Reno office space on upswing

Vacancy rates are turning upward in Reno office buildings, and owners of older buildings are feeling competitive pressures.

Both Colliers International and Grubb & Ellis Nevada Commercial Group peg the vacancy rate in top-drawer office space at about 13 percent around the Reno market.

That's a bit above the 10 percent rate that real estate experts consider to indicate a balanced market in northern Nevada.

And while that's below the national office vacancy rate of about 15 percent and well below the rate in places such as Dallas,where 23 percent of the office space is empty it's still pressuring owners of some existing buildings.

On one hand, the continued development of garden offices smaller complexes built by companies that want to own their own space continues to bring office space into the market.

"We're losing a ton of tenants that are going out and buying space," says Brian Armon, a specialist in office brokerage at Grubb & Ellis Nevada Commercial Group.

Along with those smaller buildings, several larger projects are coming out the ground in the South Meadows and Meadowood area.

And as the supply of offices is increasing, demand appears to be slackening, says Tim Ruffin of Colliers International in Reno.

Ruffin says commercial real estate brokers are seeing fewer inquiries from California companies that are looking for locations in northern Nevada.

The rapid run-up in home prices, he says, removes one of the factors that drew companies out of the Bay Area.

Further dampening office relocations from California comes from the rising cost of office and commercial space in the Reno area.

Says Armon,"Leasing in the office market is really tough right now." And owners of existing office buildings who are looking for second- or third-generation tenants find the market toughest of all.

Owners of older buildings in less-thanideal locations face particular difficulties with leasing after tenants move out, says Ruffin.

But at the same time, Scott Shanks of Alliance Commercial Real Estate Services note that owners of older buildings have a powerful tool in lease negotiations.

In comparison with new buildings, tenants' costs often are substantially less in existing buildings.

Monthly rents in older Class A buildings around the area typically run in the area of $1.65 to $1.75 a square foot.Newer space runs $2.25 or higher.

(Concessions by landlords such as free rent in the currently soft market reduce some tenants' true cost.)

An even bigger issue, says Dominic Brunetti at Alliance Commercial, is the cost of tenant improvements.

In new buildings, that can run $75 or more per square foot.

"You can save quite a bit of money to build out second-generation space,"Brunetti says.

Even though improvements usually are modest when a new tenant moves into existing space paint and carpet often are about the extent of the work some landlords are providing a little more money for new tenants in existing space.

At least one real estate broker says it's a good idea for landlords to spend money sprucing up newly vacated space before potential new tenants come looking.

"You want to make the space market-ready," says Scott Borgia of CB Richard Ellis in Reno.

"When a prospective tenant walks in, you want them to see and smell fresh paint and carpet.

The biggest mistake owners of second generation space can make is waiting for a tenant to come along before refurbishing a space."