I have had the pleasure of selling commercial office space in Northern Nevada for nearly 15 years. During this time, I saw the peak of the market from 2003 to 2008 wherein construction was at an all-time high, lease rates were reaching unseen heights and absorption was setting records.
Then we all got to experience the Great Recession from 2008 through 2012. This saw nearly half of the buildings that were constructed during the previous peak become empty. Vacancy rates hit 20 percent, lease rates dropped to levels well below where they were in 2003, and construction came to a screeching halt.
Kevin Annis, ArchCrest Commercial Partners
Then, magically, at the beginning of 2013 the economy took a turn and the Northern Nevada office market began its recovery. This was expedited in 2014 with Tesla making its announcement of the Gigafactory in the Tahoe Reno Industrial Center and the Tesla Effect created a national buzz that hasn’t slowed.
Unfortunately, this has created a new problem. The Reno office market sits at 10.1 percent vacancy, down from 20.7 percent during the recession, as net absorption has been positive year over year since 2012. The absorption has been primarily in second-generation space as there has been relatively no new construction over that same time frame.
This lack of new construction is based not only on the vacancy levels, but also on the increased cost to build. It simply did not make economic sense for a developer to build an office property speculatively at the then-current lease rates.
This is changing as the first speculative office buildings on Kietzke Lane are being built by McKenzie Properties and Charles Schwab Bank. The current overall lease rate has made projects like these possible. The number of options for a tenant looking for space is very limited due to the lack of development and the vacancy rate drop. This has created a shift in momentum from a tenant to landlord market. This has also caused lease rates to increase about 15 percent year over year.
Landlords are now achieving rates approaching the 2008 levels, the previous market peak. That being said, there is still about 20 percent more room to achieve the highest rates seen during the peak.With ever-increasing construction costs, I forecast continued lease rate increases.
The other significant trend in Northern Nevada is the incredible amount of investors that are entering our market, especially from California. There are numerous macro-economic reasons Reno is an attractive investment alternative to California.
This could be an entire article in itself, and this flood of investors has created an interesting dynamic in the investment market. Fully leased investment properties in the Reno market have seen cap rates drop from 7.5 percent to 8 percent down to low 6 percent rates.
While this market has similar momentum as the previous market spike, there is a fundamental difference in the reasons behind the activity levels. The market from 2003 to 2008 was based on the residential market and the buyers purchasing real estate with “liars loans” and counting on speculative appreciation.
This current market has a true backbone of business behind it. With Northern Nevada continuing to be an attractive state to do business and invest in, I don’t foresee the market slowing down anytime soon.
— By Kevin Annis, broker and principal, ArchCrest Commercial Partners. This article first appeared in the April 2018 issue of Western Real Estate Business magazine.