— By Daniel A. Kapic, Vice President, Regional Manager, Marcus & Millichap —
Reno continues to be one of the nation’s fastest-growing smaller markets, underpinning tenant demand in the office sector. While remote and hybrid work have impacted office use in the metro, market-wide vacancies have kept in decent shape. Entering July 2023, Reno’s 15.1 percent vacancy rate was below the pre-2017 average. Rapid household growth has backstopped space needs, with law, financial and health service providers executing expansions to capture share in a growing market. The local household count increased 2.2 percent year over year in September, which was the second fastest among metros with fewer than 600,000 households. South Reno is spearheading this growth with 14 consecutive quarters of positive apartment net absorption through June 2023, drawing consumer-facing office tenants to the highly developed Meadowood neighborhood. The Reno VA Medical Center — which serves patients as far as Alturas, Calif. — recently announced its relocation to the area, which should also elevate long-term needs for nearby medical office space.
While household growth has shored up space demand, Reno’s office market is still recalibrating to a 20-year-high supply injection. Overall inventory expanded 2 percent in the first half of 2023 — the most in any six-month span on record — pushing vacant Class A stock above 600,000 square feet for the first time since 2011. Operators have adjusted asking rents to compete with new supply, as the mean marketed top-tier rate fell 8 percent throughout the period. Rates may continue to decline over the rest of the year, as another 137,000 square feet remains to be completed in 2023. Nearly all this space is pre-leased, however, which may save Reno from recording the first calendar-year Class A rent decline since 2015. Even so, recent deliveries of traditional offices have not fared as well as mid- and lower-tier counterparts. Clear Capital recently exited its anchor lease in April at Reno City Center, putting 80,000 square feet of newly renovated space back onto the market.
Despite Class A headwinds, Reno’s top-tier stock only comprises 18 percent of total inventory. Class A supply pressures will also dissipate next year as deliveries of note beyond 2023 consist of only one 120,000-square-foot medical office. The Class B/C sector, meanwhile, is positioned to continue attracting space demand. Plateauing asking rents in the segment should motivate expansions and renewals among more rent-sensitive tenants as rapid household growth expands consumer needs for business services. Meadowood, the area that hosted an outsized share of recent apartment move-ins, had its Class B/C office vacancy fall 100 basis points in the first half of 2023 to a 16-year low of 9.4 percent. Tight conditions here may steer tenants to surrounding areas, benefiting space demand in Central-Airport and South Meadows over time. Providing another tailwind for Reno offices, the Grand Sierra Resort is underway on a $1 billion expansion in downtown. Upon completion, the boost to local foot traffic volumes should provide strong momentum for space demand in Reno’s office sector.