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10 bold predictions for the Reno-area office real estate market

Kevin Annis

Here are 10 bold predictions for the 2012 office market …

Well, more like five bold predictions and five fairly obvious observations. I am asked daily what is happening with the local office market. When do I expect us to pull out of this recession? What do I think is going to happen with certain submarkets? What are “market rents” and when do I anticipate rents and sales pricing bottoming out?

Like any real estate prognostication over the past decade, these should be taken with a grain of salt. However, our company has completed over 2 million square feet of office leasing, sales and development, and I feel we are uniquely qualified to make what are basically qualified guesses. So without further qualifiers, explainers, or CYA clauses, here is what I see the office market doing in 2012, in no particular order:

10. Northern Nevada businesses will realize the worst is behind us. I recognize that this is not a measurable prediction; however, it certainly is worth recognizing. Companies that have weathered the economic storm have made it past the worst of it and will begin reinvesting in local economy.

9. Due to this, I predict that we will actually see positive absorption … that’s right, space will actually be taken off the market and vacancy will drop.

8. The gap between A and B quality property will widen. During the last four-plus years, price points for both A and B properties have fallen to such low price points that the difference has been relatively negligible. This is why you have heard the term “flight to quality,” because in some cases the higher-quality space was priced equivalent to those of the B-quality properties. I predict that the A quality will be back in the $2-per-square-foot, full-service range in the next 18 months, while B properties will stay 10-20 percent below this to be competitive. Companies looking to lock in rates for class A space should look to do it in 2012.

7. Until we reach these higher price points and get a vacancy in the low teens (currently at 19.6 percent), there will be no speculative construction. So for 2012, I predict zero spec construction.

6. However, companies that have specific interior build outs will be able to look at low land values and construction costs and will actually make sense of build to suit construction. Therefore, I predict that there will be more than 25,000 square feet of build-to-suit construction of office space.

5. We will hit the bottom of the market for office building sales. While there will be an occasional REO that will hit the market, we are currently at a price point that is below replacement costs. If this does not increase, we will be stuck in a market wherein builders will not be able to get financing to build and buyers will not be able to obtain financing to buy. This equals doom for a real estate market.

4. Owner user financing will stay at or below 5 percent through 2012. Currently for January SBA financing is as low as 4.84 percent, and I anticipate it staying very attractive for most of the year. In addition, some owners are willing to work with buyers and an owner/user can purchase office space for as low as 3 percent down. Combined with my fifth point (that we are hitting the bottom of the market for sales pricing) this will continue to encourage businesses to consider owning their real estate.

3. We will welcome at least one large, California based company to bring at least a portion of the company to Northern Nevada and will absorb a good portion of available space in either South Meadows or downtown. In addition, as long as we keep our competitive advantage of real estate prices (commercial and residential) and our favorable tax friendly business environment, we may be able to attract more than one.

2. Of the top 25 office buildings in Reno, at least one of them will sell in 2012. Just a gut feeling on this one, but I think that there are some buyers out there waiting to jump on an opportunity.

1. The Reno economy will truly begin its recovery. While this is a very long-term prediction, it is more of a vision of positivity and hope. Again, not necessarily a measurable prediction but I think that in five years we will look back at 2012 and see a year in which there were many more positive headlines than negative. If nothing else, we will no longer be the punchline of Saturday Night Live jokes…

Kevin Annis is the broker/owner at Tanamera Commercial Brokerage. Contact him at kannis@tcbrokerage.com or 742-2539.