The northern Nevada office market is picking up steam, despite still lagging behind the robust growth taking place in the industrial and multifamily sectors. Year-to-date net absorption of 136,607 square feet has brought overall market vacancy rates down to 10.1 percent. Rates are well below that in the more desirable office submarkets. South Reno, once plagued with vacancy rates exceeding 30 percent during the downturn, now hovers at a rate of 6.3 percent.
Downtown vacancy rates currently sit at 7.9 percent with no new supply on the horizon. In fact, no significant office property has been built in downtown Reno since 1981. Reno is a market in need of new office supply; however, new office construction is challenging to build on a speculative basis except in the most amenity-rich locations that offer visibility and accessibility.
The lack of incoming supply and rising demand has caused office lease rates to increase. Rates have generally remained stable over the past few years with the exception of Class A office lease rates, which have climbed steadily over the past 12 months. There is a gap between existing Class A office lease rates, which range from $2 per square foot to $2.50 per square foot, and the rates required to pencil new Class A office construction, which are needed in the $3 per square foot range. The result is limited office product coming on line until rates increase, which has begun and is expected to continue given the robust population and employment growth taking place in the market.
New office construction in premier locations are capable of commanding new construction rents. McKenzie Properties will be completing the first speculative Class A office building of this cycle in later 2018. The four-story, 45,000-square-foot property will be nearly fully leased by the time construction is completed, which is expected this November. Other developers are positioning themselves for growth in the office market. This includes JMA Ventures, a well-known Northern California-based developer that recently released plans for two hotel properties and a 54,000-square-foot office building adjacent to the Reno-Tahoe International Airport.
Developers that include a mixed-use component in their plans are likely to fare well with tenants in northern Nevada, where there is a lack of suburban office properties that offer walkability to restaurants, coffee shops, fitness centers and other amenities. Occupancy cost is not always the primary driver in choosing an office location. As more tenants shift divisions or entire companies to northern Nevada from more expensive markets like California, the rental rates are often of only moderate concern.
— By Matt Grimes, vice president, CBRE. This article first appeared in the November 2018 issue of Western Real Estate Business magazine.