— By Jason Hallahan, associate, Colliers —
Northern Nevada’s office market remained resilient throughout last year in the face of strong headwinds. Reno’s office market saw a blend of market fundamentals as net absorption declined, investment activity slowed and available sublease space shrunk. Negative net absorption in three out of four quarters brought the annual total to nearly 23,000 square feet of negative absorption — the lowest the market has seen since 2020.
Vacancy ticked up 100 basis points year over year to 11 percent by the end of 2023, though it is well below the pandemic peak of 13.4 percent of mid-2020. Average direct asking rents also softened slightly this year, though tenant demand and asking rates both remain strong among Class A office product.
A combination of growing vacancy, heightened interest rates and continued uncertainty in office space needs have curbed investor appetite this year. Demand for Reno office product fell sharply at the beginning of 2023 when first-quarter sales shrank to less than 20 percent of the average quarterly sale totals from the past three years.
Buyers and sellers struggled to reach a middle ground as elevated vacancies weakened sale prices and increased borrowing costs discouraged investors. There was, however, a strong uptick in owner-user sales this year. Half of all transactions last year were owner-user purchases.
Thankfully, Reno’s office market experienced strong recovery in the office sales market by the end of
the year, with robust sales in the fourth quarter. Transaction volume shrunk by 40.5 percent year over year with a total of 50 office sales in 2023. Sales volume has reached roughly $91.3 million in 2003, which was just 46.2 percent of total sales in 2022. While average price-per-building square foot saw a steep dip in the first quarter, pricing steadily recovered and moderated by the end of the year. The market average price per square foot settled at $241.31 by the close of 2023, down 7 percent since 2022.
While many larger markets were quickly flooded with sublease vacancies following the pandemic, Northern Nevada did not feel that effect for some time. Reno’s sublease market reached a peak at the start of 2023, with more than 300,000 square feet of office space available for sublet in the first quarter. We’ve been fortunate to have this wave of sublease space subsided through the year. The sublet market has now fallen below half of its previous peak, totaling roughly 144,000 square feet at the end of 2023. Expect to see improving tenant demand and recovering office sales in the New Year