— By Melissa Molyneaux, Executive Vice President, Colliers —
The Northern Nevada market has seen continued positive net absorption, slowed investment sales and a sizeable increase in available sublease space in recent months.
Local tenants with smaller footprints have been the driving force behind leasing activity and the market’s positive net absorption, with most new leases signed in 2022 being 5,000 square feet and less. Meanwhile, national and corporate tenants reevaluating their space needs have brought much of the available sublease space to the market in significantly larger blocks.
Uncertainty surrounding interest rates has slowed investment sales, although pricing remains healthy. With investors putting a pause on new acquisitions, owner-user purchase activity may increase as tenants seize new occupancy opportunities.
New construction starts have been minimal, although redevelopment/renovation projects remain prevalent. Two new developments that have broken ground include the Kimpton, a premier Class A high rise in downtown Reno, and Renown South Meadows, a specialty care center with about 40,000 square feet available for third-party providers. Each development represents continued demand from client-facing occupiers and healthcare providers in the region.
In 2022, there were 30 companies that either expanded in or relocated to Northern Nevada, according to the Economic Development Authority of Western Nevada (EDAWN). The total potential of jobs added in the region is 2,459. Eight of these companies were in the technology sector. Ten of these companies have or will have headquarters in the Reno/Sparks region.
The verdict is still out on whether Reno-Sparks is a landlord’s or tenant’s market. Northern Nevada’s resiliency through COVID has shielded landlords/owners from the vacancy challenges many primary markets faced. However, with net absorption trending downward and sublease availability spiking to an all-time high of 23.1 percent of all available space, decision-makers may shift to a more tenant-centric approach to lease negotiations.
Northern Nevada’s vacancy rate sits at 10 percent, with fourth-quarter 2022 being the sixth consecutive quarter of positive absorption.
The average asking lease rate is currently $23.04 on a full-service gross basis, up 4.2 percent since fourth-quarter 2021.
Concessions in Northern Nevada vary greatly between properties due to a unique mix of institutional owners and mom and pop landlords. However, many owners are still leaning toward rent abatement and incentivized lease rates over significant tenant improvement allowances.
We expect sublease availability will continue to increase in 2023. This will initially lead to higher vacancy rates as leases expire in upcoming years, though the opportunity for tenants to reconfigure their office footprints will continue to drive demand and gross absorption. Property owners may start improving large blocks of space to make them suitable for a greater tenant mix as current occupiers vacate or downsize.
We foresee an incentive for developers to deliver Class A product as more companies eye Northern Nevada as a relocation option due to its numerous operating advantages. We also anticipate a shifted focus to healthcare providers as Northern Nevada races to accommodate its anticipated population growth.
New speculative construction began at Renown South Meadows Specialty Care Center last quarter, delivering 121,117 square feet of Class A medical office space to the South Meadows submarket. Roughly 70 percent of the available space will be occupied by Renown, with some 40,000 square feet still available for lease. This development will provide much-needed medical occupancy opportunities and continue to attract medical users to the South Meadows submarket.
Downtown Damonte, a new mixed-use project in south Reno, was also recently announced. This DiLoreto Cos. and Nevada Pacific Development Corp. project will include residential, retail, restaurant and up to 150,000 square feet of office space. Scheduled to deliver in early 2025, the project is set to house Ridgeline’s new tech campus and its estimated 1,500 employees.
Redevelopment projects have continued at Reno Public Market, the Oddie District and Reno City Center. Reno’s first Kimpton boutique hotel also broke ground in downtown last June. These developments and revitalizations will provide more client-oriented office space and serve as case studies for the reconfiguration of obsolete product.
The Downtown, Meadowood and South Meadows submarkets have boasted the most leasing activity in recent months. This is because these areas offer the most opportunity for Class A occupancy. Notable new leases in these submarkets include tenants like Signature Bank, Universal Engineering Sciences and Ormat Technologies.
Panasonic Energy of North America has been a leading corporation in office development as their redevelopment project at 645 E. Plumb Lane continues. The new 94,483-square-foot campus is set to house contemporary engineering labs and training facilities.
While Tesla announced a $3.6 billion expansion to their Northern Nevada Gigafactory, the market has gained increased interest as a relocation option. The recent uptick in sublease availability from existing corporate and national companies could allow new occupiers to enter the market and benefit from lower operating expenses than the location of their current headquarters. With strong rent and wage growth — not to mention relatively affordable housing — the Reno-Sparks area will be an ideal location for businesses and individuals for years to come.