The retail conundrum: High demand, high land prices

Carson City's commercial real estate prices have soared 30 percent in the last year, construction costs are up 20-30 percent, according to local real estate experts, and key storefronts up and down Carson Street are dark.

City officials say that the retail business wants to come, and will come - it's just expensive.

"The most difficult challenge is the cost of real estate and how that doesn't equate to the rents the land can generate," said Joe McCarthy, Carson City economic development/redevelopment manager. "But, that being said, we're finding there is a lot more interest in developing in Carson City, and the city is trying to be as supportive to allow for that development."

That means the city uses property tax dollars to help expanding or new businesses in targeted areas. That could be a downtown restaurant getting a $50,000 grant for remodeling, or a car dealer receiving $3.6 million to purchase land to build a new dealership. These deals are made to increase business revenue, which would then increase tax dollars and beckon positive economic forces into the area.

McCarthy said companies want to relocate to the area, bringing jobs with middle-to-high wages. Carson City has the affordable housing, mature infrastructure and good programs. One thing lacking: The retail isn't in place.

So far many big developers have preferred Douglas County and Reno.

Challenges to wooing retail

The first phase of the $100 million Summit Sierra shopping center on Mount Rose Highway will open in March 2006. It will feature 70 shops, including national names such as Dillard's, J.Jill, Abercrombie & Fitch and Banana Republic.

Many Carson City shoppers will make the 20-minute drive to south Reno for the selection. Commercial real estate broker John Uhart said in the last few years he's watched Carson City's vacancy rate increase because shops are bailing to neighboring counties. This presents a conundrum for a community looking to build its retail base: Many of these national retailers aren't coming to Carson City because they'd lose the business in Reno, or Douglas County.

"If they build here then they lose their bottom line," he said. "If we get more of a population, then we'll see more big retailers coming."

The old Kmart building on North Carson Street and several nearby storefronts have been vacant for about two years.

Southgate shopping center on South Carson Street has several vacancies, around Raley's grocery and the old Wal-Mart building, which has been empty for more than two years.

Both of these shopping centers are difficult to lease because of unusual circumstances. The old Wal-Mart development, owned by former Hollywood star Max Baer Jr., is on hiatus because of a dispute between tenants within the shopping center about what is allowed in the anchor building. The Kmart building is for sale, with an asking price around $6 million, but the building sits on a long-term ground lease.

Retail businesses will often choose to build to suit, rather than fit into some one else's footprint.

"The cost of construction has gone up 20-30 percent in the last three years, so we have to really be creative on working with our clients to keep our costs down," said Tom Metcalf, owner of Metcalf Builders.

He said office space is difficult to develop because of increasing costs of both construction and real estate. Office rents aren't keeping up. Office space for sale in Carson City is competitive with South Meadows in Reno.

One of Metcalf's clients is building a 39,000-square-foot office at Fifth and Saliman streets. The land cost his client $11 a square foot - a price increase that surprised Metcalf, a longtime Carson City builder. With the cost of construction where it is today, land that's $10 a square foot or higher doesn't work if the builder is going to turn around and lease that space.

"It's too expensive compared to the lease rate," he said.

Real estate - is Carson City running out?

When land owners perceive there is not a lot of land available, they are more likely to do long-term leasing said Bruce Robertson, an associate with Sperry Van Ness/Gold Dust Commercial.

"There isn't a lot of commercial land left," he said. "A lot of the open spaces are Forest Service and BLM (Bureau of Land Management).

"I think it's a factor of supply and demand. Almost everywhere real estate prices are up about 30 percent."

Carson City does have a supply. Carson City Principal Planner Lee Plemel said 2,600 acres have been identified in the current land-use plan for commercial/office/industrial. Of that, 1,500 acres, or 12 million square feet, has already been developed. That leaves 1,100 acres available for non-residential development.

Real estate supply is fixed. A county can't get more land than it has unless it annexes a neighbor. So price change must be attributed to the demand side, said Sheri Faircloth, a University of Nevada, Reno associate professor of finance.

"In the long run, in my opinion, the most important factor influencing demand, and in turn prices, is the level of interest rates," she said. "Interest rates have been low according to historical averages; therefore, demand for real estate is increasing. Other factors commonly cited are positive local employment trends, supply constraints and transportation costs."

At a business appreciation awards dinner last week, Gov. Kenny Guinn boasted that Nevada has led the nation in growth for the last 18 years. State and local officials often credit this growth to businesses leaving California because of high taxes, increasing workers' compensation and inflated land costs.

Where business goes, so do jobs.

As high as the land costs are getting in Nevada, it's still not too high for those cashing out in California and crossing the border. Bruce Robertson said commercial real estate prices aren't too high yet "because people are still paying the prices."

When they stop buying or leasing, then it's too high.

Liz MacMenamin, director of government affairs for the Retail Association of Nevada, said the quick growth rate is one reason for increasing real estate costs. The association lobbies for national chains and about 1,100 local businesses in the state Legislature.

"We have so many people coming in from California and cashing in on the real estate here," she said. "They're making bundles on it and are willing to escalate the price so much. Land is not plentiful."

n Contact reporter Becky Bosshart at bbosshart@nevadaappeal.com or 881-1212.

How much does land cost?

Land on the main streets through Carson City varies from $10-$32 a square foot, said Bruce Robertson, Sperry Van Ness/Gold Dust Commercial associate.

The main areas for commercial are Carson and William streets. College Parkway, Fairview and Clearview drives and Koontz Lane are also in demand. The highest prices are near interchanges of the new freeway because there is only so much land around those interchanges.

Available land surrounding downtown is selling for around $10 a square foot. But there isn't much for sale. Tom Metcalf, owner of Metcalf Builders, bought two acres for his multi-use development Westknoll on Curry Street for a little under $10 a square foot in December 2004.

On East College Parkway and Research Way, on the east side of the freeway, four parcels ranging from two acres to 41Ú2 acres are selling for $20-$32 a square foot. Robertson called this area near the new Wal-Mart Supercenter a hot spot. Those prices are comparable to north Carson City, close to the new regional medical center and the north Carson Street freeway entrance. Vacant land at Broadleaf Lane and North Carson Street is selling for $25 a square foot.

Ron Weisinger, Northern Nevada Development Authority executive director, said land owners and renters in a hot area, such as the new Wal-Mart, will barter for the lease amount because both parties want the best value for the land. In the end, vacant land around the Wal-Mart will be developed.

"They are willing to pay a little more because that additional cost will be offset by the traffic coming into their establishment," he said.

That's why Alysha "Danee" Nguyen, owner of Regal Nails, in the Carson City Wal-Mart, is paying three times the rent of what she paid for her former salon on Carson Street. She declined to say exactly how much. Nguyen owned New Image Salon and Day Spa near the Grocery Outlet for 10 years. A relative took over that business.

"I just wanted to expand my business, so I bought this franchise," she said. "I'm good with nails. I want to focus on just nails. Being here keeps me busy. I get more business."