Reno Sees Future, and It Isn’t Casinos

Jim Carlton, of The Wall Street Journal, highlights Reno’s shift from gambling to manufacturing hub in his article published on October 23rd. Even as Reno continues to grow and develop, we will always be “The Biggest Little City in the World”.

Carlton’s full article is listed below and can be viewed on The Wall Street Journal‘s site.

RENO, Nev.—For much of the past half century, Reno moved in lock step with its glamorous big sister, Las Vegas, their fortunes rising and falling with their mainstay industry, gambling.

But Reno is now betting on a different economic future, turning its back on casino tourism as an economic driver in favor of becoming a manufacturing hub for everything from drones to car batteries.

Since 2011, the “Biggest Little City in the World” has recruited about 100 companies to locate or expand here with more than 10,000 new jobs—many cajoled by a former West Point cadet who instilled military discipline into Reno’s economic-development office.

He had a hand from a cowboy-hat-clad brothel owner turned civic booster, who was a pivotal player in persuading electric-car maker Tesla Motors Inc. to build its coveted $5 billion “Gigafactory” here.

Reno landed the Tesla deal in no small part because of a $1.3 billion tax-break package signed by Nevada Gov. Brian Sandoval. Critics saw the tax break, the state’s largest ever and among the biggest such enticements nationally, as a giveaway of public funds.

Some residents of cross-state rival Las Vegas, a metropolitan region that is home to roughly three-fourths of the state’s 2.8 million residents, seethed at what they saw as Mr. Sandoval, a Republican from Reno, favoring his hometown.

But they loved it in Reno, a metro area of about a half million people.

“We’re like the cool kids,” says Mayor Hillary Schieve, who was congratulated on the Tesla deal by other elected officials at June’s U.S. Conference of Mayors in San Francisco.

Many cities across the U.S. are trying to do the same thing as Reno: diversify away from once-bedrock industries that have cratered or become too volatile. Houston, for example, has tried to branch out from energy production into technology and health care. For many Rust Belt cities, the makeover process has been a struggle, in part because they started too late, says Gary A. Hoover, chairman of the economics department at the University of Oklahoma.

“If they’re smart, cities will diversify,” Dr. Hoover says. “Even if they are still successful, they need to be flexible and think about what the emerging markets will be in the future.”

In Nevada, taxes and fees on hotel casinos accounted for nearly $1.4 billion or 45% of the $3 billion in state general-fund revenue in fiscal 2014—more than for any other industry, according to the Nevada Resort Association.

But a gambling and tourism economy has proved a dangerous proposition during hard times: Nevada’s jobless rate hit nearly 14% in 2009—the highest in the country.

Nevada has counted on Las Vegas to help lead it back after past recessions. This time, many state officials hope a more diversified Reno will provide Nevada a cushion.

“What’s happening in Reno is certainly good for the entire state,” says Steve Hill, director of the governor’s office of economic development.

There are signs Reno’s strategy is starting to pay off. Before Nevada’s top two metro areas went into recession in 2008, both had unemployment rates below 4%. While the jobless rate in both soared to 14% in 2011, Reno’s has fallen to 6.1%, as of August, vs. 7% for Las Vegas, according to Labor Department estimates.

One reason is that Reno— just outside of California along the major cross-country corridor of Interstate 80—has experienced 14.7% growth in manufacturing employment over the past five years, compared with just 4.8% for Las Vegas, according to state data.

Reno’s renaissance isn’t assured. The city has to demonstrate it can meet the demand for the new jobs, many of which require technical skills.

Owen Tripp, chief executive of Grand Rounds Inc., a San Francisco-based Internet medical startup that expanded here earlier this year, says his firm is now relying heavily on graduates from the University of Nevada, Reno to ramp up to 200 employees over the next two years, from 50.

Reno also is bound to feel the strain of new demands for government services such as public education and housing.

With thousands more jobs in the pipeline—Tesla alone estimates it will hire 6,500 by 2020—local officials worry construction won’t catch up with the demand. The median price for an existing single-family home nearly doubled to $283,200 in the second quarter from a postrecession low of $147,800 in 2012, but still below the 2005 peak of $365,500.

“I’m worried housing prices are going to go too high,” says Reno’s mayor, Ms. Schieve.

Tax breaks

Critics of the Tesla deal say the state gave away too much in tax incentives, making it harder to fund infrastructure needs. And Tesla is obligated to hire only half the employees for its lithium-ion-battery plant from Nevada; the rest can come from California, says Greg LeRoy, executive director of Good Jobs First, a watchdog group in Washington.

Mr. Sandoval said he had no choice but to offer substantial tax breaks because other states offered incentives too. “Would I prefer not to have to offer abatements and such? Of course,” said Mr. Sandoval, who has made diversifying Nevada’s economy his priority. “You can not offer anything and have nobody come. That’s your alternative.”

Las Vegas, too, has diversified within its linchpin visitor industry, with casinos offering more nongambling options. Since 1990, gambling’s share of total resort revenue on the Las Vegas Strip has declined to 37%, from 58%, according to the Center for Gaming Research at the University of Nevada, Las Vegas.

But Las Vegas isn’t getting the same level of tax incentives from state government as Reno for attracting new businesses, ruffling feathers among state and local leaders in Nevada’s Clark County, which includes the city.

“We’re patiently waiting in Las Vegas to see what kinds of deals might be struck that actually benefit our residents,” says Clark County Commission Chairman Steve Sisolak.

Mr. Hill from the Nevada’s governor’s office says the difference in incentives looks less pronounced when the Tesla deal, an outlier, is removed from the equation.

Even so, Nevada over the past year has awarded $359.6 million in incentives, including tax abatement, to companies in the Reno area, compared with $284.7 million in the Las Vegas area, according to a July report by the Governor’s Office of Economic Development.

Nevada has been a gambling haven since its early mining days in the 19th century, and Reno was its capital of excess well before Las Vegas got its first gambling license in the 1930s. But the fortunes of the two cities changed forever in the 1940s when mobster Bugsy Siegel built his famed Flamingo Hotel & Casino in Las Vegas, making it the flashier den of sin.

Reno continued to beckon residents across the state line in California, but it lived in the shadow of Las Vegas, which became an international attraction. Reno got tagged with a darker image when Johnny Cash sang, in “Folsom Prison Blues”: “But I shot a man in Reno/Just to watch him die.”

“The perception has been gaming, Johnny Cash and debauchery,” says Brian Bonnenfant,project manager for the Center for Regional Studies at the University of Nevada, Reno.

Not a sure bet

Reno shifted away from gambling in part because it was becoming less of a sure bet. The growth of Reno’s casino industry closely tracked Las Vegas’s through 2000, but the legalization of Indian gambling in California cut deeply into Reno’s business.

Gambling revenue in Washoe County, which includes Reno, fell by a third to $752.4 million in 2014 from $1.1 billion in 2000, while on the Las Vegas Strip it jumped by a third to $6.4 billion, according to UNLV data.

Reno started to diversify about 15 years ago by marketing itself as a distribution center, touting its abundance of land and proximity to California and other Western states. But the benefits were limited.

Then the recession hit, tanking another economic driver: construction, which had been fueled by the Southwestern housing bubble. Reno’s construction employment dove by 18,100 jobs, or 71%, between 2006 and 2011.

In 2011, local boosters decided to seek outside help. The Economic Development Authority of Western Nevada recruited Mike Kazmierski, a retired Army colonel, as president and CEO.

Arriving in Reno, Mr. Kazmierski, once the top economic-development official in Colorado Springs, saw one of the first things he wanted to change: advertisements atop taxicabs for gentlemen clubs.

“We wanted to show we’re not Las Vegas,” he says.

Mr. Kazmierski, 62, got the cabs to replace the ads with more business-friendly fare, like promotions for the University of Nevada, Reno. And he set out to lure new businesses such as manufacturers.

One of his first wins was getting CustomInk LLC, a maker of custom T-shirts and other accessories in Fairfax, Va., to open its first Western office in Reno in 2012. At the time, it was looking at other cities in the region, including Salt Lake City, says Lauren Peterson,the company’s Western site leader.

“We really didn’t know anything about Reno,” Ms. Peterson recalls. “A lot of our people thought it was a mini Vegas.”

To sell his new town, Mr. Kazmierski undertook a strategy he has used since: Do whatever it takes to get a prospect to visit. Most newcomers aren’t aware the city is only a half-hour drive from Lake Tahoe, he says, or that there is a lot more to Reno than just casinos.

Among new arrivals are at least nine drone manufacturers, with 400 announced jobs among them. The University of Nevada, Reno has become a partner on R&D with one, Australian drone startup Flirtey Inc. “The main reason we moved there was the spirit of the place,” says company Chief Executive Matt Sweeny. “It was a small town with a big ambition.”

One of the keys to targeting bigger firms was Lance Gilman, a real-estate broker and minority owner of the Tahoe Reno Industrial Center, a 107,000-acre former ranch in neighboring Storey County. Mr. Gilman also runs another, more infamous local enterprise: the Mustang Ranch, a legally licensed bordello.

“In some ways, it’s the spirit of the West,” says Mr. Gilman, wearing a black cowboy hat and diamond rings.

Landing Tesla, the crowning achievement of Reno’s makeover thus far, required the joint efforts of Messrs. Gilman and Kazmierski.

In late 2013, Mr. Kazmierski says, he got a call from the Governor’s Office of Economic Development that Tesla would be visiting one potential site in Las Vegas as part of the Palo Alto, Calif., firm’s review of several states. He was told if he wanted to pitch Reno, he would have to do it there.

“We knew that if we went to Vegas and showed them a few PowerPoints, we wouldn’t have a snowball’s chance in hell,” Mr. Kazmierski says.

Reno officials hurriedly put together a plan to charter a private jet to fly two Tesla representatives to their city. But it fell through because Tesla had a company policy to only travel commercial. Still, Tesla was impressed with Reno’s effort and agreed to visit a few weeks later.

Tesla toured the Tahoe Reno Industrial Center with Mr. Gilman and initially gave him 15 minutes to present his case, he recalls.

They ended up lingering for hours. When the Tesla officials asked how long it would take to get an earthgrading permit, a county official present handed them one.

“He said, ‘Fill it out and it’s yours,’ ” Mr. Gilman says.

Tesla wouldn’t publicly discuss details of the courtship.

When the deal was announced last Sept. 4, 2014, at Carson City’s 1871 capitol building, Tesla CEO Elon Musk referenced Nevada’s regulatory environment. “It’s a real get-things-done state,” he said.

Since then, Reno’s growth has kicked into even higher gear. In January, Switch Communications Group said it was expanding from Las Vegas to build a $1 billion data center at the Reno industrial park with up to 2,000 more jobs.

Though gambling isn’t what it once was, the casino operators say the boom is helping them too. “When you get people working,” says Stephen Ascuaga, corporate director of business development for Peppermill Casinos Inc., “everything else follows.”