Good opportunities for 2009.

by admin

The northern Nevada office market remained weak in 2008 with all four quarters recording increased vacancy and negative net absorption, a continuation of a trend that began in 2007 when three out of four quarters finished with negative net absorption. Last year finished with negative 116,000 square feet of leased office space and vacancy exceeding 20 percent.

Directly related to the drastic downturn in the residential real estate market, Reno’s office performance had been fueled by the national homebuilders, mortgage companies and title companies, who saw their requirements for office space drop as quickly as the demand for their products and services. The area’s office sector quickly changed from growth and high demand to nearly non-existent demand and increasing vacancy, thus leaving investors and developers scrambling for tenants.

With rising vacancy and demand declining, many office property owners are willing to slash effective lease rates to secure tenants. The average asking rate for Class A properties at year-end 2008 was $22.08 per square foot, a $1.56 less than a year earlier, and Class B was down to $16.68 per square foot. During the highs of late 2006, the effective rates for class A product exceeded $27 per square foot. With current conditions putting tenants firmly in control, informed ones are driving hard bargains, and those landlords willing to bend are winning business. With few sizeable tenants searching the market and ever-increasing vacancy, prospective occupants are looking for aggressive terms to finalize transactions. From turnkey tenant improvements to free rent, concessions continue to be available.
Office developers have shelved most plans for new product to wait out this market. Nearly all of the office development in the past 10 years occurred in the suburban South Reno area, with the vast majority of projects completed in the South Meadows submarket. Developers such as Tanamera Development and The Ribeiro Companies had success with garden-style office properties and mid-rise Class A office buildings. Unfortunately, this submarket has now been the hardest hit with the loss of many of the large tenants related to the residential real estate business. Vacancy approaching 25 percent has ensured that the speculative nature of previous Reno development is not likely to return in the near future; the focus of office developers is now build-to-suit.

The completion and subsequent $20.735 million sale of the 79,248-square-foot Employers Insurance Group office building by Tanamera is a good example of the developer’s revised strategy. Plans exist for at least three major office developments in South Reno, including two additional multi-story properties in Templeton Development’s Mountain View project, and two high-rise towers in South Meadows. Although these projects are not likely to start soon, the developers are ready for an upswing in market conditions.

Office investment sales slowed dramatically in 2008, which posted 43 transactions for a total of just less than $100 million. Three deals amounted to half of the total sales amount, including the aforementioned Employers Insurance Group building. The others were DP Partners’ $20.2 million acquisition of the Mitel building via a sale-leaseback transaction and the AT&T disposition of 645 E. Plumb Lane for $12 million. The average price per square foot in 2008 was $231, down from $257 in 2007. Investors remain interested in the market, yet most investors are looking for higher capitalization rates or value from distressed properties. Transactions are being completed at cap rates of around 7.5 percent for Class A product with credit tenants and more than 8 percent for Class B product, more than a full percentage point higher than they were a year ago. Market conditions should continue to provide buying opportunities for investors.

Expect to continue to see the effects of this difficult market throughout 2009. As demand remains weak, Reno vacancies will continue to rise with sublease space returning to owners, resulting in increased pressure on rents. 2009 should present good opportunities for both investors and tenants as sale and lease pricing will be at levels not seen in at least 5 years.

— Brian Armon is a principal at Trinity Commercial in Reno.

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