’s Office of Economic Development stating that “Tesla would be an important contributor to the region’s economy and could serve as a catalyst for additional manufacturing and logistics development in the region with its worldwide name recognition and cutting-edge technology. In addition, all of the jobs created by the company would be net new jobs thereby growing the economy both locally and regionally. The attraction of this company to Washoe County and Storey County would not only create a large number of new direct jobs but also support a sizeable amount of additional economic activity, jobs and payroll at related local supplier and consumer businesses.”

Tesla promised to create 6,500 permanent jobs in Nevada and expected the factory to employ 3,200 workers by March 2018. Panasonic is also hiring at high rates. Reno’s unemployment rate is below 4 percent for the first time since 2006, and the fastest job growth in the region comes from manufacturing, employing almost 15,000 workers, up 15 percent in the past two years.

Tesla’s holdings in the Nevada desert currently amount to 3,200 acres, roughly four times the size of Rhode Island. Even though it’s only 30 percent finished, the Gigafactory facility is already immense. The current structure has a footprint of more than 1.9 million square feet, which houses more than 4.9 million square feet of operational space across several floors and is more than a mile long.

What does this mean for Nevada CRE?

Commercial real estate has experienced a large growth in sales volume not only in Reno but in all surrounding counties of the Gigafactory. Washoe County, which houses the city of Reno, has seen substantial sales volume increase in all asset classes. Utilizing Reonomy data, we analyzed sales volume and found the average of all commercial properties had 73% sales volume growth increase from 2013 to 2017 – the area is a hotbed for CRE investment. The growth has been most significant in the office and multifamily asset classes, with 69% growth and 75% growth respectively.

But with industry and population increase comes a need for CRE changes. As the Gigafactory continues to expand, and Tesla continues to hire hundreds of people a year with a higher base salary than most of the surrounding areas, the required infrastructure of the city will continue to expand.

Reonomy CRE Data for Nevada Counties

Washoe is the second most populated county in the state of Nevada and encompasses the City of Reno. Though the Gigafactory is located over 20 miles outside of Reno proper, the closest town to the factory is Sparks, a suburb of Reno. Renomy’s data showed a 58% increase in commercial sales over the past 3 years.

The Gigafactory at the Tahoe Reno Industrial Center is located in Storey County, which has also experienced a large spike in sales volume increase over the past 3 years. Since Tesla broke ground in Sparks, commercial sales have increased by 41% in comparison to the previous 3 year period. But because the closest city to the Gigafactory is Reno, the most CRE growth seems to be centered around the city. After spurring a movement of tech to the area, Reno and the surrounding counties have become an area of possibilities in terms of CRE development.

The growth rates of two other counties around the Gigafactory, Carson City and Lyon, also showed high sales growth rates. Carson city 52% increase and Lyon 47% increase in sales volume.

Opportunities for new and innovative office space, continued multifamily growth, a need for affordable housing and mixed-use space to foster the coming expansion of the area’s population and cultural needs.

 

Through the expansive data Reonomy provides, we have taken a closer look at some of the target asset class segments that have already experienced a lot of growth.

Overall, the largest jump in sales growth has been in the Multifamily market, Storey county excluded as it has a population of less than 4,000. Washoe County had high sales volume growth rates (between 65-75%) for Industrial, Multifamily, and Office asset classes. Though the Gigafactory is in Storey county, it actually had the lowest sales growth of the four. Lyon County experienced high sales volume growth in Multifamily, 72%, but more moderate growth in Industrial (38%) and Office (28%).

Reno has seen a large amount of growth in value since the construction of the Gigafactory began. Industrial properties have especially seen a jump in the price of sale. With more manufacturing centered in the area, there is an increasing need for large industrial spaces for production, shipment, and processing centers. And in order to attract the working population, companies have a desire to build close to the burgeoning city.

 

By leveraging Reonomy’s data, we have also looked at the City of Reno specifically. Sales Price changes in the City of Reno from 2010-2013 compared to averages from 2014-2017 showed an overall increase of 55%. Asset class specific sales price increase was highest for Industrial properties (60%). Increase in sales price of industrial properties YoY from 2013-2014, when Tesla broke ground on the Gigafactory, jumped to 82%. Office (55% increase) and Multifamily (43% increase) sales prices had a more consistent YoY increase in the same time period.

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Other Factors

Tesla may not be the only driver of change in the area, but the sheer size of the factory is causing the area to change dramatically fast – driving up the cost of living and changing the culture. In 2011, Governor Brian Sandoval signed a law aiming to improve the state’s economy by diversifying the workforce. Nevada was dealing with a 14% unemployment rate.

The Reno area has recently scored some other big wins, such as a new, highly automated factory run by Ardagh Group SA that churns out 3.5 million cans of tomato paste and other food products a day.  More companies have expanded or moved to the area since. Switch, another tech company, is building a billion-dollar, three million square-foot data center right next to the Gigafactory. Apple is planning on erecting a 14-building data-center site out in the desert, too.

“What Tesla did was it took our success and made it huge by reinforcing the message.” —Mike Kazmierski, president of the Economic Development Authority of Western Nevada.

CRE development is skewed heavily towards growing the area into a tech-centered community –   and has not yet worked to create enough affordable housing. Current residents may be displaced due to the growing cost of living and the influx of higher paid workers. This could possibly stratify the inequality levels in correlation to distance from the tech center, a similar situation to what happened to real-estate in San Francisco.

Industrial Growth in CRE: continuing trend in 2018

Though changes in trade policies and transportation of goods are creating uncertainties in the market, fundamentals remain strong: construction still trails demand, infrastructure investment looks promising and the proliferation of e-commerce will continue. Everything checks out for continued industrial real estate market growth in the year ahead.

Industrial real estate demand and the push to improve last-mile delivery services could influence development throughout the country, encouraging companies to seek space in secondary or tertiary markets. Smaller urban core warehouses and fulfillment centers, reconverted assets, and multi-story warehouses could become last-mile solutions for many companies in 2017. Nevada isn’t the only state experiencing growth in this sector, and Tesla certainly isn’t the only company looking to expand their holdings and grow manufacturing.

 

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