Office Vacancy Declines As Product Dries Up
Last year was a relatively flat year for the Northern Nevada office market. Reno/Sparks had negative absorption in the first and third quarters of 2016, and positive absorption in the second and fourth quarters. The year ended up at 10,153 square feet of net absorption, according to the DCG internal database, essentially nullifying any real gains or losses. However, the Reno office market is much healthier at a 12 percent vacancy rate as compared to the nearly 20 percent recession highs. Each quarter also recognized more gross absorption than the previous quarter in 2016.
Class A office continued to be in demand with rents increasing to north of $2 per square foot, per month, full service. Large spaces ideal for company relocations are difficult to find. Reno currently has a small supply of vacant, Class A spaces with more than 10,000 square feet available. However, we should see our first speculative construction take place in the Meadowood submarket as Mckenzie Properties plans a 40,000-square-foot building in Mountain View Corporate Center.
New corporate relocations for office tenants were relatively quiet in 2016. In comparison to 2015, we saw large tenants relocate to our region, including Grand Rounds in South Meadows and Clear Capital in Downtown. The largest new office tenant to enter the market in 2016 was regulatory compliance company Caek, which leased 13,000 square feet at the repositioned 100 N. Arlington Towers in Downtown. Outside of that tenant, most of the office growth was organic from local companies moving or expanding within the office market.
As we move into the New Year, we’ll continue to see a decline in overall vacancy, which conversely will push lease rates higher. Compared to other West Coast competitors, our area is still very attractive in that we have significantly lower average lease rates, a high quality of life, a business-friendly environment and a top-tier university. This is a combination of benefits few markets can provide better than Reno-Tahoe-Sparks.
Alternatively, there are some concerns. These include a lack of new inventory, perceived lack of educated employee base and lack of large-scale vacancies (more than 10,000 square feet). Until we see newly constructed buildings break ground, we’ll continue to have a lack of Class A available vacancies. The challenge for new development will be the rents required to achieve healthy returns on investment. As reported in the recent BANN/CCIM Commercial Real Estate Forecast, our average Class A lease rate is $1.57 per square foot (gross). The high water mark is $2.70 per square foot. New product would have to be north of $2.75 per square foot, on average, to make a new development feasible. Thus, developers are wondering if this is achievable given the significant jump in lease cost over current asking rates. Within the near future, we’ll find out, and we’re betting that the pent-up demand will be beneficial to the first one that jumps in.
— By Scott Shanks, Partner, Dickson Commercial Group; Dominic Brunetti, Partner, Dickson Commercial Group; and Tom Fennall, Partner, Dickson Commercial Group. This article first appeared in the April 2017 issue of Western Real Estate Business magazine.