Demolition in process of the Second Street Bridge on Interstate 580 as part of the Spaghetti Bowl Express project in Reno.
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Real estate developers and commercial property brokers were hoping for some relief from the high interest rates that stifled new construction and sales throughout 2024, but it’s looking like 2025 will bring more of the same.
Interest rates were just one topic discussed Jan. 23 at the National Association of Industrial and Office Properties Nevada Chapter Developers Forum breakfast meeting at Grand Sierra Resort. Moderator Joel Grace of Locus Development Group peppered panelists John Ramous (Dermody Properties), Donald Gibson (Edgemoor Infrastructure & Real Estate), and Ryan York (Google) with a series of development-related topics, including the region’s current and future power needs, rising construction and insurance costs, workforce shortages and similar hot-button issues facing developers in Northern Nevada.
Jeff Brigger, business development director for NV Energy, and Taylor Adams, chief executive officer of the Economic Development Authority of Western Nevada, provided opening remarks. Brigger covered NV Energy’s many upcoming initiatives to increase power generation and capacity in the north state, including conversion of a coal-fired power plant at Valmy into natural gas and the large-scale Greenlink West transmission line that was approved late last year by the Department of the Interior.
Construction on the $4.2 billion, 210-mile long project is expected to begin later this year and will not only increase regional grid capacity by creating a continuous high-voltage power loop throughout the state, but it also will provide access to the power grid for numerous green-energy power generation projects planned in the state, such as Arevia Power’s 700-megawatt solar generation and 700-megawatt battery storage facility roughly 20 miles south of Yerington.
“(Greenlink) will essentially create a giant loop around the state, it also will allow us to access renewable energy that’s otherwise constrained, and it will allow us to move resources north and south and better take care of the large customers that are showing up,” Brigger said. “With the loads that are being requested right now, we need that baseload generation to serve these customers that have 24/7 operations.”
Adams, meanwhile, told the crowd that lack of movement on interest rate cuts is making deals harder to pencil. Despite that fact, EDAWN announced 22 new businesses to the region in 2024 and has a mandate for the new year for three new announcements each month.
“We love the rate cuts we have gotten so far,” Adams said, “but we are concerned about the fact that the four rate cuts predicted for this year have been trimmed to two, and we are seeing a sticky 10-year Treasury. That is skinnying up cap rates and making deals harder to do.
“As things settle down in Washington, D.C., I think the 10-year will start to pull back just a little. We have to get through the turnover and get people seated, and then deals will start to open up – the economy always expands on the back end of a presidential election, and every day we start to see more and more where the opportunities will be in 2025.”
Dermody’s Ramous, meanwhile, said developers long expected to see additional rate cuts, but they most likely won’t surface in 2025.
“The benchmark for us is really the 10-year Treasury; that historically has dictated where the real estate industry and much of the economy is driven,” Ramous said. “We certainly were expecting further cuts.
“The reality is that there has been robust (development) activity over the last 10 years as interest rates were in general hovering in that 1 to 3 percent range,” he added. “Now we are seeing the 10-year Treasury in the mid to high 4 percent range, and that has stymied the commercial market in general for lenders, developers and companies that want to expand.”
Although development was stagnant in 2024, it may tick back up slightly in Northern Nevada as the national political and economic landscapes begin to stabilize.
“When you don’t have stability, that causes caution and everything stops,” Ramous said. “We are starting to see a leveling off, though, and people can forecast. If (interest rates) end up in the mid-4s, people can work with that. But the important thing is stability.”
Stubborn interest rates aside, panelists also were asked about construction costs. While construction costs seemed to level off after rapid increases over the past 36 months, they appear to be rising again, Grace said.
Edgemoor’s Gibson said that costs rose so much in the post-pandemic years that it created a near crisis in markets across the country. Forty-percent or higher increases in construction costs can’t be supported when the revenue streams required to support new buildings and projects have not, Gibson said.
Edgemoor is increasingly looking at ways to boost productivity and production as a means to hedge against those costs, he added.
“A lot of the economy has seen big gains in production, but not the production of buildings and the creation of built environments – we are almost in reverse,” Gibson said. “It’s really the entire development process, whether it’s looking at new ways to bring people together and aligning them contractually, getting better efficiencies out of the process, getting through permitting faster, and eliminating those costs to get a building going up faster.
“That's an area where a lot of innovation is possible, and within buildings we are seeing possibilities with how buildings are designed and constructed to make that more efficient.”
Gibson noted that RHP Mechanical Systems did a lot of prefabrication of the mechanical systems being installed at the new College of Business at the University of Nevada, Reno, as a way to increase productivity.
“It had a positive impact on the project for sure,” Gibson said. “When you look at the whole process, there is a lot of room for improvement in our industry. Costs are going up 2 to 4 percent per year in some markets, and in certain sectors we are being priced out of demand – (developers) can’t provide product that demand can afford. There’s a lot of room for improvement and innovation (in the construction industry).”
Grand Sierra Resort will host the next NAIOP event as well. The NAIOP Commercial Real Estate Awards will be March 8 from 5 p.m. to 10 p.m. Individual tickets start at $200.